Moog Inc (MOG.A) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Moog third-quarter fiscal 2013 conference call. Today's conference is being recorded. And at this time like to turn things over to Ann Luhr. Please go ahead.

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 of July 26, 2013, our most recent Form 8-K filed on July 26, 2013, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. Those of you did not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at, www.Moog.com. John?

Things. Ann. Good morning, thanks for joining us. This morning we report on the third-quarter fiscal '13 and update our guidance for the full year. Will also provide our first look at fiscal '14. This quarter has quite a few headlines. First, our operations came in on plan at $0.90 per share, in line with our last forecast. This is exclusive of a couple of active write-downs which I will describe later.

In the quarter, our Aircraft and Component businesses were strong and we've not yet seen any appreciable impact from sequestration. Second, our Industrial business is improving. The benefits of our restructuring efforts are starting to filter through. Third, our Medical business had its strongest operating quarter in five years. We benefited from some strong sales in our Enteral pump line combined with the continued focus on cost control.

Fourth, our Space and Defense group had a very tough quarter. One of our recent acquisitions has turned up a significant technical challenge in a particular program, and we ended up taking a $5 million program charge to fix the problem. Fifth, we had two write offs of note in the quarter. In our Medical segment, we took a second $7 million pretax write-down on the divestiture of the Buffalo Ethox operations, and in our Industrial segments, we took a $2 million write-down on the technology investment that we made a couple of years ago.

Sixth, we announced a strategic review for the remainder of our Medical segment in collaboration with the Royal Bank of Canada. We think this process will take 6 to 12 months. Finally, we are providing a first look at fiscal '14 this morning. We think sales will be up marginally next year, but margins and earnings will be up nicely. We are projecting EPS in the range of $3.90 to $4.10 per share on sales of $2.7 billion.

Now let me provide you with some number starting with the third-quarter results. Q3 fiscal '13 -- sales in the quarter of $671 million were up 10% from last year. We saw higher sales in every segment except Industrial. Acquisitions contributed the majority of the $60 million sales increase. Excluding the effect of the write-downs I mentioned earlier, adjusted net earnings of $41 million were up 7% from last year and adjusted earnings per share of $0.90 were 6% higher.

Taking a look at the P&L,our gross margin is down slightly, primarily as a result of the program charge taken on the Space and Defense segment in the quarter. R&D remains elevated as the A350 program continues to move to certification, while other G&A expenses came in lower as the percentage of sales. We incurred $5 million in restructuring expense in the quarter, mostly in our Industrial segments. Our effective tax rate was up slightly from last year. The overall results, after restructuring, and the write-offs I mentioned earlier, was net earnings of $34 million and earnings per share of $0.75. The Medical write-down was equivalent to $0.11 per share, and the Industrial write-down was another $0.04 per share. Adding these back gives us the adjusted earnings per share of $0.90, in line with our April forecast.

Fiscal '13 outlook -- last quarter we forecast that the year would finish out of the earnings per share in the range of $3.40 to $3.50 on sales of $2.6 billion. Sales for the year should be pretty much on plan, and the underlying operating performance of the businesses should end the year at the lower end of this range. We also need to include the $0.15 per share of write-downs in the third quarter in our projection for the full year, and taken altogether EPS for fiscal '13 will be $3.25. Fiscal '14 -- for next year, we're projecting a 3% increase in sales and a significant improvement of profitability with earnings per share up 23% from fiscal '13.

This year our Industrial business has struggled with a significant slowdown in demand, and our Space business has suffered from some technical challenges at a couple of our recent acquisitions. We've spent the year repositioning our businesses and we see the benefits in our margins in fiscal '14. Sales next year net should be up in Aircraft, Space and Defense, and Components. We are assuming flat sales in Industrial, but sales in our Medical segment will be down slightly as a result of our recent sale of the Buffalo Ethox facilities. Organic sales in Medical will actually be up in fiscal '14. Operating margins for the Company fiscal '14 will be up to 12.4% from 10.6% in fiscal '13. We're projecting earnings per share in a range of $3.90 and $4.10.

Now to the segments. I'd remind our listeners that we've 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 and in parallel with the text. Starting with Aircraft, Q3. Q3 continued a pattern of strong organic growth and healthy margins. Total Aircraft sales were up '13% in the quarter.

Over the last several quarters, the Commercial side of the house has been the engine of growth, but in this quarter about 50% of the dollar increase in sales came from the Military side. The F-35 drove most of this growth. In the third quarter we've received a long awaited order for LRIP-6, resulting in an usual pop in sales. Next quarter will be a more normal revenue run rate for the [equity five]. We also had higher sales in the KC-46 Tanker, the Korean G-50 and in the Military after-market this quarter. On the Commercial side, sales to Boeing were up nicely as the legacy book strengthened and the 787 ramp continues. Sales to Airbus were also up on higher production rates. Commercial aftermarket was down from last year, but that is that result of the slowing initial positioning on the 787.

Aircraft fiscal '13 -- we are adjusting our full year fiscal '13 sales force -- sales forecast upwards for the strength we saw in the third quarter. By keeping the fourth quarter sales in line with our April forecast, the result is that the full-year sales will be $20 million higher than our forecast of 90 days ago, $10 million in Military and $10 million in Commercial. We believe the strength we saw in the third quarter will not repeat in the fourth. To compare to the third quarter, sales in the fourth quarter will be lower in the Military markets, and about the same in the Commercial markets.

Looking to fiscal '14 in Aircrafts, we're projecting a modest 2% increase in total Aircraft sales in fiscal '14. Military sales will be down 5%, on much-reduced F-35 development work, lower B-22 production rates and the softer aftermarkets. Our Military projection includes our best guess on the effect of sequestration. On a positive note, we should continue to see strong growth in the Commercial markets, as the 787 continues to ramp, and the A350 production starts up.

Aircraft margins -- margins in the quarter were 11.4%, slightly lower than our first two quarters. We incurred a restructuring expense of just over $1 million in the quarter. Aircraft R&D in the quarter was up over last year, but down from last quarter. The spend rate on the A350 program slowed this quarter somewhat. We believe the R&D spend has turned a corner in that program and, assuming the Aircraft development continues on plan, we should see a continued reduction in A350 R&D through fiscal '14. On the other hand, our recent Embraer win on the new E-Jet program will start to ramp up through fiscal '14.

Aircraft R&D in fiscal '14 will be about 50 basis points lower as a percentage of sales then in fiscal '13. Margin for the full-year fiscal '13 should be in line with our last forecast at 12.2% after restructuring. For fiscal '14, we are projecting margins of 13%. In fiscal '14, we'll have a less favorable product mix as the sales shift from Military applications to Commercial OEM sales. However, R&D will start some moderation, albeit slightly, and our continuing Lean activities should result in a nice uptick in margins over fiscal '13.

Turning now to Space and Defense, Q3. Sales in the quarter were up 15% from last year to $100 million. Similar to last quarter, sales from our recent acquisitions in Space Propulsion and Broad Reach Engineering drove all of the growth. Factoring out the impact of these acquisitions, organic sales were down slightly from last year. In the Space market, we've seen the Commercial satellite and launch markets soften over the last few quarters, and that trends continued this quarter. Defense was up this quarter as we benefited from some spares orders for the LAV-25 program. Security sales were flat with last year.

Fiscal '13 -- we're moderating our Space and Defense sales forecast for the year by $17 million, to $404 million to reflect our experience in the third quarter. We are reducing our Space and Defense forecast in response to the continued softening of the Commercial satellite markets. We're also moderating our Security forecast slightly to the run rate of the last two quarters. We are keeping our Defense forecast unchanged.

For fiscal '14, we're projecting a 7% increase in sales to $433 million. Space should be up about 8% as we include a full year of sales from the Broad Reach Engineering acquisition. We're also forecasting that the Defense business up about 8% next year, with growth on the FAD program and some foreign Military vehicle programs. Security should be up 3% with the additional sales coming from some recent new product introductions.

Space and Defense margins -- margins in the quarter were a disappointing 6.7%. This quarter, we learned that one of our recent Space acquisitions had significantly underestimated the technical complexity of the job they took on before we acquired them. A thorough review the program resulted in a $5 million program charge to cover the cost to complete the present contract. The problem that we have encountered is a very subtle manufacturing issue in a very complex satellite subsystem. At the time of the acquisition, we could not have anticipated this problem. But we are where we are, and we believe that we have identified all the problems at hand. We've dispatched the necessary resources from across our Space and Defense segments to address the underlying system issues and ensure we stay on track the future.

Given the poor performance in the third quarter, we are moderating our margin forecast for the year to 8.9% pre-restructuring. As a result of the challenges we are seeing in this segment, we're planning a restructuring charge in the fourth quarter of $1 million to better align our cost structure with the business conditions. Post-restructuring margins in fiscal '13 will be 8.5%. Margins in fiscal '14 should recover to 10%.

Turning now to Industrial Systems. Sales in the third quarter of $147 million were down 7% from last year, but in line with the run rate of the first half. We believe sales have stabilized at a run rate of about $145 million per quarter. Compared to the same quarter last year, Energy sales were up $10 million, driven by the continued slowdown in our Wind Energy business. Our non-Wind Energy sales were actually up $2 million from last year. Industrial Automation sales were down, from a year ago but up marginally from last quarter. Finally, our Simulation and Test business was up nicely from a year ago. So the macro picture remains unchanged, and very challenging wind markets, a stabilizing Industrial Automation market and a strong simulation and test market.

Industrial Systems fiscal '13. Our wind sales had another disappointing quarter and as a result we are reducing our forecast for the full year in that market by $5 million, to $72 million. Despite the challenges and wins, it is our second largest single Industrial market after Simulation, and we believe an important opportunity for future growth. On a positive note, we just received an order for 300 Pitch Systems from Brazil over the next three years using our new AC technology system. This is a milestone for our wind business as it is the first significant production order for our new pitch control solution.

We're keeping our Industrial Automation and Test and Simulation forecast unchanged from 90 days ago. The result is a total forecast of fiscal '13 of $585 million. Fiscal '14 -- going into next year, we are assuming flat sales in each of our key markets. We believe we've found the bottom of the wind sales -- only time will tell. We think Industrial Automation is stable, but with the Europe in the doldrums, and China slowing, there are few signs of a recovery in sight. Test and Simulation was strong in fiscal '13, and with the continued increase new airplane deliveries, as well as healthy investment in auto test facilities, a combination of these markets should remain strong in fiscal '14.

Industrial Systems margins -- margins this quarter require a little extra explanation. Let me provide two margin numbers to help explain what is happening. First, let me discuss the underlying operating performance of the business, excluding both restructuring charges and the effect of a massive write-down in the quarter. This underlying operating margin was 9.8% in the third quarter. This compares with 6.6% in the second quarter, and 6.1% in the first quarter. Sales for the first three quarters were about flat, though our underlying operations are starting to recover nicely as our cost reduction actions take over. Second, we had $3 million of restructuring expense in the quarter, and we booked a $2 million asset write-down, which brought our all-in margins down to 6.3%.

Let me offer some color on the write-down. A couple of years ago, we took a small stake in a technology start up with a $5 million equity investment. The company had several interesting Industrial technologies which we wanted to incorporate into our product. Our technical cooperation with the [stock up] worked well over the last couple of years, but unfortunately the majority owners have decided to sell their interest at a price which reduces the value of our investments to $3 million. As a result, we took a $2 million valuation adjustment in the quarter. Given the events in the third quarter, we are moderating our margin forecast for the year to 7%, down from 7.2% 90 days ago. For fiscal '14, we are projecting a significant improvement in margins to 12.2% on flat sales of $585 million.

Now to the Components group. Sales in the third quarter were up 25% over last year with strength in both the A&D and Industrial markets. In the A&D markets, we saw some additional spares activity and some stronger foreign Military sales. In the Industrial markets, sales in our Energy sector were up almost 70%, a combination of continued strengthening of this market, and the sales from our Tritech acquisition. Medical sales were up on stronger demand for motors for sleep apnea machines from Respironics, and our general automation sales -- general Industrial Automation sales were up as a result of our Aspen acquisition. Overall a very nice quarter in our Components group, with growth in every major market.

Components fiscal '13 -- we are tweaking our sales forecast a little this quarter again through the results of Q3. We think our Military Aircraft business will be a little stronger than our forecast in April, but our Industrial Automation business will be a little softer. The net impact is a downward sales revision of $4 million. This results in full-year sales of $421 million, a12% increase over last year.

Components fiscal '14 -- we are projecting a sales increase of 9% in fiscal '14 to $460 million. Component sales into the Aerospace and Defense markets will be down slightly from fiscal '13, but sales in Energy and Industrial Automation should be up nicely, as we enjoy the benefits of a full year of the Aspen acquisition and increased sales at Tritech. Components margins -- margins in the quarter of 16.3% were strong. The margin shift in this business quarter-to-quarter is primarily a function of the sales mix. Given the strong third quarter, we are increasing our margin forecast for the year to 16.5% from 16%.

Full-year fiscal '13 margins will be particularly strong, given the mix of business and the benefits of an earn out reversal in our first quarter on our Protokrafts acquisition. This reversal contributes $2 million in operating profit, and boosted the margins for the full year fiscal '13 by 50 basis points. For fiscal '14, we are projecting margins of 15% on a slightly less favorable mix of sales.

Medical Devices -- there was a lot of news in our Medical Device segment this quarter. We had strong sales, and double-digit operating profitability. We sold our Ethox Buffalo operations on the last day of the quarter, and we announced the strategic review for both segments. Let me start this section with a discussion the strategic initiatives, and then go to the numbers. We sold Ethox Buffalo this quarter for just over $5 million. This operation contributed sales of $12 million annually, and broke even. We took a write-down of $7 million pretax largely associated with intangible assets.

We acquired the Buffalo operation in our purchase of Ethox International in 2009. At the time, the facility was primarily a contract manufacturer producing products designed by its customers. However, the folks there were also developing some proprietary products which we thought were promising. Unfortunately, those products did not pan out, and Ethox Buffalo remains a contract manufacturing facility. Our broad technology base does not provide us any advantage in this market, and therefore we decided to divest the operation to a buyer with more expertise in that area. Parallel with the sale of Ethox Buffalo, we've engaged Royal Bank of Canada to help us with our strategic review of the rest of our Medical Devices group, including the possibility of a sale.

You may remember that we first got into the Medical Devices business with the acquisition of the Curlin company back in 2006. In total we acquired five companies between 2006 and 2009, all focused on pump technology. At the time we entered this business, we believed that the technology company like Moog could design a better and more reliable pump than the competition. We believed our capabilities in fluid control, reliability engineering, and digital control systems would give us an edge in this market. Our strategy was based on introducing new products on a regular basis, and winning market share with our superior performance.

It was a strategy based on innovation, something we think we are really good at. In the first few years, our strategy worked well. Our business grew, and we were nicely profitable. Then, the regulatory environment changed. The Food and Drug Administration, which regulates Medical Devices -- put an intense focus on pumps, and changed the game for introducing new products to the market. A new pump that used to take three to six months to get regulatory approval was now requiring several years to get through the FDA.

As a result of the shift in the FDA's behavior, the effectiveness of our innovation strategy has been greatly reduced. Therefore, we have decided to explore the possibility that another company, employing a different strategy, would be more successful. This processes is likely to take 6 to 12 months, and we are relatively early in that timeline, so I do not expect there'll be any news for a quarter or two.

Now back to this quarter. Medical sales in the third quarter of $38 million were the highest in two years. Pump sales were up slightly, we had a nice pickup in sets and other sales -- other sales include both aftermarket services, as well as a range of Medical Components. This quarter we had higher aftermarket sales as well as an unusually strong sales on a particular OEM product.

For fiscal '13, we are revising our full year forecast down by $2 million. The divestiture of the Ethox Buffalo operation will result in $3 million lower sales versus our forecast from 90 days ago, but we think the remainder of the business will be about $1 million stronger. The results will be full-year sales of $139 million.

Medical fiscal '14 -- full-year sales in fiscal '14 or projected to be $137 million, down $2 million from fiscal '13. Organic sales will be up about $7 million, compensating for $9 million of reduced sales as a result of the Ethox Buffalo transaction. The organic growth will be in pumps, as our sales efforts continue to gain traction. Set sales will be lower due to a shift in our contracts with a large customer who's moving from a Component sale, to a royalties structure. The shift results in better margins, but lower set sales.

Medical margins -- excluding the $7 million pretax write-down on the Ethox Buffalo transaction, margins in the quarter were 10.4%, the best showing in many years. Strong sales, a favorable mix, and continued cost containments all contributed to the strong performance. Including the write-down, we had an operating loss of $3 million in the quarter. Fiscal '13 full-year margins are forecast to be 6.4%, excluding the write-down, up from our forecast of 5% 90 days ago. Full-year margins, including the write-down, will be 1.5%. For fiscal '14, we are projecting full year margins of 7.1%.

Summary -- after all the various adjustments, our fiscal '13 sales forecast is now $8 million lower than our forecast from 90 days ago. Total sales in fiscal '13 should be $2.58 billion, up 5% from last year. The sales growth is a story of strong Commercial Aircraft, combined with sales from acquisitions, compensating for lower Industrial Systems sales. Our operating margin for the year will be 10.6% and earnings per share of $3.25. Our EPS of $3.25 includes $0.15 per share in restructuring and $0.15 per share in asset write-downs. Exclusive of these charges, the underlying operations should deliver $3.55 per share.

In fiscal '14, we are projecting a small sales increase, but a significant improvement in earnings. Sales in fiscal '14 will be $2.67 billion, up 3% higher than this year. Aircraft sales will be higher on ramping Commercial demands. Components, and Space and Defense sales, will also be higher on full-year acquisition sales. Industrial and Medical will be about flat for fiscal '13. We are projecting earnings per share in the range of $3.90 to $4.10. At the midpoint of the range, net earnings will be $185 million. Debt margins will improve to a record 6.9%, and earnings per share will be up 23% from fiscal '13.

So what do we see as the risks and opportunities associated with our forecast for fiscal '14? On the risk side, I'd say that sequestration remains the major concern. Our forecast for next year includes our best guess as to how sequestration will play out for us, but given the uncertainty around how the DoD will achieve the mandated savings, there remains the same uncertainty in our Defense projections. On the opportunity side, our Industrial businesses could see some pickup in demand, and our Space businesses could perform better than planned. As always, we try to provide a forecast which balances these pluses and minuses.

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

Thanks, John, and good morning everyone. Free cash flow in our third quarter was a strong $52 million. Our net debt declined to $623 million. Through the first nine months of fiscal '13, our free cash flow was $97 million compared to year-to-date net earnings of $105 million. Balance sheet account movements over the last three months were relatively quiet as receivables inventories and accounts payables netted to show a minor decline. Offsetting those positive cash flow movements was a decline in customer advances to $109 million resulting in a $14 million use of cash.

Our loss reserve balances increased by $1 million to $45 million. Capital expenditures were $18 million in the quarter compared to $27 million of depreciation and amortization. For the first nine months, CapEx was $63 million, while D&A was $80 million. We're now focusing -- I'm sorry, we are now forecasting our CapEx to come in around $95 million for all of fiscal '13, down $10 million from our forecast from last quarter, and compared with our projected depreciation and amortization for all of fiscal '13 of $108 million.

Turning to pensions -- in our first nine months of fiscal '13, our Global DB plan expense was $38 million and cash contributions were $30 million. We are estimating that our full-year 2013 Global DB plan -- pension plan expense will be $50 million, while our contributions will be $43 million. All in all, we are expecting another strong free cash flow quarter in the fourth quarter, and that will result in free cash flow for all of fiscal '13 of $140 million up slightly from our last quarter's forecast. This will result in a cash conversion ratio above 90% for fiscal '13. Our initial free cash flow forecast for next year, fiscal '14 is $165 million, or a cash conversion ratio of about 90%. We are forecasting $105 million of CapEx, and depreciation and amortization will be $113 million. Our Global DB plan expense for fiscal '14 will be $41 million, while our contributions will be $51 million.

Turning to our finances, we had total debt outstanding at the end of the quarter of $785 million, and our cash balances were $162 million. Our total book equity was $1.4 billion. Our quarter-end net debt as a percentage of total capitalization was 30.8%, about the same as last year's. Our leverage ratio, net debt divided by EBITDA, was 1.74 times. The quarter-end unused capacity on our $900 million revolving credit facility, which terms out in 2018, was $370 million. Interest expense will be $27 million in fiscal '13, and declined to $24 million in '14, as we called in our 6.25% debentures back in January of this year.

Our effective tax rate in the third quarter was 28.1%, up slightly from last year's 27.2%. For the first nine months the effective tax rate was 28.5% compared to 28 -- I'm sorry, compared with 29.1% last year. For all of fiscal '13, we are forecasting our effective tax rate to be 29.8%. Looking ahead to fiscal '14, we are forecasting an effective tax rate of 31.7%, up from this year's rate, largely due to fewer favorable tax adjustments including in 2013 benefit of the retroactive reinstatement of the R&D credit.

As John stated, we try to present a balanced outlook as we provide guidance. The biggest uncertainty for us at the present time, as we head into fiscal '14, is sequestration, and we've tried to capture that -- we've tried to capture the effects of what that might mean, showing a decline in our Military Aircraft business of 5% despite the belief that we are on some very good programs. We've almost got fiscal '13 in the record books, and we are happy to begin focusing on 2014. Thanks for listening and we will now turn the call back over to our moderator, and we'll take any questions you might have. Vicki? Vicki, are you there?

Yes, sir.

( Operator Instructions )

Julie Stewart, Credit Suisse.

Military after market was strong again this quarter and know you've talked about the fact that it will eventually soften from sequestration. How do we think about your visibility, and then which quarter to expect this to begin to start softening?

The visibility in the military after market is not great, Julie. We typically have frame contracts out as we go into our fiscal year for maybe half of what the fiscal year might hold, but there are essentially agreements in terms of conditions and pricing, etc., assuming that the business comes in. But if they do not send us back the stuff to repair, it does not guarantee you anything. Typically you don't have very long visibility the military after market. It is really a function of how many airplanes they fly, and how much stuff they send back to us.

We don't know when to expect the downturn, Julie. We keep thinking that we should see it this quarter, next quarter -- so far we haven't seen it. The folks that do the forecasting, they're doing forecasting based on talking, having detailed discussions with all of our customers at the bases, and they make the best estimate they can with forecasting. Next year it will be down a little bit. I wish I could tell you exactly how much and when. But unlike the OEM side, where we know the B22 is going to come down, we know the rates next year, and therefore we have got a very solid projection on that. In the military after market, it is very tough to forecast.

That is the big uncertainty. As we have said, that is the one that we do not know. This year we are thinking it is going to come in at about $228 million, next year we're thinking it is going to be just below $220 million. I wish I could be more specific. The best I can say is, our folks are watching, and we will be ready to react up we see it drop.

Okay. And then, given the strong cash conversion with this year and next year, can you just remind us of the priorities for cash deployment?

In the short term, we would use cash to pay down debts, and I think we got enough debt that we can keep going for several years on that. Beyond that, Julie, it is too early to speculate. Historically, we've used, essentially we've used free cash flow to acquire and grow the businesses, and we're still the market for the right acquisitions, but at the moment that is pretty quiet.

Okay, great. Thank you.

Cai von Rumohr, Cowen.

A couple of questions -- medical, your margins were 10%, if we take out all the nonrecurring items, and you're projecting 7% next year. What is the reason for that?

Hi, Cai.

So, medical had a particularly strong sales quarter. Sales were $38 million and there was only once in the history of the company that medical was above that. It was $38.2 million a couple years back. There was an unusually strong sales quarter, and that is a little bit of some stuff that came in a little bit early, we got some larger orders for some replenishment and we are not anticipating that that will repeat.

In the fourth quarter we are thinking sales in the medical business will drop to the more normal run rate that we've seen over the last several quarters of $35 million on average. Actually, we are thinking next quarter it will be down to about $31 million. Now, that $31 million includes $3 million of lost sales on Ethox. So put that in and you're back at $34 million.

And the business has been running $1.5 million to $2 million of operating profit per quarter, and on the $34 million, $35 million, that is reasonable. When you get to $38 million, you get some nice pop in the sales, continued cost reduction in a nice mix.

It was a very nice quarter and we are taking credit for that. It is not that we would say this is a pattern, and it is just going to continue to get better. And therefore for the year we were at margins in the 5%. We've said now with the strong third, we think will be at margins in the 6% range. But next year there'll be a continued focus on the R&D to develop new products, and we think the margins will come in just over 7%.

If I look at your Boeing business, it is showing enormous growth. Were there any contract renegotiations or anything there? Because you're really up basically $15 million, almost 70% year-over-year?

There is a combination. I'd say it is a combination of three things, Cai. It is underlying production rates at Boeing, it is 787 ramping, and it is contract re-negotiations that are up at around this time.

Okay. Basically you have gotten some price hikes, then?

We've had some adjustments.

Adjustments. Okay, great.

If we are looking at the after market, you mentioned that 787 provisioning was down, and others have mentioned that too, but they seem to be indicating, others do, that now the deliveries are resuming, that they are resuming. If I look at your numbers it looks like you may be projecting another soft quarter in the fourth quarter, and then you have after market down next year. As you give us some color on that?

Actually if you look over '11, '12, '13 and '14, and you take out the initial provisioning, the after market is running flat at about $100 million. I think what is happening there is it's a combination of, on the upside you have got more traffic, on the downside you are on some older platforms and there is more activity in terms of parting out stuff. So I think we are treading water there.

The difference, then, between the $100 million of what we have done over the last few years, $110 million, $112 million, is initial provisioning of the 787. That is really the only other factor above that, and we are forecasting for this -- last year it was $13 million, this year we think it will be about $11 million, we're forecasting $7 million or $8 million remain dollars for next year. Perhaps that's conservative.

I think it is based on the way that we anticipate that fleets will take them -- take the actual cost plus the fact that we are working with the various airlines and with Boeing trying to put -- slide by our type of contracts in place. What that does is it guarantees you a longer term of stream revenue, but it doesn't give you that pop in the initial provisioning, because what you do is you provision parts at locations around the world and you guarantee a turnaround time.

Long-term that is a better business model both for us in the airlines, because it is based on having on-time on the wing. Short-term you have the issue, though, that you see a little bit less initial provisioning. I think may be a factor that our products are slightly different from some of the other folks. It may also be a fact of the fact that we are trying to push to a longer term fly by our guaranteed multi-year contracts with airlines and less of the initial provisioning.

Okay. A last one, could you give us what the R&D was in the aircraft sector, and where and how much of that was A350, and where you see that going?

The R&D in the quarter, the aircraft group was about $19 million, and about half of that is on the A350. We see that for the year will be similar to last year, a little bit down from last year. It will be about $45 million, and as we look out next year we think that will come down by about $10 million to $12 million next year.

That's great. Thanks so much. I'll get back in the queue.

Tyler Hojo, Sidoti.

Just a follow up on the last line of questioning on R&D. What is your expectation for the entire Company for fiscal 2014?

This year, when you get fiscal '13, R&D for fiscal '13 is about $135 million, and for next year fiscal '14 we see that coming down to about $130 million. The difference really is lower R&D spend in the aircraft business as the 350 starts to tail up.

On the other hand, the Embraer jets, the E-Jets, programs for the primaries we just won, that will start to ramp up. So you do not see dramatic drop off, but there is a little bit of a reduction from this year to next year. It actually -- the reduction when you combine the $5 million, and then the sales, it is about 50 bps reduction in R&D in the Aircraft business from '13 to '14.

Just so if aircraft R&D is coming down, call it $10 million to $12 million in fiscal '14, is there anything --

No. Aircraft R&D is coming down about $5 million, I said. (multiple speakers) The 350 is coming down about $12 million, but on the flip side, you have got the Embraer jets starting to ramp up so, that is the net of it is only about $5 million.

Okay, got it. I guess there's no question there, then.

Just one other one for me, just in regards to the Wind Energy business, I guess that is a nice development in terms of the new orders that you just talked about in your prepared remarks. I am wondering if you look at the volumes of that business today, firstly, is it profitable at current levels? And maybe if you could expand on, I think you're looking for volumes to remain flat in fiscal '14 -- what are the puts and takes there?

We don't go into profitability by individual market segments, so I didn't want to answer that question. It has come down from $150 million business a couple of years ago, to a $70 million business, so you can imagine it is not the highest margin business that we have got right now.

We have done some significant restructuring. We had a facility in Shanghai, we had two facilities in Shanghai. One was a facility we got when we acquired the Wind business. We have closed that facility we have moved back into our other facility. So we have taken out significant structural cost. We've taken out cost in Europe as well, lining it up with the underlying run rate of the business.

We think where we have cut the costs to the point where we think it is an okay business. We do believe that longer term, and I've said this before, this has real potential for us. If you look at the wind business globally, it actually it is a growing business. It's not growing double-digit mark, double-digits rate that it was a few years ago, but there is long-term sustainable growth in the projections, at least from the market pundits in the wind business.

The higher growth area is off-shore winds, where the whole idea of performance really matters, failure being a very expensive thing. That is a stronger growth business, and that is an area where we think we have got some skills. The key is innovation. That is why when I described the contract we received for Brazil, it is over three years and it is not going to make our next year's forecast, but it will be a piece of it.

It is a step to say the next generation system, which gives us a significant cost reduction on our side, it gets us back to where we can actually make it a nice margin business. That is starting to take hold. As you can imagine introducing something like that to OEMs, it take some time to do it. You don't just go one day to the next, from one product type to the next.

So that is the path. The path is, we have a new AC system we have on the drawing board for the next several years. We'll be developing the next generation of systems after that, and we believe that is the opportunity to grow again in the business in the future. Addressable markets, as we see it for our stuff, is in the $300 million to $500 million per year. That's the addressable market. We think it is worth the efforts to see if we can be a real success in it. (multiple speakers)

The forecast we have for that next year is fast with this year. Every quarter we have the internal discussion, we're reducing the forecast again. Eventually we're going to get to point where we won't do that, but I'm hoping it is not because we get to zero.

Think the forecast we have for next year, it is about $70 million, it's the forecast we have for this year, we have done a detailed look at that. We are hopeful that -- that is our best estimate that we can do. I've said that before, so I am hoping that I'm right this time.

Got it. Thanks very much for that color. Just a follow up in regards to Brazil. When are shipments slated to begin on the contract?

It will be '14, '15, '16. We really just got the contract so it -- assuming it takes a couple of months to get stuff squared away, it is really a -- laid out over fiscal '14, 15, 16.

Got it. Perfect. Thanks so much.

Michael Ciarmoli, KeyBanc.

I was wondering, I don't know if you'd be willing to this, but looking at that commercial aircraft, specifically the OEM growth, would you be able to,or willing to, parse out legacy platform growth versus new aircraft like the 787 or A350?

Yes, I can give you the sales on -- I can do that. The 787 sales in the quarter were about $22 million, and the legacy was about $29 million. More or less, round about $50 million.

I was thinking too, what about going into '14 next year? Because you that 16% growth.

So 787 sales -- let me do '13 first -- 787 sales in '13 are about $82 million, and next year are about $100 million. The Boeing platforms this year are about $102 million, and next year they go up to about $122 million.

I've also noticed you got a pretty nice uptick in business jet. Is that just the introduction of some of these new platforms? That market, especially the small -mid, continues to lag, so what is behind that nice mid-teen growth rate there?

The business jet from about $43 million to $49 million, $50 million next year, so about a $6 million to $7 million increase. And a big piece of it really is the 280. Actually if you take the 280 and the 650, you get probably 90% of the growth, so that is really what's happening. It is a Gulfstream business.

Then just the last one for me, you have got the strength projected next year in satellites. I know one of the smaller OEMs in the space just talked pretty nicely about some increasing orders, and those geosynchronous satellites coming back.

Are there any one -- is that your primary market there? Should we should be looking at some of the larger satellite manufacturers? Just trying to get what else is behind that strength you are seeing there for next year.

The strength next year is all acquisitions. It is just full-year sales of acquisitions. And actually the underlying space business, a combination of satellites and launch, we think it will be a little bit softer next year.

That is the pattern that we've seen for the last several quarters. Perhaps that will be a little bit better, and if there's good news out there would be delighted to take it. But right now we are projecting that our underlying space business will be a little bit soft, and you see the growth just from full-year acquisition sales on In-Space Propulsion and Broad Reach Engineering.

Okay, perfect. That's all I had, thanks guys.

Karl Oehlschlaeger, RBC.

Going back to commercial aerospace after market a little bit, you talked about how kind of been stripping out the 787 provisioning. It is roughly flat with a puts and takes there, and the takes, or your mix on both the legacy and the impact of parting out.

Looking not just into FY '14 but beyond, when do you see that, or how do you think about that business in terms of that region on the horizon, and not being quite as an issue that is offsetting the growth in traffic?

I think if we look out the next few years, the underlying after market business, that will be pretty flat. There may even be downward pressure on it. The flip side of it will be, the 787 addtional provisioning which we started to see, additional provisioning on the 350, which probably not next year but maybe the following year you will start to see that kick in. Some after market growth on some of the business jet platforms, we just chatted a little bit about the Golfstream stuff.

And then longer term, of course, the growth associated with fly-by our type contracts that get you long term growth, the 873 fleet and the 350 fleet then grow. The 919 subspace, that's going to kick in as well. And then Embraer Air, but then you're out in '17, '18.

I think the underlying business it will be, we'll work hard to try to keep that flat, but even with traffic growth, I think the fact that these fleets are aging and the fact that there's more and more parting out, I think that may be a challenge for us. But I think there are long term growth drivers behind the business. It is probably just going to take a couple of years.

On sales, you have over-all sales growing 5% this year, and 3% next year. Maybe talk a little bit about how you think those numbers are on an organic perspective?

They are all organic. (multiple speakers ) Are you talking about the Aircraft business?

I'm talking about overall company sales.

I'm sorry. For the total business, for this year and next year -- so this year, the total sales are up about, call it $125 million. Of that, most of that is acquisitions. About a 70% to 80% of that is acquisition driven. Next year, sales in total are up just under $100 million, and of that about two-thirds is organic and one-third is just effect of the acquisitions that we owned for a partial year this year.

Okay, thank you.

And at this time, there is one name remaining in the roster.

( Operator Instructions )

Neal [De Hora], MorningStar.

Just two clarifications. One on the F 35, is this still the development versus production -- I guess I'm not sure how to say it, but the transition from those two things? And two, I think you guys said this, is the industrial margin improvement only due to the actions taken in the last couple of quarters? Thanks.

So your first question on the F35, the pop in sales in the quarter was not a developments production split issue. It was the fact that we received an order for LRIP6, and we had put some inventory into place to guarantee lead time, so that is the order comes in, the contract absorbs the inventory and you get a temporary pop in sales. That was a one quarter phenomenon, and the next quarter will back to a more normal run rate on the production of the F 35.

The developments -- this year we're looking at about $21 million of development efforts. Just to put it in context, that is roughly the same level as we saw in '11 and '12. They were in the low $20 millions. Next year, we think the development effort will drop to about $6 million. So, you drop from $22 million down to about $6 million on the development side. On the production side it is roughly the same level. It is running in the mid-to-high $60 million range.

So the total sales on the equity five next year are down about $70 million from $90 million this year, to -- call it low $70 millions. And that really is the developments contract winding down significantly. We have been expecting the development contract to wind down for years, to be honest. And each year some new -- something new comes along or some derivation or some upgrades, and it's kind of held that at $20 million, but we are forecasting next year it really will drop off. That is what is happening there.

Operating profit margins, is it all due to restructuring?

Yes, If you take the number I gave in the text, if you back out the effects of the asset write-down in the quarter, and that's $2 million, and the effects of the restructuring in the quarter, that's $3 million, the underlying operating margins in the quarter were close to 10%. They were 9.8%.

We have had approximately flat sales, and approximately the same mix in Q1, Q2 and Q3. And that margin went from -- so the underlying operating margin on same sales went from 6.1% in Q1, to 6.6% in Q2, to 9.8% in Q3, and we are forecasting getting it to 12.2% for all of fiscal '14. That is a benefit of the restructuring. That's essentially what happens.

Okay, great, thanks. Very helpful.

Cai Von Rumohr, Cowen.

Can you give what your estimates are -- assume for corporate expense, of FAZ123, the stock, and for interest expense this year and next year for the full year?

If I heard you right, you're looking for corporate expense for the full year. Let me give you '13 and '14, and then I think you said the equity-based comp, as well? And interest.

Let me start with corporate expense. Corporate expense, we've got $26 million forecasted for '13, going up to $28 million in '14. Interest expense is $27 million in '13, coming down to $24 million in '14. And then equity-based comp is $6.5 million in '13, going up to $7.5 million in '14.

Can you give us some rough color -- I don't know whether you've done this yet -- if it's premature, tell me, but how should we think about the quarterly pattern of fiscal '14?

We haven't done that yet, Cai. We'll do that next quarter.

Okay. Very good. And then a larger question -- if I look at aircraft, did I -- I heard you correctly that the R&D there will be down approximately $5 million, with A350 down and the E-Jets starting to build? That's essentially the pattern?

That's the story.

And yet, if I back out all the other adjustments with your margin guidance, that seems to apply that the margin before R&D is relatively stable, with a mix that really going a little bit against you. It's going more toward commercial OE. What's happening there? Is that lean initiatives? Is that the better mix on the F 35? What are the key elements?

Actually, I would say that it's -- I think there's more margin increase than you're looking at. The forecast for this year is about 12.2 % in margins, and next year we're projecting 13% in margins, so that's 80 basis points. About 40 to 50 of that is on the R&D line, and the other piece of it is continued operation and improvement in the face of, as you described -- you are correct, of a negative shift in the mix.

We're forecasting military down, we're forecasting military after market down, and we're forecasting, the growth is going to be in the commercial OE side. And that's not as profitable as the military sides, early in the phases of the programs. It is the result of continued focus on operational improvements across the Company.

Okay. And then a broader question -- we've seen more in terms of restructuring, we've seen more in terms of write-off. I know this is sort of a process, John, but as you look at '14, are there more things that maybe need to be done in terms of restructuring? More things that maybe need to be cleaned up in terms of the technology? I know that was a one-time thing, but outside of medical, in your thinking, potentially?

I'd say, at this stage, Cai, our forecast for '14 is a clean forecast. It does not include any restructuring. It, obviously, does not include any future asset adjustments, write-downs, or anything like that we may take. We're feeling like we've done some fairly big things in '13. I'm hoping that the restructuring is behind us, and that we are starting to see some significant operational improvement. I did mention, the space and defence group had a tough quarter. They're looking at doing some adjustments in the fourth quarter.

It really depends, then, on how the businesses play out next year. I can imagine if sequestration has a significant negative impact, then clearly we will be going back around and looking at how we adjust for that. And in terms of other business, the big one is the consideration for the medical business right now. That's probably going to keep us busy for the next six months or so, and I wouldn't like to speculate beyond that at this stage. I don't think that would be a sensible thing. I think we've got a good portfolio of businesses.

But we're constantly reviewing them, and as I said, I think, before, through the course of '13, a lot of the restructuring has been about picking which businesses we wanted to be in, and some businesses that we decided they weren't long-term viable for us, we just haven't carved them out in that particular light.

They've kind of been restructuring, but it has been saying, this line of business or that line of business, we don't think that's a great future in that market for us. We haven't performed particularly well, so let's not invest a lot more there. Typically, they were smaller pieces of business.

Reviewing where we are, what the businesses are, we'll continue that. But sitting here today, I'm not anticipating significant changes next year. A year ago, sitting here, I wasn't anticipating everything that was going to happen in '13, either, so who knows. But that's not in the plan right now.

Terrific. Thank you very much.

And there are no other questions, so I'd like to let everyone know that there will be a replay of today's call, and it will be available starting today, July 26, at 12 o'clock pm Central time, and will run through July 31 at 12 o'clock pm Central. You may dial 888-203-1110, or 719-457-0820, and enter code 1990152. Again, that is 888-203-1110 or 719-457-0820, and the code is 1990152. Thank you very much.

Thank you all for joining us. We look forward to seeing you again next time -- or chatting with you in 90 days.

Thank you very much. That does conclude our conference for today.