Moog Inc (MOG.A) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Moog second quarter fiscal 2012 earnings conference call. (Operator's Instructions). At this time I would like to turn the conference over to your host, Ms. Ann Luhr. You may begin.

Good morningBefore we begin, we call your attention to the fact that we may make Forward-looking statements during the course of this conference call. These Forward-looking statements are not guarantees of our future performance and are subject to risk, uncertainties and other factors that could cause actual performance to differ materially from such statements.

A description of these risks, uncertainties and other factors is contained in our news release of April 27, 2012, our most recent form 8K filed on April 27, 2012 and in certain of our other public filings with the SEC. We have provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have a document, a copy of today's financial presentation is available on our investor relations homepage and webcast page at www.moog.com John.

Good morning. Thanks for joining us. This morning we report on the second quarter of fiscal 2012, and we update our guidance for the year. Q2 was another strong quarter. Sales were up 9% to $625 million, a record for the Company.

Net earnings of $45 million were up 16% and earnings per share of $0.77 were up 17% from last year. Sales were up in every segment and operating profit was up in four of the five segments. Our story is one of balanced growth and good operational performance. Taking a walk down to PNL, our gross margin is slightly better than last year on the higher sales.

R&D is down both in dollar terms and in the percentage of sales due to the timing of reimbursements negotiated on certain commercial programs. SG&A is up slightly as a percent of sales as a result of some moving costs in Wolverhampton which I will describe later. Interest expense is down marginally on lower rates and in the other category, we have the effect of some foreign currency movements in the quarter.

Income taxes came in at 28.9% slightly down from last year's 29.3%. Overall results with the 5.7% net margin and as I mentioned, earnings per shares of $0.77.

Fiscal 2012 outlook. There's minimal change to our forecast for the year to report this quarter. We are adjusting the mix slightly in our sales forecasts to reflect the performance in the first half, but the net result is a very modest reduction of $4 million in our projected sales for the year. We are maintaining our forecast for net earnings of $152 million and earnings per share of $3.31.

When we started out the year, we expected a somewhat slow start in Q1 and Q2 and that the second half of the year would be considerably stronger. Our original forecast for the first half was to earn $1.53per share and at the halfway mark we are $0.04 ahead of that plan.

For the year, we are keeping our forecaster unchanged as 331, our earnings per share of $1.74 for the second half. We believe it is the realistic view of the next six months, balancing the expected acceleration and earnings in the second half with the macrouncertainties associated with defense spending and the industrial economies around the globe.

Before I jump into the segments, I would like to provide some perspective on the broader story at play for our Company. We describe ourselves as a Company that provides customized high-performance control systems and components in applications where performance really matters. We apply our capabilities to a diverse range of markets and applications. Over the years, this diversity has helped us navigate through the ups and downs of the different markets we serve.

We enjoy diversity across markets, technologies and geographies. And we also enjoy diversities within markets. Let me offer some other sort of examples of that diversity by providing some color on what we are seeing in our major markets.

Starting with defense, a topic of considerable debate at present. So far this year, we have seen a clear slow-down in those defense programs which were associated with vehicle upgrades and the US war efforts Overseas. A good example is our Driver-Vision Enhancer program. On the other hand, our major aircraft production programs have held up well and our foreign military sales are strong. The defense market is not the growth engine for the company that it was a few years ago, but it remains a strong contributor to our overall performance. Counter-balancing the slow-down in defense spending is the pickup in the commercial aircraft market.

In addition to the general growth in this market, we have a very strong position on tomorrow's Whitebody Fleece and should enjoy many years of good growth as new airplanes come into service. We will be open to our industrial businesses. We have seen a nice recovery since the low point of 2009. Within our industrial portfolio, we also have a diversity element playing out. With a nice mix of industrial automation with strong roots in the European machine builder sector, energy, a mix between renewable and non-renewables and test and simulation, a real growth driver at present. When we add it all together, we believe that our business will continue to perform well over the long term despite the ups and downs in any particular market. And this is indeed what we are seeing in 2012.

Now to the quarter. Starting with the aircraft business. We had a strong sales quarter in aircraft with good increases in both our military and commercial product lines. Based on the solid first half in our military business, we are increasing our sales forecast for the full year by $15 million. In the second quarter, total aircraft sales were up 15% to $236 million. Military OEM sales were up 17% with gains across multiple platforms. Our F-45 program was up 25% over last year as with a the B-22 program.

In addition, we are ramping up our efforts on the KC-46 Tanker Development Program. Foreign military sales were also stronger than last year with gains on the F-15 for Japan, light combat aircraft for India, and T-50 for Korea. The growth story on the commercial side of the business continues. Commercial OEM sales were up 27% with growth across all our major platforms. Of particular note is our business jet product line where sales were up significantly over last year.

We are enjoying the general recovery in this market, and we are seeing nice orders for the Gulfstream G650 aircraft. On a less positive note, we have minimal sales on the Hawker 4,000 in the quarter. We have been very diligent in managing our relationships with Hawker over the last year as they walk their way through some difficult circumstances. As a result, we are not exposed from an inventory or receivables perspective and to be conservative we have assumed minimal sales on this program for the remainder of fiscal 2012. The commercial aftermarket was up 16% in the quarter with general strength across the board.

In addition to increased fleet activity, we are also enjoying the benefit of some initial provisioning of spares on the 787 program. Looking out to rest of fiscal 2012, we have increased our sales forecasts by $15 million with all of the increase on the military side. There are minor puts and takes across multiple platforms but nothing of particular note. The runways in the first half have been stronger than we had anticipated, and we do not envisage a slow-down in the second half, and therefore have revised the second half up to take account of the first half results. There is no change to the forecast for the commercial book.

Aircraft margins. Margins in the quarter were 9.6%, up from 9.3% a year ago but down from the first quarter and our expected run rate for the year. There are two stories of note in the quarter. On the one hand, R & D was down in the quarter as a result of reimbursements agreed on some commercial jobs. On the other hand, we are in the process of moving our facilities in the U.K. out of the antiquated GE Wolverhampton building into a new purpose-built facility.

When we purchased the Wolverhampton building our business in 2009, we had agreed to vacate the building within three years. This quarter we incurred considerable moving expense which depressed margins. The move also contributed to production inefficiencies which resulted in somewhat higher product costs. Q3 you should see some residual moving costs, but the bulk are now behind us, and for the year, we are maintaining our margin forecast at 11%.

Turning to the space and defense segments. Sales in the quarter were up marginally from last year. The Driver-Vision Enhancer Program is winding down and excluding the effect of that program sales in the quarter were actually up almost up 10% from last year. For the full year we are still anticipating an increase from last year, but today we are moderating our sales forecast to reflect weaker defense and security spending. Sales in the second quarter were $90 million.

It is a similar story to the first quarter with strength in the space market compensating for weakness in the defense and security markets. Starting with the space markets, sales were up almost 40% from last year with growth in each of our main product lines. Satellites, launch vehicles and NASA.

The commercial satellite market remains buoyant, and this year we have the benefit of some additional sales from our Bradford acquisition in Europe which we completed in the first quarter. Our launch vehicle business is also up as we perform work for United Launch Alliance on the common TVC system for the Delta 4 and Airtex 5 next generation rocket. Finally our sales to NASA were down from the first quarter as budgets were reset in 2012, but they were up from the same quarter a year ago. We view this year-over-year increase as a positive sign, and we believe that the NASA budgets are settling down and there is opportunity for some upside relative to our last forecast. Defense sales were 9% lower in the quarter.

Our defense sales are into two primary markets, missiles and military vehicles. On the missiles side, a year ago we were working on a large contract for a storage management system, and that contract is now closed out. The remainder of the missile business however is strong.

Our military vehicle business was a little lighter this quarter, although we believe this business is stabilizing with about 90% of the sales now coming from outside of the US. The security business was down in the quarter driven by $6 million lower DBE sales. We had been anticipating an uptake in the general security business but have not yet seen it. That market is partially dependent on municipal government spending as well as the recovery in the US commercial construction market and both of these drivers remain muted. Base and defense fiscal 2012

We are reducing our sales forecast for the year by $19 million to $365 million. The reduction in the defense and security markets. In defense, we have been forecasting sales in the second half on some new programs and those programs have pushed to the right outside of fiscal 2012. The result is that our second half sales will be lower by about $10 million from our last plan.

We have also reduced our security forecast by $9 million as the pickup in spending on new security installations has not yet materialized. We are leaving our space forecast unchanged from 90 days ago. Margins. Margins in the quarter up 11% were down from 14.9% last year. Lower sales on the DBE program and the store's management application accounted for most of the difference.

Compared to our forecast of 90 days ago, we are forecasting lower sales for the remainder of the year, but we have taken some steps to mitigate the last contribution on those sales and as a result we are keeping our full year margins forecast unchanged at 12.2%. Industrial systems. Sales in the second quarter were up 8% from last year. We saw some mixed shifts within our markets but in general we are unplanned, and we are keeping our sales forecast for the year unchanged. Sales in the quarter were $168 million. Up $12 million from last year.

All of the increase was in the simulation and test market. In this market, we provide 6-degree of freedom motion basis for flight training similarities and product test systems as well as a range of high performance mechanical systems used in both Aerospace and automotive test applications. Sales in this quarter in that market were up almost 50% over last year. The flight training simulator market remains strong as the commercial Aerospace sector gains momentum and new aircrafts are introduced to the global fleet.

Our test business was also very strong, almost double last year's sales. We are several years into our initiative to take our components and systems capability into the test market and that initiative is now paying off. Sales in the energy market were flat with last year, although we saw a shift within this market with higher sales in oil and gas exploration, compensating for lower sales in wind energy. Finally, our industrial automation sales were flat with last year and in line with the average sales in this market over the last six quarters.

This market saw 10 quarters of sequentialal growth as we came out of the recession, but over the last year has leveled out. Most of our industrial automation sales are in Europe and our business there remains solid despite the ongoing fiscal challenges in various countries. Industrial systems for fiscal 2012. We are keeping our sales forecast for the year unchanged at $650 million.

However, we are shifting the mix somewhat between energy and simulation and test. We are decreasing our energy forecast by $10 million to reflect the ongoing challenges in wind in the China market. Balancing this out, is an increase of $10 million in our test and simulation markets which continue to outperform. Margins. Margins in the quarter were 11.5% and for the first half were 10.8%.

For the year, we are keeping our margin forecasts at 10.5%. Turning to the components group. Q2 was a record sales quarter for our components group with sales up 6% from last year. Our components group sells in all the same markets as the rest of the company and there are great diversity play within their own 15% slice of our overall business.

The headline story within this business continues unchanged. Nondefense markets improving and defense slightly weaker. For the year, we do not see any changes from our last forecast. Sales in the second quarter at $96 million were up $5 million from last year.

We saw increases in each of the non-aerospace and defense markets. Marine sales which are driven by off-shore oil exploration were way up with oil prices high and uncertainty surrounding future supplies from Iran, the push to find new fields off-shore continues. Our medical business was also up nicely this quarter with particular strength in CAT scan equipment.

Finally our general industrial business was stronger, the result of the additional sales from our recent animatics acquisition. Turning to the Aerospace and defense markets, total sales in this quarter were $47 million, down marginally from $49 million a year ago. Military and commercial aircraft sales were flat with last year while our space business was up.

On the other hand, our defense controls business which consists of products which go on military vehicles was down from 12 months ago. In the component segments our military vehicle sales are predominantly in the US, and they are suffering from the shift in US defense priorities as the Overseas operations wind down. For the fiscal year, fiscal 2012, we are keeping our sales forecast unchanged at $372 million. Within the markets, we believe our marine business will be slightly stronger, but our general industrial business will be slightly weaker.

Looking back over the last few years, the continued strength in our components business is a direct result of our diversity strategy. In fiscal 2012, we are expecting a sales breakdown between Aerospace and defense and non-A&D of about 50-50. Going back just two years to fiscal 2010, that ratio was 65-35 in favor of A&D.

Our strategy of balanced investment across all our markets has provided for steady consistent performance through this dramatic shift in the business cycles and allows us to tell a story this quarter of record sales and healthy profits. Components margins. Margins in the quarter were 14.1% compared to 14.7% last year.

This quarter we took a modest restructuring charge to align our future resources with our forecasted military sales. For the year, we are leaving our margin forecast unchanged at 15.5%. Medical. Our medical business had another good quarter. I am happy to report that there is nothing much to report on this business this quarter. Sales and profits were in line with plan, and for the year, we are were actually increasing our profit forecast modestly. Sales in the quarter were $35 million, up marginally from last year and in line with the first quarter.

There was some shift in the mix with higher pump sales, more than compensating for lower sensor sales, but overall nothing of significance. Fast year during Q2, we restructured this business and changed strategies to focus on a combination of profitability and modest sales growth in the short term. That strategy is now firmly in place. Q2 was the fourth consecutive quarter of profitability, and over the last year, we have introduced a new pump to the International market which is providing modest sales growth. Comparing the first half of fiscal 2012 with the first half of fiscal 2011, we see that our total sales are up about $3 million. But the real story is in the profitability.

In the first half of fiscal 2011, we were struggling with high development costs, recall issues, and the last of our exclusive IV distributor in the US, B Braun. Since that time, we focused on improving our internal operational and quality systems, trimmed and refocused our development efforts, and built a non-exclusive distribution channel in the US. In the first month of fiscal 2011, we lost $3 million on sales of $67 million. In the same period in fiscal 2012 we earned $3 million on sales of $70 million. Almost 900 bases points of margin improvement.

Our margins are not yet where we would like them to be, but we have made significant progress, and we believe our results will continue to improve. For fiscal 2012 we are forecasting sales of $145 million unchanged from 90 days ago. We are changing the mix slightly with pump sales a little lower than our last forecast and set sales a little higher. Margins. This quarter, we had an operating profit of $1.5 million or 4.2% of sales. This was similar to our first quarter.

And we are increasing our margin forecast for the year to 4.2% from the 3.4% we reported 90 days ago. So putting it all together after all the various adjustments, our sales forecast for the year is now $4 million lower than our forecast from 90 days ago. Total sales for the year should be $2.47 billion, up 6% from fiscal 2011. Sales in the aircraft group will be $15 million higher than our last forecast as a result of strength in the military market.

On the other hand, sales in our defense, space and defense group will be $19 million lower than our last forecast, a combination of lower defense and security sales. Forecasted sales in the industrial components and medical groups are unchanged. We are maintaining our operating margin forecast at 11.3%. We earned $1.57 per share in the first half, a little ahead of our original plan.

But the second half we are forecasting $1.74 per share, a slightly higher sales and improving margins in the aircraft business. And for the year, we are maintaining our EPS forecast of $3.31, a 12% increase over fiscal 20'11.

We are forecasting now quarterly earnings of $0.84 in Q3 and $0.90 in Q4. Let me pass you to Don who will provide some color on our cash flow and balance sheets.

Thanks, John. And good morning. Our net debt decreased by $3 million during our second fiscal quarter of 2012 to $622 million. Our free-cash flow was a positive $13 million. The $10 million difference relates to a March 13 components group acquisition of a company named Protocraft located in Kingsport, Tennessee.

Protocraft designs, manufacturers, and markets fiberoptic connectors and switches for environmentally challenging environments. Protocraft's sales for the last six months of fiscal 2012 are forecasted to be about $4 million while the impact on EPS is expected to be neutral. So free-cash flow for the first six months of this year was $21 million compared to our year-to-date net earnings of $72 million. So we are obviously off to a slow start relative to our last quarter's projection of $110 million for the whole of fiscal 2012.

Our second half should be considerably better, driven by improving working capital results, specifically better timing on collections and better inventory terms. Our collections will improve largely related to two issues. In our second quarter, we had an unusually high amount of shipments in invoicing that went out late in the quarter in our industrial segment. Those are receivables will be collected during the second half.

More importantly, we have a number of open contract negotiations, predominantly in our aircraft segment that are nearing completion, and we expect that the majority of these will be finalized during the second half resulting in a noticeable infusion of cash and of course finding decrease in either unbilled receivables or an increase in customer advances. These types of negotiations are always ongoing for us, but timing is apparently a bigger issue for us this year. Inventory turnover should improve during the latter half of this year.

You recall that John mentioned the significant activity in Wolverhampton moving into a new building, direct costs and inefficiencies associated with this move are significant enough, but we have also been building inventory to support timely deliveries to our companies in anticipation of this physical move. Over the next six month, we expect that this will normalize, and we will see the effects of this reverse. It looks like we have set ourselves up for a rather steep hill to climb in the second half of the year in order to hit our previous precash flow forecast of $110 million. Although we are still targeting to achieve this for the year, it is fair to say that it will likely be the high-end of the range. If one or of the negotiations going on do not settle timely to the point of collection by the end of our fiscal year, free-cash flow for all of 2012 might end up coming in somewhere between $95 million to $110 million. So that is our range.

That is the macro picture on cash flow, but occasionally some of you are interested in some more specific balance sheet items. So I will trip through them rather quickly. Customer advances declined during the quarter by $8 million to $107 million. As we work off some of the previous advances we received. Particularly in our space and defense business. Loss reserves declined from the prior quarter by $2 million to $40 million.

Capital expenditures were $27 million in the quarter and $54 million for the first six months on pace with our forecast of $105 million for all of 2012, and finally depreciation and amortization totaled $24 million in Q2 and $49 million to date depreciation and amortization for all of fiscal 2012 is forecasted to be $102 million. Our pension story is the same as last quarter. We previously described how we accelerated contributions into our US defined benefit pension plan and fiscal 2011 making our forecasted contributions in fiscal 2012 on the lighter side. In our first six months, our global DB plan contributions were only $5 million while our expense was $18 million.

We are estimating our full year 2012 or 2012 global DB plan contribution and expense to be $19 million -- sorry, $9 million and $35 million respectively. From a financing perspective, we are in very good shape. Our quarter end net data is a percentage of total capitalizationwas 32.7% compared with last year's 33.9%. Our leverage ratio was down to 1.8 %four times.

In terms of unused borrowing capacity, during the quarter we began drawing down on a new $100 million, 364-day securitized facility it is secured by our domestic receivables, and we do plan on rolling that facility over annually. Our treasury team has been working diligently with our 13 banks in our bank group over the past few quarters to get all of this lined up allowing us to effectively increase the borrowing capacity on our revolver by the same amount. The unused capacity on our $900 million revolving credit facility jumped up $74 million during the quarter to $616 million as a result of us implementing this new securitized facility. In addition, we have already begun saving at current interest rates about $500,000 annually in borrowing costs. Longer term, our refinancing needs are secure.

Our revolver terms out in 2016 and our two high-yield debt issues each at about $190 million term out at 2015 and 2018 respectively. So one might ask, what are you planning on doing with all this capacity and this strengthening financial picture?Using it to grow through targeted acquisitions is our primary focus at this time. Over the past four quarters, we have spent over $80 million on four acquisitions including Animatics which is a smart motor business in our component segment, Crossbow, a members based gyro basis in our aircraft segment, Bradford engineering, a European-based space controls basis in our space and defense segment and most recently Protocraft that I mentioned earlier. So we are active, and we continue to actively look for strategic properties that will be a good fit with our core businesses.

Our effective tax rate in our first quarter was 28.9%, about the same as last year's 29.3%. For the first six months, the effective tax rate was up to 30.1% compared to 28.1% last year, that primarily is related to R & D tax credits. This year as you know the tax credit has at least for now expired as of the end of our first quarter, the summer of 2011. So we have recognized only that first quarter's estimated benefit.

Last year's first half tax rate included the R & D tax credit benefit for both 2011 and 2010 because of the timing of when the related legislation was passed. For all of 2012, we are forecasting our effective tax rate to be 29.9%, down just slightly from our last forecast. To reiterate John's summary, we have got a very solid first half behind us.

Our forecast in 2012 sales will be up over 2011 by 6% to $2.47 billion and EPS will be at 12% to $3.31 a share. Lastly, cash may be off to a slow start, yet we are confident we will see substantial improvement in the second half. So now let us hand this back to John and ask our moderator Andrea to facilitate any Q & A.

Thanks, Don. Andrea, can you give the explanation for asking questions, please.

(Operator Instructions). Our first question will come from Julie Yates.

Good morning, gentlemen.

Good morning, Julie.

Hi, Julie.

John, I think last quarter you reduced the after market guidance from 9% to 6% and you have seen a nice uptick in the growth rate in the second quarter, but your outlook remains unchanged. How do we think about aftermarket as the year progresses and the timing on some of that provisioning that that you thought was slipping to the right in the last quarter.

I am thinking Julie you are talk about the commercial after mark ups?

Yes, correct.

The spears provisioning through the first half was a couple a million dollars, and we think that will strengthen in the second half, but that is starting to come into line. Generally when we are forecasting our after market quarter to quarter, Julie, we get to see some fairly significant moves up and down. So if I look at the commercial after markets this quarter it is about $29 million, but over the last four to five quarters we have been running an average of 24/25. So we have seen a particularly nice quarter this quarter, but our after market is not easily correlated one-to-one with either fleet usage over the long term. So we are feeling like we had a good quarter, but we do not want to bump it up for the year at this stage. We think the year's forecast that we did last quarter was probably about right, and we are sticking with that for the quarter.

Okay, great. An then just one follow-up on industrial margins. It looks like there was a nice uptick in the quarter, but your guidance implies it will revert back down in H2. What is going on there?

Yes, well if you look at the first quarter of the margins were 10%. Second quarter they were 11.5%so through the first half we are at 10.8%Kind of the first quarter, the second quarter gives you a sense of shift in the mix, and this business can kind of shift fairly significantly quarter to quarter.

And we are seeing -- we are not changing the forecast in total for the year in that business in terms of sales. So we just think it is prudent to keep that number in line with what we had last quarter. Our European business, the industrial business, the machine business that is holding up well. Our Asian business in China is kind of softening a little bit like we have said before. US business, the test and simulation is doing well, but we think it is prudent not to get ahead of ourselves in terms of the performance in one quarter, and we think again for the year we are sticking with what we have got with softer first quarter, better second quarter.

We think for the full year the 10.5%, we think that is probably a reasonable number.

Okay. Great. Thank you.

You are welcome.

Our next question will comes from Tyler Hojo.

Hi, Tyler.

Yeah, hi, good morning. I was wondering if your could expand a little bit on kind of the sales weakness within the wind market. Just with the production tax credit expiring here in the United States. I was thinking maybe it would be a little bit stronger.

Well, so our wind business is really a two-market business. It is an Asian business, and it is an European business. It is really a China business and a European business, and we have almost no business in the US. We supply pitch control systems to OEM manufacturers of turbines and the only real OEM manufacturer in the US is GE, and GE has an in-house solution. So for that reason, we do not supply in the US. Now that is not to say that turbines we supply on are not installed in the US, but some of our European customers install turbines in the US [ ] for instance. Then we have US content, but we see that as European sales. So the effect in the US - - actually we have a little bit of sales this quarter in the Americas, but that was actually for some wind farms that were being installed in Brazil. So we have not ever had any sales of any significance in the US, and therefore the shift in the tax regime does not make any difference to us.

Okay. And could you maybe just talk about what your outlook is for the wind market a little bit longer term? I mean, there was some data out the global market was up something like 20% plus year-to-date, and obviously you guys are not seeing that. So that is really what I am getting at.

Yes, so our wind businesses really a story of two different markets. It is the European market, and the Chinese market and what we have seen -- Let me start with the good news story. The European business has actually strengthened very significantly over the last couple of years. If I go back a couple of years, our European business was in kind of the $60 million range, and this year we are forecasting it will probably be closer to $80 million.

That is a business that is characterized by long-term relationships, bringing value to the OEM and where the OEM's do not feel threatened by having strong suppliers. In China, it is quite a different story, and our business there has gone down from the $90 million to about half of that we are forecasting this year, and what has happened in China is that the - - first of all the market has shifted, there were far too many OEMs, a lot of start-up, that consolidated into a couple of very large players, and the large players at this stage of their evolution, and they are only a few years old. They are probably in the 5 to 10-year-old companies, have decide they want to insource most of the key technologies. So our competition and our sales in China, those companies that are third party suppliers, are all seeing this effect where the major guys are looking at insourcing, and you are competing with an inhouse supply.

So that has changed the dynamic of the business in China. Our belief is that in time, the Chinese market will consolidate and then the suppliers will develop into the more mature type of customer supplier relationship that we see in other markets like for instance in Europe, and that our value proposition of providing superior controls in difficult applications will actually win through. But at the moment, It has turned out to be a very volatile market, and we have seen some significant shifts. So as I said, it is stronger business in Europe, weaker business in Asia, and overall, the growth in the wind market at the OEM level we are not seeing reflected down into our level because of this insourcing effect particularly in China.

Okay, great. I really appreciate that color. And just one last one for me. You mentioned some moving expense impacting your results this quarter. Could you maybe quantify what exactly that was?

Well, I can describe what it was. I don't want to go into the details of exactly what the numbers were. But when we bought, back at the end of 2009, we bought Wolverhampton business, the GE Wolverhampton business in our aircraft business, this was a flight controls business. At that time, that facility that those folks were in was built I think in the 1920s or the 1930s, very old facilities, made lots of fighter aircraft during World War II, and has a lot of history, let me put it that way.

As part of the purchase, we decided that we didn't want- - the building was too big, it did not meet our needs, and there was a little bit of a concern that perhaps there might be some environmental issues. I am not saying there were, just from our perspective we did not necessarily want to take that on. So the agreement was that we would have a three-year lease in the building, and that we would move into a new facility.

So over the last couple of years we have been building a new facility up the - - couple of miles up the road. This quarter we had some the major move expenses where you are moving large machines and moving equipment into that new facility. And those expenses played through in the operating margin on our aircraft business in the quarter. You also get the indirect effect where you get production inefficiencies when you do that type of thing, start up, wind-down costs with the machine, start up on the next machine and that would also have depressed the margin as little bit in our aircraft business. Our aircraft margins are lower than you might have expected. We think for the rest of year we will see a pickup in them, and that really was those move expenses were what were pushing them down this quarter.

And the move will be behind us by the end of Q3, is that a fair statement?

There will be some residual costs in Q3, and we are up and running in the production, but yes, essentially it will be gone in Q3 and Q4 will be fully up and running in our own facility.

Okay, great. Thanks a lot.

Thank you.

Next we will go to Eric Hugel.

Good morning, guys, good quarter.

Thank you, Eric.

I just wanted to follow up on the prior question on your answer to your wind turbine exposure that just because it is an European OEM, you don't have any exposure to the US win market if the production tax credit sort of goes away. I think your answer wasn't quite -- was not quite what I would expect. Basically you are telling me just because it is an European OEM that if US sales drop off, you are not going to have exposure. That does not make of sense to me. Maybe another way to ask it, in looking at the end, end market sort of the where the sales that your OEMs are coming from, can you sort of talk about what your US exposure is?

Okay. That is a fair answer. I think I answered a different question then, perhaps, which was - - our sales in the Americas and would our sales in the Americas be affected by the tax credit?We do not have good visibility through to where the ends farms are that our actual products go into, but I can tell you that the focus in the European business is more moving towards offshore wind farms. And offshore right now is more of a European business. It is also an Asian business. I think in the US the offshore is not yet a particularly strong contributor.

So unfortunately the shift in the US market I cannot quantify in any great detail. I can tell you that our forecast for this year for our wind business in Europe, and this is based on direct feedback from our wind customers, is up about 12% from what we saw last year. So the business is doing well, and we have got some large contracts with some of the major suppliers there.

How they then -- which products they put into which end markets whether the end market is the US, Europe or perhaps somewhere in South America is not immediately obvious to us. The one exception that I can identify in that is as I mentioned we have sales this year of this quarter of a couple million dollars for an out some. So this is where we do know the European customer but those sales are going to a Brazilian wind farm and because of the way that is structured, we deliver actually that through the US organization. So we do take those sales in the US where we can directly see what the end market is. But generally speaking, that visibility through to the end market is not clear to us.

Okay.

So based on what we have seen so far in our business in Europe, that has not been a factor that has been raised.

Okay. Just to follow up also on your Chinese industrial demand. You talked about last quarter that slowing down and you said that has. Has that slowed down pretty much in line with your expectations, better, worse?

Well, I think what I said last quarter was that the growth in China was slowing, and it is in line with our expectations. In that, if I put that -- that is in our industrial automation category. We are not changing our forecast for industrial automation. We are at about $299 million, $300 million for the year. That is what we were at last year, last quarter. Through the first half. We are kind of a little bit ahead of that run rate. But it is pretty much lining up with what we thought. So there is no shift in our expectations in the general industrial business in China verse us what we have been thinking for the last several quarters.

Okay. And lastly, can you maybe sort of think about maybe a little longer term when we think about the aircraft market? When we look out past the development costs in terms of, you know, 7, 8, 7, 8, 350 and sort of that hump, where you think ultimately you can get those sort of margins. In the past we have talked sort of in maybe the low to mid teens. Is that still sort of something that you can target and maybe sort of a time frame on when you could get there?

I would say that is-- the story is the same that we have been telling for quite a while. You are right. As we get past the major R & D, we see margins expand, but also with the ramp up in production, we should start to see some benefits from that.

So we are still anticipating get to go mid teens by middle of the decades. That is kind of our broad plan. Next quarter we will give you a little bit more insight obviously into 2013. I do not want to be too specific, but I would say our overall strategy has not planned. The overall plan has not changed, and we are targeting mid teens by mid decade.

Great. Thanks a lot, guys.

Thank you.

Our next question will come from Michael Ciarmoli

Good morning, guys. Thank you for taking my question.

Thank you, good morning.

Just to foul up on maybe the aircraft margins. I know you did not want to get into the exact costs, but X the charges, you have probably been running at this 10.5, I think even the second quarter was 11.2 charges. Would you guys have been in that mid 10.5 range if it was not for the closing costs and the associated productivity disruptions.

I think that is the same question in a different way, but I would say yes, our business is well into plan.

Fair enough. And can you just elaborate on the charges that hit the component segment.

Well, what we said, we took -- what I call a modest restructuring charge in the quarter. It was essentially a voluntary package that we offered to some folks in one of our facilities that is primarily focused in the defense business. That is because we are seeing the defense business slowing as we had anticipated. So it is in the range of 50 bases points, kind of a 50/60 basis points. So the margins would have been more in line from what you would expect from the first quarter or average of the year if you were to exclude that charge.

That is helpful. And then just on the F35 program, you are obviously forecasting a big increase this year. How should we think about that program going forward if production rates kind of hold at current levels? Is there an ability for you guys to still drive growth from that platform? Or do we start to see revenues sort of level out over the next 18 to 20 months or so?

Well, our business is going to go off with what the forecasted sales are. I think the US forecast give or take a couple of airplanes per year is in that kind of the round a flat 30 over the next few years.

Right.

As we get out into 2013 and 2014 and particularly when you get to 2015, you start to see some significant uptake from the foreign military sales. Now of course that assumes that picture does not change, and I think of course the picture keeps changing on a regular basis. But right now we are assuming - - our assumption lines up completely with the what the DOD and Lockheed are projecting which is flat around the 30 units per year in the US and then starting to pick up from FMS sales out a year or two. With flat sales there's not going to be any significant growth in terms of the revenue line for the F35.

It does depend a little bit on the mix because we have on the A we have the flight controls. When you get to the B, the stover we have the lift fan on the back and on the C we have the wing foldThe mix reflects how much content we have to some, extent, and the other effect, of course, is once the fleet starts to fly, you actually do start to get some after market activity, whether it is upgrades, whether it is retroprofits, whether it is some spares. So you actually as the fleet grows, you do start to see incremental revenue from that. But, we are anticipating, and as we give guidance next quarter for 2013, and when I talk about mid teens by mid decade, we are working with the assumptions that the F35 is not going to ramp significantly. It will ramp in line with what folks have been -- what the DOD is projecting at the moment.

Okay, that is perfect. That is helpful, and then last a one for me. Can you give us any color on the 787 program, and how that is feeding into your full-year growth forecast, and maybe even what the margins for trajectory on that program is looking like as you Boeing starts to ramp towards I guess five at the end of the year?

Well, for the year, we are anticipating full-year sales on the '87 of about $50 million. That is up from $40 million last year, $25 million the previous year. So, it is picking up. It is a 20% increase on last year. But of course it is not like the number of deliveries is not connected to Boeing delivers directly because delivers only really started in the last quarter or two. So we are seeing that business grow. We are at the same production rate that Boeing is about 3.5 per month.

We will accelerate our production rate in line with their requirements, and we will continue to see that grow. We have gone on record saying we have roughly $1 million of content for airplanes. So you can start to extrapolate as you move to the future as to how those sales will grow. We do not get into margins on individual programs. We do not get into that level of detail.

Okay. Fair enough. Thank you, guys.

You are welcome. Thank you.

(Operator Instructions). Next we will go to J.b. Groh.

Thanks guys for taking my call.

Thank you.

You mentioned you had some good growth in aftermarket and some of that was driven by the spares provisioning for 787. Can you maybe help us out as to what sort of impact that was, and how aftermarket would have looked without it?

Like so many things in our business, there is a lot of small moving parts. So the aftermarket, the commercial aftermarket in the quarter was about $29 million. $1 million or $2 million of that is spares business. So it is not the huge bulk of it. The vast majority of the aftermarket business is just the reflection of the increased usage of the fleet and that started to roll through to our business.

And what is your -- oh, I am sorry, go ahead.

It is not that is all of the increase is not being driven by the initial purchasing of the 87.

Okay, good. Sort of what is your feel of customer inventory levels at this point?

Well, that is a real tough one to put any kind of a number around. I think we saw through the downturn that customers clearly worked on their inventory and what our sense would be is that they are working -- they have minimized their inventories, and we do not think this is a restocking effect. I think they continue to work very hard to given the financial pressures they are on to keep stocking levels at a minimum. I do not think we are seeing any kind of a restocking effect. I think we are seeing them - - this is the real demands that they have got to actually keep their aiplanes in the air.

It is important, though to mention again that in our aftermarket business, it is not scheduled maintenance. It is maintenance that comes as a result primarily with the flight controls of some leaking typically on the hydraulic side, and the seals need to be replaced and stuff, but it is based on some kind of issue comingup with the hardware, and then there is a repair or a spare that is inserted. It is very difficult to time it, and it is very difficult connect it directly to flight hours. Over the long haul, more airplanes were used, the more of seals wear out, the more stuff we get coming back, but quarter to quarter it bounces around by 10% /15% up and down around the median and then gradually you start to see that increase, and I think this quarter was strong for the year. We are forecasting about a 6% increase over last year, and we think that is probably still a reasonable number.

So over a long period of time there should be pretty tight correlation, but quarter to quarter it is not something you are going to ever have a ton of visibility on. It is just going to happen the way it happens?

Absolutely. Quarter to quarter is driven by a particular order from spare orders or repair units from particular airlines. It bounce around a bit.

Okay. And then one for Don. On the corporate and equity-based compensation, that looks like the sum that has been running at $8.5 million. Is that a good run rate for the second half of year? Or will it be a little lower?

The equity-based cap, and what else did you say?

Well, I actually add up the corporate and --

Well, so it is corporate and other. Yes, we had - - John mentioned that we had some foreign exchange in the first half, second quarter that was a little bit heavier than the norm. So I would say that right now we are forecasting the equity-based capping and other miscellaneous stuff to about $8 million for the full year.

Great, okay. Thanks a lot for your help. Good quarter.

Thank you.

Thanks.

Our next question comes from Cai von Rumohr.

Thank you. Nice job, good quarter.

Thanks a lot.

Your aircraft -- how big was your aircraft R & D in this quarter, and what is your expectation for aircraft R & D, and total R & D for the year?

Aircraft R & D for the quarter was about $14 million. And for the year, aircraft will run in the low $60s. For the year we are anticipating about $113 million in total R & D.

Okay. And then usually you have contract loss adjustments in the aircraft group or some kind of adjustments. Were there any kind of any additions to the contract loss reserve in the aircraft group in the quarter, or any sort of other adjustments either positive or negative?

There was not anything of significance Cai that we felt was worthy of singling out. I mentioned that the loss reserves came down by a couple million dollars in the quarter. So it was kind of normal run-off rate, nothing unusual.

Got it. And then if we kind of go back to your guidance, it looks like your military aircraft in non-helicopter OE is up. How come?

It is a reflection, Cai of what we have seen in the first half. The first half has been a little bit stronger than we anticipated. And we do not anticipate that it is going to get softer in the second half. Second the run rates through the first half if you analyze it, it is pretty close to what we are seeing.

So we felt that we should take the guidance up in line with essentially what we have seen in the first half, and it is a myriad of small puts and takes across all of the programs, and if you add them all you up, it ends up with about a $15 million increase in that total business including the aftermarket for the whole year.

Terrific. And if I take your guidance for BIZ jet which did not change and it appears to look like you are looking for the BIS jet business to slow in the second half, is that correct?

Yes, it will be down a little bit in the second half - - primarily what shifted there is Hawker is done from what we had been anticipating.. We had been anticipating $6 million or $7 million in sales in that program, and we have essentially got a couple of million through the first half, and we have each decided that to be prudent, and this is not a reflection on their plans or any suggestion about what their future business is, but just for our own internal uses we have taken that forecast down for the rest of the year, essentially reduced that to a negligible amount.

Also on the G650 we had a little bit heavier activity in the first half, and that will moderate in the second half.

Got it. And then if I go to kind of the components grove, if I look at your run rate on both medical and your run rate for Marine, it looks like you did not change the numbers. So that we are looking at a fair deceleration there. I would think that the Marine business would not be decelerating, but if anything would be accelerating. Are those numbers conservative?

Some of the Marine business - - all of the businesses kind of have ups and downs. We have got a very strong first half behind us in the components business. And where kind of the numbers, - - it is in the noise, Cai, I would say the Marine if you annualize the first half we are kind of 45/ 46 range.

Our forecast for the year is just about $1 million below that. Some of the Marine business is based on some very large shipments of big pieces of equipment called the floating FPSOs, floating platform storage, and uploading swivels there, and they can be in the couple of million dollars a unit. So that really depends on when those actually ship because -- those because are short term accounting, but some bigger ones in the second half of the year, some of them may be in or may be out. I think we are being a little bit conservative there. Or at least hopefully realistic.

We are trying to be as realistic as we possibly can. And on the medical side- - a good first half. We are just not expecting that it is going to get any better in the second half. Maybe it is a little bit conservative. On the other hand, I would say in the defense world in the components business, we have seen defense over the last several quarters slow more quickly than we anticipated. And I think if you take it all on balance, keeping the forecasts flat, it is probably a prudent thing to do.

Got it. And then if I look at your medical division, the sales are off a little bit, but an interesting mix shift with administration is up and pumps down. So essentially more of the good stuff. Maybe explain that, and does that give you a little bit more margin opportunity because the sales of admin sets really look quite good in the second half.

In the second half of the year, Cai? I am sorry. I am wondering what you are looking - -

Right. Am I correct that admin sets are going to be a little under 55 for the year? So looks like they would trend up a bit in the second half. Pumps are up 41. So they will be a little better but, compared to your last guide, there was a little bit more pumps and somewhat less in admin sets.

Yes.

So you are right. Admin sets, the run rate on that we think we have got a little bit better in the second half. We are saying that maybe the pumps will not be quite as strong. I do not think that it is -- I would not assume that there is dramatic difference in the margins. The pump business actually has some nice margins at the OEM level but, we have also increased our forecasts, our profitability forecasts in the medical business. We have ticked it up a bit from 3.4% to 4.2%. It is immaterial in the total scheme of things, but it's about $1 million of extra profitability coming in the second half. I think we are reflecting fact that particulars like things might be getting a little bit better.

Okay. And then the last one, you mentioned that you do not have exposure to Hawker. How big are your receivables out to Hawker? Because the expectation that is that they could be going into bankruptcy. So what is your -- what do they owe you?

It is not much. And we have got ourselves very well protected, Cai.

This is something that I would say over the last year our folks here have been working every closely with the customers to make sure that we do not have an exposure that we would be reporting. So if something were to happen, it would not -- it just would not show up on any of the line items in terms of the size. It would be immaterial.

Terrific. Thank you very much.

You are welcome.

Thank you.

And ladies and gentlemen, our last question will come from Eric Hugel.

Hey, guys. Just a follow-up on some medical business. John, I know and I agree with your short-term strategy of stabilizing the business and sort of getting everything sort of in place. But when you look at the long-term strategy, do you believe that you have sort of the critical mass in that business with sort of the pieces that you have right now to really effectively compete in that market?

Well, that is an interesting question. So let me turn the question around. Can a small player establish a position in the medical devices market and be successful?

And I think it you look at the history of successful companies, at least over the last several years, there have been a variety of companies, and I am going to quote one that is actually, [ ] a company called Sigma that was just bought out by Baxter which was a company that started up within the last decade, very small start-up, developed a superior product, got that to market, got it through the FDA, and have done extremely well, and were bought out by Baxter for a very large sum of money. So I think, if you ask, so what are the characteristics of the markets and do you need a certain size?

Pick a number, half a billion, a billion dollars just to be able to compete, I would say no, you do not. And I think - -we bought five companies, they were small pump companies that individually had also found opportunities, found niches in the markets to be successful with their pumps. So I think we have $150 million , $135 million, $150 million business. It is a business that is profitable. I think if we can focus our strategy in the right areas, develop the right products, I think we can be successful in it?

Do you envision further M&A down the road? Are there other sort of capabilities or products that would sort of mesh well together with that would sort of improve the overall business? Or is your really plan to grow it organically?

I am assuming that the question is still pertaining to the medical devices business, is it?

Yes yes.

In the next -- no, I do not envisage that we will do any significant acquisitions in that business. I think we have acquired a series of companies. We have integrated them. I think we stabilized our business. Perhaps there is a little piece of technology here or there along the way that we decided we want to add, but sitting here right now, I do not know exactly what that would be. I think we need to prove to ourselves that we understand the market, and can make a good business out of what we already have acquired and not try to acquire our way to profitability. We need to consolidate what we have got. So right now acquisitions in the medical devices sector not on the horizon for the moment.

Okay. Maybe in a broader standpoint from the M&A when you look at the M&A pipeline, can you sort of talk to us about what you are seeing there for the whole company sort of in terms of numbers of opportunities and sort of the size and sort of where -- are there any particular areas of focus for you?

I would say there is an active pipeline of opportunities. It is not particularly better or particularly worse than it has been historically.

As Don mentioned, we have actually purchased four small companies over the last year, but to some extent it has gone unnoticed because they have been relatively small, but we have spent $80 million, and we have acquired what I would call four niche technology companies that fit nicely within our segments in terms of broadening their product portfolio giving then additional opportunities of scope growth that existing customers and perhaps hoping up some new adjacent markets. And that continues. We have continued to find there is always a pipeline, and there is always some things going on at any one particular time. I do not envisage there is larger opportunities when you start to get into the multi-hundred million dollars opportunities, those opportunities we do not see on the horizon at the moment. Of course, that can change any moment, but right now I would say our focus and our activities are more in the smaller, the sub hundred million dollars opportunities where they are tack-on acquisitions for products that we are familiar in markets that we know our way around. We will continue to do that over the next few years.

And just two quickies for Don. Don did you say - - it was JB's question that the combined corporate overhead and option expense number should be around $8 million per quarter?

Well, let us make sure we have got it right. I said there is a couple of numbers, but I will throw them all out. The corporate expense number, our forecast for the year is $21 million. And then we have got equity-based comp and other that will be closer to $8 million. So combined, you have got about $29 million in total.

Perfect. And just in terms of - - again you have done a number acquisitions over the past year. Can you sort of break out what was the organic growth versus the total growth?

In the quarter, and in the year it is - - I would say about 80% of the growth in the quarter was organic. So we experienced in the quarter 9%. So it is about 7% organic.

Great. Thanks a lot, guys.

Thank you.

And with that, I would like to turn it back over tour presenters for any final and closing remarks.

Thank you very much indeed for your attention. We look forward to speaking to you again in about 90 days. Thank you.

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation and have a great