Moog Inc (MOG.A) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Moog first-quarter fiscal year 2013 earnings conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Ms. Ann Luhr. Please go ahead, ma'am.

Good morning. Before 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 risks, 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 this January 25, 2013, our most recent Form 8-K filed on January 25, 2013, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our customers better follow long with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast pages at www.moog.com.

John?

Good morning. Thanks for joining us. This morning we report on the first quarter of fiscal '13 and update our guidance for the full year.

Our first quarter was a slower start to the year than we were planning. Our Aircraft and Components groups delivered excellent results, but sales in our Industrial Systems business were below plan, and margins in this segment were weak.

Six months ago we provided our initial guidance for 2013. At that time, we projected a sales range of $2.58 billion plus or minus $25 million. We intended the range to reflect uncertainty, principally in our Industrial business. We also projected a mark -- a range in earnings per share of $3.50 to $3.70. 90 days ago we reaffirmed that guidance. We updated our sales to account for some acquisitions we had made, and we maintained the earnings guidance.

We were also forecasting earnings per share for this quarter of $0.80 at the midpoint of our range. The news of the day is that the first quarter of 2013 was not a strong industrial sales quarter. Sales of $148 million came in about $10 million below our expectations. As a result, our earnings per share for the quarter came in at $0.75.

Some of the shortfall was the result of customers delaying the placement of orders. We think these orders will ultimately be placed, but given our experience in the first quarter, we are revising downward our forecast of industrial sales for the year. The leadership of our Industrial group is taking the appropriate actions to adjust our cost structure, but the lower sales for the year will have an impact on the Industrial operating profit.

I'll describe that in more detail in a few minutes. But first let me provide the highlights in the quarter and more detail on our revised outlook for the year.

Sales in the first quarter of $621 million were up 3% over last year. The growth is all attributable to acquired sales from recent acquisitions. Absent acquisitions, sales were about flat with fiscal 12.

We had good organic sales growth in our Aircraft and Components segments, relatively flat sales in Space and Defense and Medical and lower sales in Industrial. Net earnings of $34 million and earnings per share of $0.75 were both 6% lower than last year.

Taking a look at the P&L, our gross margin is unchanged from fiscal '12. R&D is up, driven by acquisitions and the continued spend on the A350. SG&A is also up in the quarter as a percentage of sales due to a combination of acquisitions, higher pension costs and the timing of some expenses.

For the full year of fiscal '13, we are anticipating SG&A will be about level as a percentage of sales with fiscal '12.

Interest expense in the quarter was unchanged from last year. Our income tax rate came in at 30.5%, 80 basis points below last year on a different mix of international earnings. The overall result was a 5.5% net margin and, as I mentioned, earnings per share of $0.75.

Outlook for fiscal '13. We're moderating our sales forecast for the year by $29 million. There is no change in Aircrafts, Components, or Medical. Sales in our Space and Defense group will be $20 million higher as result of our recent Broad Reach acquisition. Our industrial system sales will be $49 million lower than our last forecast, reflecting three more quarters about equal to the first quarter. As before, our forecast does not take account of any potential impact from sequestration should it occur.

Given the lower sales outlook, we are narrowing our EPS range to between $3.50 and $3.60 on total sales of $2.62 billion.

Before I jump into the segments, let me provide some more color on the weakness in our Industrial Systems segment and expanding our thinking for the remainder of the year.

We are disappointed with our results in our Industrial segment this quarter. 90 days ago, our forecast for fiscal '13 included a sales range for our Industrial segment between $624 million and $674 million. We are now forecasting sales of $600 million. That is $24 million below the low end of that range.

For several quarters, we have been reporting that the Industrial markets in the US were strong, stable in Europe, and weak in Asia, particularly China. That quarter we reported some slowing of incoming orders in Europe, but we believed our forecast for fiscal 13 already captured this effect. This quarter we saw further weakness in Europe and a continued slowdown in China.

Our new forecast of $600 million for the full year reflects a second quarter similar to the first and then a very modest improvement in the second half.

We believe we have a robust forecasting process -- a combination of a detailed rollup by customer from our field sales people, coupled with the top-down analysis of major trends. We have also been watching our order rate for signs of structural weakness, and given our experience in the recession of 2009, we have been particularly vigilant.

Despite our efforts, however, we missed the turn in the business this quarter. I am reminded of a quote I heard one time which was attributed to a famous economist whose name I don't recall, and he said, when you've seen one recession, you've seen one recession. For Industrial segments, this means forecasting will remain challenging, so we need to plan our business assuming volatility in the market, both on the downside and on the upside, and build as much flexibility into our cost structure as possible.

This is the path we have been on for the last three years and continue to pursue.

Margins in our Industrial segment were 6.1% this quarter. Based on a range of actions we're taking, we believe margins for the year will be 8.4%. These margins include about $4 million or 80 basis points of restructuring.

Over the last few years, we have increased the number of temporary walkers in our production areas, and we have used this flexibility to align our direct staff with the needs of the business as our sales have dropped. Given the nature of our business, however, it is not possible to maintain a large temporary workforce of skilled development, application and sales engineers. Therefore, we are now engaged in a range of restructuring activities, including reducing overheads, consolidating facilities and exiting some product lines. Some of these actions have already occurred, but others have not yet been communicated within the Company. So we are not going to discuss these in detail at this stage. These activities will take several quarters to complete, but we plan to exit fiscal '13 with a more profitable and focused industrial business.

We are often asked about the upside potential and the downside risks associated with our forecasts. On the upside, I would say that our aerospace and defense businesses could be stronger than we had forecasted, and our offshore energy markets could be better. On the downside, we still have the risk of sequestration, and of course, our industrial business could continue to weaken beyond what we are now forecasting.

Now let me go through the segments. Before I do, I would remind our listeners that we provided a two-page supplemental data package posted on our website, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text.

Starting with Aircraft. Q1 was a very strong quarter. Total Aircraft sales were up 9% to $252 million. There were gains in both the commercial and military market. In the commercial OEM markets, sales in the 787 were more than double the level of a year ago, rising to $19 million this quarter.

The growth in sales to Boeing accounts for 100% of the OEM sales increase year over year with 787 sales contributing 80% of that growth. In our other OEM categories in commercial aircraft, we saw some ups and downs, but little of notice. The commercial aftermarket was up 5% on strong 787 initial provisioning.

In the military market, our OEM business was about flat with last year, but we saw nice pickup in the military aftermarket, driven by strong sales on the C-5, F-15 and F-18 platforms.

Aircraft's fiscal '13. We are keeping our forecast for both commercial and military aircraft unchanged from 90 days ago. On the military side, we are expecting fiscal '13 sales of $590 million. Comparing to our forecast last quarter, we think the military OEM will be about $7 million lower balanced by $7 million higher military aftermarket sales.

On the commercial side, we are forecasting fiscal '13 sales of $437 million. The production rampup on the A350 program is going to be slower than we were anticipating, but that will reduce our Airbus forecast for the year by about $7 million. But we should see higher sales in our other OEM accounts and a slightly stronger commercial aftermarket.

Aircraft margins. Margins in the quarter of 12.3% were strong on a nice mix of sales. We are not forecasting the same margins for the full year, but given the strong first quarter, we are raising our margins forecast for all of fiscal '13 to 11.9%, up from 11.5% 90 days ago.

We have been telling the story for several years that our Aircraft margins would expand as various programs shifted out of development and into production. We are now seeing this effect come through strongly with margins in 2013 up 100 basis points over 2012. And as I mentioned last quarter, were it not for the higher pension costs associated with the low discount rate, Aircraft margins in 2013 would have been 50 basis points higher still or 12.4%.

Turning now to Space and Defense Q1. Sales in the quarter were down marginally from last year at $87 million. We had growth from acquisitions balanced by softer sales in some of our legacy platforms. The satellite market was way up with growth coming from our recent ISP acquisition. Our NASA business was lower as work on the Orion multipurpose crew vehicle slowed significantly.

In the Defense market, sales were slightly lower as work on armored vehicles declined. The missile replenishment work was in line with last year. The security sector was also lower, but the majority of this drop is due to the lack of DVE sales in this quarter.

Space and Defense fiscal '13. For the year, we are increasing our sales forecast by $20 million to $433 million. We acquired Broad Reach Engineering, a manufacturer of spacecraft avionics at the beginning of Q2. This will add $32 million in sales to the year.

Our legacy Space and Defense market softened in the first quarter from what we are anticipating, so we are moderating our forecasts for these markets slightly to reflect that slowdown. We are keeping our forecast for security unchanged from 90 days ago.

Overall Q1 was a relatively slow start to the year, but we believe activity will accelerate as we move through the year. Our activity on the common CVC system for the Delta IV and Atlas V will pick up in the second half, and we are anticipating orders for some foreign military programs in our missiles product line.

Space and Defense margins. Margins in the quarter were 9.5% below our average at the last four quarters. Acquired sales from recent acquisitions balanced lower sales on our legacy business. This resulted in an unfavorable mix, which depressed margins. We think we may continue to see a slightly adverse mix over the next couple of quarters, so we are moderating our margin outlook for the year to 10.2%.

Before I leave the Space and Defense segment, let me add a couple of comments about our recent acquisitions in the Space market. Over the last year, we've acquired Bradford in the Netherlands with capability in space components, ISP in Niagara Falls in the UK with satellite engine capability, and Broad Reach in the US with avionics capability. When we combine these capabilities with the Moog heritage space business, we believe we have the broadest range of satellite components on offer in the market.

Our strategy has been to increase our scope of supply on every satellite and add value by integrating components into more reliable and compact subsystems. With the addition of these three recent acquisitions, we believe we have carved out a unique market niche as a full range supplier of components and subsystems to the global space graph market.

Now let me turn to Industrial Systems. Q1 -- sales in the quarter of $148 million were 6% lower than last year. Sales were down in energy and industrial automation, while simulation and test sales were marginally higher. Within energy, the story continues to be the wind challenges in China. Sales this quarter were only $6 million compared to $17 million a year ago. The nonrenewable energy sector was actually up nicely in the quarter.

Turning to industrial automation, we have seen a slowdown in most of the major industrial markets we serve, including plastics, metal forming, and steel mills. Last quarter we reported that Europe was starting to slow, although we weren't sure if it was more a summer month seasonal effect or a structural shift.

This quarter the slowdown continued, and we believe we are now facing a structural slowdown which we do not see improving in the next few quarters.

Our test and simulation business, on a positive note, was up slightly in the quarter, a combination of strong simulation growth and a slowing in our autotest systems business.

Industrial fiscal '13. Given the slow start to the year and our outlook that sales are unlikely to improve much over the next three quarters, we have moderated our forecast for the year down to $600 million. This total is in line with the run rate of the first quarter.

Last quarter we forecasted a sales midpoint of $649 million. Comparing our thinking now with that midpoint, we are reducing our wind forecast by $14 million, our industrial automation forecast by $25 million and our test and simulation forecast by $10 million. The reduction in the test and simulation market is all on the test side where we anticipate the delayed receipt of orders for some large automotive test projects.

Industrial Systems margins. Margins in the quarter were a disappointing 6.1%. Coming into the quarter, we were sizing our organization for higher sales through fiscal '13. Lower sales and poor mix and higher operating expenses all contributed to the weak margin performance.

Last quarter we reported that we had taken action in our wind business in response to slowing sales in China. This quarter we've developed a more comprehensive restructuring plan to align our cost structure with our realized sales forecast.

Based on the plans in place, we anticipate a recovery of margins in the second half to yield full-year fiscal '13 margins of 8.4%. These margins are inclusive of restructuring costs of about 80 basis points or $4 million.

Turning now to our Components group. Q1 -- a great quarter for our Components group with sales up 13% to $99 million. Our aerospace and defense businesses were slightly this quarter, but our sales of components for offshore exploration were very strong. Historically we have classified our oil and gas exploration sales in this segment as marine. Going forward we are including all marine sales, as well as sales of slip rings on wind turbines, in a new energy category. In this quarter, our sales of slip rings and wind turbines in the Components group were $1 million, while our sales in the marine markets were $23 million.

Sales in the marine markets were driven by very strong deliveries of large slip rings used on offshore oil storage vessels, as well as sales from our Tritech acquisition.

Components fiscal '13. We are keeping our forecast unchanged from 90 days ago. Our new energy category includes $75 million of marine sales and $5 million of wind sales. These wind sales were previously in our Industrial category, so that category is now $5 million lower than 90 days ago.

Components margins. Margins in the quarter were very strong at 19%. In addition to a very strong underlying business, margins this quarter benefited 200 basis points from the partial unwinding of an earnout provision on our Protokraft acquisition. Protokraft is forecasted to grow very nicely in fiscal '13, but will not meet the sales level required to secure the full earnouts of the sellers.

Based on the strong underlying margins in the first quarter, we are increasing our margin forecast for the year to 16.2%.

Medical. Medical Q1 -- sales in the quarter of $35 million were in line with the last eight quarters. Comp sales were down a little from a year ago balanced by slightly higher set sales.

For fiscal '13, there is no change in our sales forecast of $146 million for the year. We think comp sales may be a little lower and set sales a little higher, reflecting the trend we saw in the first quarter.

One development of note over the last quarter has been the decision by Abbott Nutrition to exit the enteral pump market in the US. This creates an opportunity for us to gain some market share, which we are actively pursuing. Any impact on fiscal '13 is likely to be small, but longer-term we could see some gains from the departure of a major player in the market.

Medical margins. Operating profit in the quarter of $1.6 million was 4.6% of sales. This was up from the average margin in fiscal '12 of 3.9%. For the year, we are maintaining our margin forecast at 6%.

So let me summarize. We are off to a slow start this year. The weakness is in our industrial markets, while our aerospace and defense businesses are strong. For the year, we are projecting sales of $2.62 billion, down $29 million from our last forecast, but up 6% over last year, which we are projecting earnings-per-share within a range of $3.50 to $3.60, a 7% increase on fiscal 12 at the midpoint. We believe the second quarter will be similar to the first and that will we will see an acceleration in sales and earnings in the second half.

On the sales side, we anticipate a modest increase in each of the segments as we move through the year. On the earnings side, we should see a stronger second half in both our Space and Defense segments and our Industrial segment. In Space and Defense, higher sales in the common CBC program and in our missiles product line will drive the improvements. In our Industrial segment, we see higher sales in the second half in our simulation business, and we will also have the benefit of our restructuring activities. The midpoint of our new earnings range is $3.55, and we are projecting earnings-per-share of $0.73 in Q2, $0.99 in Q3 and $1.08 in Q4.

Now let me pass it to Don who will provide some color on our cash flow and balance sheet.

Thank you, John. Good morning, everyone. Our net debt decreased by $9 million during our first quarter to $607 million, and our free cash flow was $6 million. Our first quarter was a slow cash flow quarter due to the payment of an annual profit share to all employees in December. Were it not for this special item, our first-quarter free cash flow would have been in line with the run rate we are forecasting for the full year. So although it appears that we are off to a slow start, we understand why and we have left our free cash flow outlook for the year unchanged at $135 million.

Similar to last year, we do expect a strong second half compared to the first half, largely due to timing issues in receivables and customer advances. In summary, our cash flow conversion of net earnings will be in excess of 80% for the year.

There aren't any notable changes in the balance sheet. Receivables were flat, and inventories were up slightly as our production activity and commercial aircraft programs continue to ramp up. Accrued liabilities were down because of the profit share payments, and customer advances increased during the quarter by $6 million to $118 million. Loss reserves declined from the per quarter by $6 million to $42 million, capital expenditures were $22 million and depreciation and amortization totaled $26 million in the quarter.

We are leaving our forecast for CapEx and depreciation and amortization for all of fiscal '13 unchanged at $105 million and $114 million respectively.

As we have begun fiscal '13, it is worth remembering that we have two rather substantial hurdles that are dragging what would otherwise be a very respectable outlook. Between higher pension costs and a higher tax rate compared with last year, our earnings-per-share are negatively affected to the tune of about $0.34 per share for the year. That is a hole of 10% on last year's EPS before we even start the year.

Our operations for the most part are filling that hole and then some, but it is a significant headwind that we have begun with.

John referenced our pension cost pressures in our Aircraft segment, but I would like to offer a broader perspective. In fiscal '13, we are forecasting our defined benefit pension expense increased by about $15 million over last year or about $0.19 per share to over $50 million. This is principally driven by a very low 3.75% discount rate that we used to measure the liability at the end of our last fiscal year.

With respect to cash contributions to the plans, we contributed $10 million in our first quarter, in line with our projected contributions for all of fiscal 2013 of $39 million.

Turning to our -- turning to taxes, our effective tax rate in the first quarter was 30.5%, as John had mentioned, down from last year's 31.3%. We are now forecasting our effective tax rate for all of fiscal 2013 to be 30%, 30.0%, down slightly from our forecast of 30.6% three months ago.

In early January, President Obama signed into law the American Taxpayer Relief Act that included the retroactive extension of research and development credits. Moog does benefit from these credits, and we have captured an estimate of these benefits in our projected effective tax rate.

Our tax rate in '13 is up noticeably from our full-year tax rate from last year of 27.0%, so 300 basis points. The increase is mainly due to the lower tax accruals last year and a couple of our foreign operations that won't repeat this year into a less favorable mix of global taxable earnings. This higher tax rate is another 15% -- or, sorry, $0.15 per share headwind on our 2013 EPS growth.

Without the effect of the pension and tax headwinds in the quarter, our EPS would have compared more favorably to last year's $0.80 per share, despite the negative effects associated with the softness in our industrial markets.

Turning to some financial ratios. At the end of the quarter, they were pretty respectable. Net debt as a percentage of total capitalization was 30.9%, down from 33.7% in the last year's first quarter, our leverage ratio was 1.73 times, and at the end of the quarter, we had $583 million of unused capacity on our $900 million revolver, which terms out in 2016.

We closed on the acquisition of Broad Reach Engineering on December 31. This was a second-quarter event based on our first-quarter cutoff at December 29, and it will be shown as part of the Space and Defense segment. The accounting and financial effects of the acquisition are all -- or in our projections, and the purchase price for Broad Reach was $48 million, including $37 million in cash, a $6 million note, and $5 million earnout provision depending on the achievement of some financial targets. Broad Reach is forecasted to add sales for the last nine months of our year totaling $32 million.

On January 15, we completed calling in $200 million of outstanding 6.25% high-yield debt that was otherwise due in 2015. There is an interest arbitrage savings that we built into our financial projections associated with this transaction. Our plan at this time is to take advantage of the low cost of our revolver debt on which we are paying interest at LIBOR +150 basis points in margins.

Cash flow is strong, our balance sheet is solid, and we have plenty of unused capacity remaining under our revolving credit facility with our bank group. Accordingly, in our projections for all of 2013, we have assumed our interest costs will be $29.0 million or $6.4 million less than our forecast from three months ago.

So we are off to a slow start, yet we see some strength as we look out into the second half of the year. Our Aircraft and Components businesses were very strong in the first quarter, and we expect that to continue. We are expecting Space and Defense to build as the year evolves, partly related to be Broad Reach acquisition, but also due to some target opportunities that should enhance the second half of the year.

Our Industrial Controls business is going through a restructuring that will continue throughout the next quarter or two, and we expect improved operating margin performance in the second half of the year.

So let me now turn you back to John for any questions that you may have. Thanks.

Thank you. Operator, we will take any questions now that are coming in, please.

(Operator instructions). Cai von Rumohr, Cowen.

Thank you very much. So, John, could you give us a little bit more color on Industrial in terms of what is the geographic mix today in terms of end markets between China, Europe, and the US and maybe the rest of Asia?

Good morning. So, our business, if you look at it across -- the way we break it down is we do Americas, we do Europe, and then we do the Pacific. And if I look at our forecasts as we are now projecting it, the $600 million, about $150 million of it is the US, $250 million is in Europe, and about $200 million is in Asia-Pacific. And if I compared that with a year ago in terms of what we did in fiscal 12, the US is up marginally. That, of course, is the strength on the simulation business.

Europe is down from about $290 million last year to $250 million, and the Pacific is actually more or less flat with last year. So the weakness in the Pacific that we saw last year, we think we have bottomed out there. We think that is reasonably stable. The weakness coming through this quarter is really mostly in Europe.

Got it. And then you had mentioned $4 million in restructuring. How much of that was in the first quarter, and kind of just is all the rest of it in the second quarter if the margins get better as we get to the back part of the year?

Yes, there was relatively little in the first quarter. We will see a big part of it in the second, and we probably see some of it in the third as well. Some of the restructuring depending -- particularly in Europe, tends to take a lot longer than, say, in the US or in Asia. So it is the combinations of second and third quarter is probably where we would see the majority of it.

Okay. And then you had mentioned your SG&A was quite high in the quarter. I think you had mentioned that you expected to be flat as a percent of sales. By my numbers, it was $105 million in this quarter, and it has got to be $100 million in the rest of each of the next quarters.

So you had mentioned -- was there anything weird in there? You mentioned acquisition expense. How big were those in the quarter, and how does it come down? Because historically it doesn't do that.

Yes, no, it wasn't acquisition expenses; it was SG&A associated with acquired businesses. So it is just the SG&A of the businesses that we have taken on board. And there was also, as I've mentioned, there was pension issues; the discount rate had affected it, but there was a timing issue as well. And so it was a combination as we go through the rest of the year of getting past some timing stuff that came in in the first quarter, plus the benefit of reducing it associated with restructuring. So for the year we are forecasting, as I said, it is within 10 basis points of what we did in fiscal 12 is our present projection.

So, then the restructuring will basically hit the SG&A, correct?

It will be mostly on the SG&A, although we -- as I mentioned, we have had a lot of temporaries working on the production side over the last couple of years, so we have been adjusting the direct staff as we have been -- as sales have been shifting through the quarters.

So the restructuring challenges that we are now faced with is more on the overhead side than it is in the direct.

Got it. And then you also mentioned on R&D was up 11%. Is it still looking like $116 million for the year? Given it was up, how much of that was in the Aircraft sector? Where was the up?

Yes. So, we are now projecting R&D for the year up about $4 million from what we said a year ago -- probably said 90 days ago. So I guess this was just about at the $120 million mark, and that really is driven by the Aircraft, and it is really driven by the A350.

And so what was the Aircraft number in the quarter, and what's it look like for the year?

Well, the Aircraft number in the quarter was about $18 million, $19 million, and for the year, it is just north of $60 million.

North of $60 million. Okay.

About $62 million.

Okay, $62 million. And last quick question, could you give us the -- you gave us the interest expense, but FAS 123 and the corporate expense for the year, what do those look like?

The equity comp in the quarter -- it was -- the equity comp in the quarter was $3.9 million right for the year. We are forecasting it to be [$6.4 million]. And your other question was what, corporate?

The corporate expense was [$7.2 million]. Where is that for the year?

Yes, we are forecasting that to be about $26 million.

$26 million. Very good. Thank you very much.

You bet.

Michael Ciarmoli, KeyBank.

Good morning. Thanks for taking my questions.

John, just to dig deeper on Industrial, I am just struggling to figure out how the margins got down that low to 6.1%. I mean that is the lowest since I think September 2009, and on a sequential basis, not much changed. I meant this was all a function of just mix, sizing and lower plan on revenues. I mean it just seemed surprising that they dipped down that significantly.

Yes, so as I said, what happened was we were sizing the business for higher sales. We were projecting higher salves as we were going into fiscal '13, higher relative to what actually came in. And, therefore, we had a cost basis that was aligned with that. Our operating expenses in the quarter were a little bit higher than we had anticipated, but actually not out of line with what we had forecasted or budgeted.

So it was really the fact that the sales were lower than we were budgeting. Granted, they were similar to the fourth quarter, down about $10 million from last year. But we had a cost basis that was prepared to do more sales. And then there was an adverse mix effect. I mean we did see a slowdown in some of the more profitable businesses. So it is really a combination of all of those.

But I agree with you. The margins in the quarter were disappointing, and we are working to see if we can make sure that that doesn't happen again.

Fair enough. And then just staying in Industrial, wind, you guys are forecasting now $80 million, I guess, for the year. If I go back when you guys bought that business, I think the expectations were about $240 million. Should we be concerned about having to write down any assets in that wind portfolio?

Well, no, not in terms of writing down the assets. The way we -- when we acquire businesses, we have reporting units, and the reporting unit -- the wind is divided between a European reporting unit and an Asia reporting unit. And because we integrate these businesses as we go along, the goodwill is carried by the reporting units once we get into a business and we integrate it. And, therefore, we have an approach that doesn't allocate the goodwill to individual acquisitions, so, therefore, no, that's not a worry at this stage.

Michael, if I can add, too. I think the other thing to consider is that the price that we paid getting into that business was a pretty nice price, and we enjoyed that ramp-up or expected to ramp-up. It never did get up to the $240 million like you suggested, but we were on that track we thought. It has come down a little bit, but I think because of the price that we paid, we don't have that at least near term issue that we are staring at.

Okay. That's fair. And then last one and I will jump off here. I think you said the A350 was expected to be slower. Could you give us an update maybe on that program? I think we saw some comments yesterday from Airbus CEO in light of the 87 that they remained on track for first flight. I mean are you guys seeing anything different there? It sounds like the program is stretching out a bit.

Well, I would be very careful, Michael. I am not going to provide you with any information that is different from what Airbus is providing. What I think we said was that the anticipated ramp in the production was going to be slower than what we had planned in. So it is not -- we aren't not changing. We are following Airbus' lead on this, and we are not suggesting that there is any different date. It is just that the ramp-up in the production is going to be a little bit slower than we were anticipating.

Got you. Perfect. That makes sense. All right. Very good. Thanks, guys.

Thanks, Michael.

(Operator instructions). Tyler Hojo, Sidoti.

Good morning. Just going back to Industrial, I think in your prepared comments you said that some orders got pushed out of Q1, but you thought they would hit. And I am wondering on timing, if you look at the guidance, it basically assumes flat volumes relative to Q1 over the next three quarters. So is the assumption that those orders just don't materialize, even though you are hopeful? I am just trying to understand that a little bit more.

Yes, the first quarter was $148 million. The second quarter, I think, it is going to be there or thereabouts. So the first half would probably be maybe $295 million, and we are anticipating $600 million for the year.

So the second half is actually up a little bit on the first half. And that is -- the pushout was mostly on the test side of our business and the automotive test area where we would be anticipating orders for test projects from the automotive sector. And those orders have pushed out, and we are thinking that they will come in in the second half of the year.

Okay.

And that a little bump in sales. So for the run rate, yes, it is an average $148 million; it is an average of $150 million. But we are projecting that the second half will be modestly stronger than the first half. And that's been a combination of some better tests on some of those projects, and then the simulation business will be up a little bit in the second half. Our assumption is that the energy business and the industrial omission business will not see much change versus the second half.

Okay, helpful. Also, on the $4 million in restructuring, get the timing in regards to when that is going to hit, but maybe you could talk a little bit about some of the cost savings that you could potentially reap from that.

While our anticipation in terms of the margins for the year suggest that in the second half of the year we should see about twice the gain in terms of restructuring benefits for the actual cost that we put in. So for the $4 million in the second half, the results of our restructuring efforts should reduce the cost base by something around $8 million to $10 million.

All right. Great. And then just on the Medical Devices business, obviously it is nice to see some improvement there. But I was wondering if you could maybe talk about the path to getting that business more towards the double-digit margin area that you envisioned when you first kind of went down that path?

Yes, the path from here to there is twofold. It is increased sales, and it is new products. So let me do those. Let me separate them.

The increased sales is because we, if you remember a couple of years ago, we had an exclusive distribution agreement for our IV products with B. Braun in the US. That arrangement came to an end a year or two ago, and since then we have been building a direct sales force to sell IV pumps directly to the market. That went through a lull as we changed out the sales channel, and we are now anticipating that that will start to grow. So that's one of the increased opportunities.

The product side of it also obviously drives the sales. We introduced a new enteral pump in Europe. We are doing of a variety of pump developments here in the US. And over a period of time, that will take a little bit longer. We should see growth through new products. So it is a combination of new products and a new sales channel that we are starting to exploit.

And you mentioned in the prepared remarks that one of your competitors was exiting the US market. Could you perhaps talk about some of the market share that is opening up there?

So Abbott Nutrition announced in, I am going to say November, that they decided to exit the US market for enteral feeding pumps. We don't have exact numbers, and therefore, I have got to be a little bit careful. But our estimate is that Abbott, perhaps, had a third -- and, again, that was a liberal rounding -- but perhaps a third of the market in the US for enteral pumps.

Now we are not one of the bigger players, but we do think that there is a potential market share for us that we might be able to capture perhaps at 10% of what Abbott is giving up.

So that's our objective. Can we get 10% of what Abbott is giving up in terms of market share? That would be a 3 to 4 percentage market share gain for ourselves. If that happens and we are busily working on that at the moment, it is probably going to be more of a 2014 effect than a 2013 effect.

Got it. That is all I had. Thanks a lot.

You're welcome. Thank you.

(Operator instructions). Steven Cahall, Royal Bank of Canada.

Good morning. Just first a quick question on the aftermarket. So you had 5% growth in the quarter. I see you haven't changed the commercial aftermarket growth trend for the year. So how are you thinking about that over the next couple of quarters, and what sort of trends are you seeing?

Yes, so the commercial aftermarket was up in the quarter. That is driven by initial provisioning of the 787. And we actually have upped our forecast for the year just marginally $2 million to reflect that.

So, as I mentioned, the IP came in stronger in the first quarter than we were anticipating, and for the year we had a forecast last time out about $110 million, and now we are bumping that to about $112 million.

And if you are up 5% now, but still negative 4% for the year, how do you maybe see that phasing over the next few quarters? Is it steady and then dramatic, or is it pretty smooth in terms of getting from one to the other?

Well, okay, let me do that. So last year we did about $117 million. This year we are forecasting $112 million. The difference is all 787 initial provisioning. So that is the only difference. It is essentially we had a big burst of initial provisioning after the 787 production, and we are seeing that last year it was about [$13 million]; this year it is about half of that. So that is really the difference in the market. I see there's probably a little bit of underlying growth that we are anticipating.

In terms of the quarter, our aftermarket is notoriously difficult to forecast quarter to quarter. We can see volatility up 10% to 15% from one quarter to the next. And that is because our stuff is not scheduled maintenance. So typically it is not that we can say that this number of flight hours or this number of CND checks and, therefore, our stuff comes back. It is a little bit more volatile than that.

So I would be reluctant to say here's how the quarters will lay out. I would say on average you will probably have quarters around the same as the first quarter in the $25 million, $26 million, $27 million range. But we could have a quarter that might be $22 million, and we might have a quarter that will be $30 million. And it is impossible. As this stuff comes in, we turn it around, we send it back out. So it is not as if we have a big backlog that I can give you that forecast sitting here today.

And then just also on the portfolio, you mentioned a couple of things in Industrials. You mentioned that you didn't want to get into detail, which we understand, but how much of this reflects how you see the end market and the revenue growth for the year changing versus maybe some pricing coming back and how you deal with the portfolio if some of the macro stuff does improve and you can maybe get some better prices for parts of the portfolio?

You are going to have to repeat that question because I am not sure I understood it.

Yes, so you mentioned in the Industrial business maybe some parts that you might look to rationalize over time. How much of that is due to a slowdown in the end markets versus other end markets across the business that might be improving, and are you looking at any parts of the business that might be more attractive to divest it? Maybe that other parts weren't as attractive because pricing in the buyers market wasn't there.

So I think it is a combination of both. I think we are in a situation where we have seen our margins compress, and in an event like this, there are -- there's the structural -- the cycle that you want to look at and see whether or not how the businesses are going to perform through the cycle. And then, of course, there's the underlying question of so are all of these products and product lines are they the ones that we want to be in as we look to the future. And I think the trick is to identify the ones that we don't feel that long-term have returned for us and not find ourselves stepping out of stuff that has actually has just got some structural weakness, and we see it coming back perhaps in a year or two. And we are going through that product line by product line. It is not a defined formula, but we are looking at areas that it is over an extended period of time. We have not seen the type of profitability that we would like, and we don't see a path from where we are today to getting to that profitability.

I would say those are the areas that we will decide to shift gears. Now that may be a combination of just increasing prices or reducing the efforts associated with growing it and gradually getting out of it, or it may be some other form of exit. But at this stage, it's too early to discuss that in detail.

Cai von Rumohr, Cowen.

Yes, thank you very much. John, could you give us some color on the recent trends in Europe and China? I know some people are talking about seeing improvement in China. Like are you seeing any trends in January that would support that? And can you give us some color? Is January in Europe worse or maybe a little better or the same?

I would say it is too early at this stage, and it would be inappropriate to provide you with a couple of weeks' worth of data and to draw some kind of a conclusion from that.

I would say that in China there are suggestions that China is getting better. I don't think we have seen it yet. I think there was export data from China to Europe that the Chinese published recently that suggested they saw a big uptick in the last couple of months to which the Europeans said, well, we don't know why, and there's nothing that we can possibly come up with as to why the Chinese would think that they are exporting more to Europe.

So, with the shift in the regime in China, I think the official numbers and what we are actually seeing are even, I think, perhaps what some of the headlines are saying. It's not possible to perhaps connect those together. We haven't yet seen it, and I think in any event it probably would take a couple of quarters before any stimulus in China or any investment or upturn would play through it to the capital investment cycle, which is what we would be looking for.

And Europe, I would say what our change in the forecast really reflects that structural weakness in Europe that for quite a while that we had managed to sidestep or perhaps it hadn't had as much of an effect on us. But we are seeing that, and I wish I could say that I could see bright spots in Europe. It does seem as if they got past the initial Armageddon meltdown situation that they were facing six months ago, but I don't know that there is any structural improvements in Europe in terms of credit availability or capital investment that we could look to at this stage that would say yes, that's definitely where we are going to see the improvement.

Terrific. Thank you very much.

My pleasure.

It appears we have no further phone questions at this time. I would like to turn the conference back over to our presenters for closing marks.

Thank you very much for joining us, and we look forward to talking to you again in 90 days. Thank you.

Thank you and again that does conclude today's conference. We thank you all for joining us.