Moog Inc (MOG.A) 2013 Q4 法說會逐字稿

Good day, and welcome to the Moog conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Investor Relations manager, Ms. Ann Luhr. Please go ahead, ma'am.

Good morning. Before we began our call your attention to the fact that we may make forward-looking statements during the course of the conference call. These forward-looking statements are not guarantees of our future performance and are not 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 November 1, 2013, and our most recent form 8K filed on November 1, 2013 and certain of our other public filings with the SEC.

We provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who don't not already have a document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page, www.moog.com. John?

Good morning, thanks for joining us. This morning we report on the fourth quarter of fiscal 2013 and reflect on our core performance for the full year. We'll also reaffirm our guidance for fiscal 2014. We'll start with the headlines of the quarter and the year before diving into the detail.

First the big news, in the fourth quarter we took a $0.52 per share Goodwill impairment charge in our Medical Device segment. As part of our strategic review process we've taken a fresh look at future protections for the business and we now believe the fair value of the net assets is less than the carrying value. Results for the non-cash charge of $24 million after tax. Exclusive of the impairment charge, Q4 earnings of $0.86 per share were $0.09 below our target for the quarter. Half of the shortfall was an operational miss in our Space and Defense group and the other was due to increased restructuring.

In the quarter, Space and Defense sales came up short. But recent acquisitions struggles and profitability suffered. We reacted very quickly to the shortfall incurring over $3 million of additional restructuring in September to adjust our cost basis for next year. On a positive note, all of our other segments performed well in the quarter. In particular, our Industrial segment is seeing the benefits of their restructuring activities, and our Medical segments is gaining traction with our sales efforts.

Early restructuring in the quarter was $0.10 per share. Exclusive of restructuring, the underlying operations delivered $0.96 per share in the fourth quarter of fiscal 2013. This compares to $0.91 per share for the same quarter in fiscal 2012. Cash was very strong in the quarter. With free cash flow coming in well over adjusted net earnings.

Now let me provide some thoughts on fiscal 2013 in total. The year turned out to be quite different from what we expected 12 months ago. In October, 2012, we were projecting sales and earnings growth in fiscal 2013, and our main concern at that time was a fresh softness in our industrial markets. Looking back on the year, the headlines are a collection of some good and not so good news. Here are the highlights.

First, three of our operations came in ahead of plan. Margins in our Aircraft and Components segments were up from last year. And within our Medical segment, our underlying operating margins, exclusive of specials, were also up from our forecast last year. Commercial aircraft had a very strong year. Components enjoyed a nice mix of products and our Medical segment saw a year of sales growth without any regulatory setbacks.

Second, we had nice program win in the year. We won the primary Fly Control package in the next-generation E-Jets at Ember Air. We believe this win, our first with Ember Air, demonstrates our leading position in the flight controls business worldwide. We also won the HelpMeSee program, a three-year development project on the training simulator for cataract surgery. HelpMeSee is an organization dedicated to curing cataract blindness worldwide by using that's advanced simulation systems from Moog to train thousands of eye surgeons.

Third, our industrial markets turned out softer than we had anticipated. The first half of the year was marked by disappointing sales and continuous restructuring. In the second half, our industrial sales stabilized and our profitability improved as restructuring benefits started to accrue. In addition to slimming down our operations, we took a hard look at the product portfolio and decided to exit some underperforming product lines.

Fourth, our Space and Defense business came up short of what we were anticipating. This was a combination of two of our recent space acquisitions underperforming, as well as some softness in our defense businesses. We had anticipated this segment would have a very strong second half, and instead the second half was marked by two disappointing quarters. Fifth, our cash flow was a really positive story in fiscal 2013. We finished the year with free cash flow $158 million and net earnings of $120 million, 131% conversion ratio.

Sixth, we completed two acquisitions in the year, spending approximately $80 million. We acquired Broadreach Engineering in the Space market and Aspen Motion Technologies in the Components group. Both of these acquisitions are working out well so far. Seventh, we announced a strategic review of our Medical Devices segment. After seven years in this business, we decided to take a fundamental re look at whether or not this business is a long-term strategic fit for us. We're still in the midst of that process but already we have invested one of our facilities in Q3 and taken a Goodwill impairment charge in Q4. We hope to report the conclusion of this review process in the next quarter or so.

Finally, we intensified our focus on bringing lean thinking to all of our activities. As part of this process we made major decision in the fourth quarter to move whole corporations to a single ERP solution over the next five to six years. Historically, we've grown multiple systems in our different operations with all the inherent inefficiencies associated with that structure. After much internal review, we concluded that a single system would bring significant benefit in the long term. This will be a significant investment and in the short term a slight headwind to earnings. However, as the implementation unfolds, we should see significant benefits in the outcast.

Let me move to the detail starting with a fourth-quarter results, Q4 fiscal 2013. Sales in the quarter of $676 billion were up 7% from last year. We saw higher sales in every segment, half of the growth came from acquisitions completed in the last 12 months. Taking a look at P&L, our gross margin was down driven by a combination of mix and the results of profitability challenge in our Space and Defense group. R&D was down slightly in the quarter, and total G&A expenses also lower as a percentage of sales.

We incurred $7 million of restructuring expense in the quarter, split between our Space and Defense and Industrial segments. We also had Goodwill impairment charge of $24 million after tax. This quarter our effective tax rate was unusually low as a result of the impairment charge. The overall results with net earnings for the quarter of $16 million, and earnings per share of $0.34. Excluding the restructuring and the impairment charge from the fourth-quarter numbers, net earnings $44 million, earnings per share of $0.96 would have 5% higher than last year.

Fiscal 2013, for the full year sales were up 6%, 70% of that growth came from acquisitions. Aircraft sales were up on strong commercial demands. Space and Defense sales were up on acquisition growth. Industrial sales were down as our wind business struggles. [Imposing] sales were up on acquisition growth and finally medical sales were up on [Knife Organical]. Net earnings and earnings per share were down 21% from last year driven by restructuring, active write-offs, and the Goodwill impairment charge.

To compare the performance of our underlying operations we need to add back $0.20 per share of restructuring, 15% per share of active write-downs and $0.52 per share of Goodwill impairments to fiscal 2013 numbers. With these adjustments, our operation delivers $3.50 per share and free cash flow of $158 million in fiscal 2013. This compares to $3.33 per share and free cash flow of $107 million in fiscal 2012. For fiscal 2013, earnings from operations were up 5% and free cash flow was up 48%. A respectful performance despite the challenge in both our Industrial and Space and Defense segments.

Fiscal 2014 outlook. We are affirming our earnings forecast for fiscal 2014 in a range between $3.90 and $4.10 per share. We're projecting a small sales increase with significant improvement to profitability. Sales next year should be up in Components and Space and Defense driven by additional sales from recent acquisitions. We're forecasting sales in Aircraft and Industrial about even with fiscal 2013, while Medical sales will be slightly lower as a result of divestiture of the Buffalo operation. Exclusive of the restructuring and charges operating margins of fiscal 2013 were 11.1%. In fiscal 2014 operating margins will be up to 12.4%, a 130 basis points improvement over fiscal 2013.

Now to the segments. I'd remind our listeners that we provided a three-page supplemental data package posted on our website which provides all the detailed numbers we are modeling. We suggest you follow this in parallel with the text.

Starting with Aircraft, Q4. Q4 was another quarter of strong organic growth and healthy margins. Aircraft sales were up 9% in the quarter, commercial side of the house continues to be the engine of growth with sales up 23% over the same quarter last year. We saw strong growth at our major OEMs, a combination of higher rates, the timing of orders, and the ramp-up on new programs. The commercial after-market was down from last year, but within the normal quarterly variability we see in that business. Industry business was down 2% in the quarter with slightly lower sales on the OEM side. Lowering F-35 development work and lower B-22 sales contributed to the drop. Despite our continued sequestration worry, the military after-market was up from last year.

Aircraft fiscal 2013. Fiscal 2013 was a record year for our Aircraft business with sales topping $1 billion for the first time. Commercial sales were up 20% with the growth coming on the OEM side. Both Boeing and Airbus were up nicely as order rates increased and new platforms ramped up. Commercial after market was down slightly in the year as some of our work on legacy platforms slowed. On military side sales were up 4% for the year, with the growth coming in the military after-markets. A nice contributor to the after-market this year was [Ron Parma's] resale for the F-15 platform. The OEM segments were about flat with fiscal 2012 with strength on the KC 46 tanker program compensating for weakness in our Navigation business.

Aircraft fiscal 2014. We're projecting sales in fiscal 2014 in line with fiscal 2013. Military sales will be down 6% and much-reduced F-35 development work. Lower B-22 production rates and a softer after-market. We think our military after-market will be down about 5% from fiscal 2013. This projection includes our best guess on the effect of sequestration. On the commercial side we should see an 8% increase in sales while the 787 continues to ramp-up and the 350 production starts in earnest. We think the Commercial after-market will be up slightly next year with 787 initial provision enclosed.

Aircraft margins. Margins in the quarter were 12%, and margins for the full year were also 12%. Margins expanded 110 basis points over fiscal 2012 on higher sales and a continued focus on cost reductions. We're projecting margins in fiscal 2014 of 13%. Next year, we have a less favorable product mix of the sales shipped from military applications to commercial OEM sales. However, R&D should start to moderate slightly and our continued (inaudible) activities should help provide slight up-tick in margins over fiscal 2013.

Turn now to Space and Defense. Sales in the fourth quarter were up 11% from last year to $104 million. Similar to the last couple of quarters, sales from our recent acquisitions contributed most of the growth. Organic sales acquisitions were up 4% from last year. We saw a little growth in our legacy space markets and had a nice pick up in our NASA business to work on the Soft Capture system. This is a system designed to help decommission the Hubble space telescope in years to come when it has reached its end of life.

Defense and security sales were down almost 10% in the quarter as program orders slips to the right. Over the last year, we have noticed a repeated slowdown in the receipt of military orders relative to what we were expecting. Space and Defense fiscal 2013. [Potin] sales in fiscal 2013 of $96 million were 10% higher than last year. Acquisitions added nearly $60 million of sales to our Space total but the legacy Space business dropped 6% on softer, commercial satellite markets. We had no acquisitions in the Defense or Security in fiscal 2013. Defense was up 5% for the year as activity on various programs slows. Security was down 9% for the year, all because in fiscal 2012 we had about $4 million of driver's vision enhance, and that program was down to $1 million in fiscal 2013.

Space and Defense fiscal 2014, despite the challenges in fiscal 2013, sales in fiscal 2014 should be up in total. We're projecting 9% increase of $433 million. In the Space market the growth is primarily the result of a full-year Broadreach Engineering acquisition. In the Defense markets, we should see a nice pick up in missile defense, as well as stronger foreign-military sales for ground vehicle. Security sales should be up slightly with additional sales coming from some recent new product introductions.

Over the last two years, we strengthened our position in the foreign markets in both Space and Defense markets. The combined acquisitions of Bradford and Inspace Propulsion have given us three space facilities in Europe, previously we had none. In the Defense business we have strengthened our European operations and are now focused our full range of US capabilities to potential foreign opportunities. We believe these actions position us strongly to benefit from increased foreign sales in the years to come.

Space and Defense margins. Margins in the quarter were disappointing 2.6%. Exclusive of restructuring, margins were 6.9%. There are two elements to this shortfall. First, our acquisition of Bradford and ISP continues to fall short of what we had planned. Last quarter we had a big rise up on one program at Bradford. But this quarter there was not any one particular problem that came up short, rather a range of shortfall across the entire portfolio. The lesson learned that when buying small space companies they often don't have the systems and controls in place that we have come to expect. Sometimes a lot more expensive than we expect in terms of dollars an time to get them squared away.

Second, our Defense business fell short this quarter. Compared to our forecast of 90 days ago, Defense sales came in well below planned and anticipated orders pushed out to the right. Typically, Defense sales are nicely profitable but they also tend to carry a relatively high percentage of fixed costs. When the sales come up short profitability is disproportionately affected. In response to these challenges we took swift action in the quarter.

We incurred over $4 million restructuring cost to resize the workforce to address the current sales levels and to meet our profitability goals for next year. As a result, we are keeping our margin forecast for fiscal 2014 unchanged from 90 days ago at 10%. Some of our recent Space acquisitions have turned out to be more challenging than we had planned. However, in time, we will get them squared away. Despite the short-turn challenges, we believe our strategy in the space market of expanding our component footprint and moving into the systems business will pay off nicely over the long term.

Turning now to the Industrial Systems business. Sales in the fourth quarter of $153 million were up 2% from last year. The sales mix, however, was quite different from a year ago. Wind energy sales were down 31% compared tot he fourth quarter of fiscal 2012 but more or less in line with our forecast of 90 days ago. Industrial Automation sales were up nicely in the quarter. To slightly view this positively, it's too early to tell if this thing with return to grown in that market just yet. Innovation and Tests was up strongly in the quarter also. Our customers in the Flight Simulation business continue to see strong demand for their products.

The macro picture shifted slightly this quarter with our wind business stabilizing and our industrial Automation market are half starting to recover. Industrial Systems fiscal 2013. Full-year sales $592 million or 7% down from fiscal 2012. The drop in wind energy sales of over $40 million made all the difference. Apart from winds, there was a slight shift in the mix with Industrial Automation down about $10 million, but Simulation and Test up a similar amount. We restructured our wind business during the year, consolidating our Asian operation in Shanghai. On a more positive note, we introduce a new AC Pitch control system this year which offers performance benefits to our customers and better margins internally. With this new system we won our first major order in South America for 300 systems over the next three years.

Industrial Systems fiscal 2014. Last quarter we said our sales in fiscal 2014 would be flat with our projections for fiscal 2013. We projected sales of $585 million next year. The fourth quarter came in a little stronger than we had expected but we're not yet adjusting our forecast for next year. Sales in the second half of fiscal 2013 were up about 3% from the first half. While we view the stronger second half as a positive sign, there is a natural range of sales fluctuation from any one quarter to the next. Therefore, we think is too early to tell at if the second half improvements are simply a reflection of a market that has stabilized or a market that has started to grow again. For the moment we're taken the more conservative approach and assuming that next year will be more or less the same as this year.

Industrial Systems margins. Margins in the quarter of 10.5% are very encouraging. Exclusive of about $3 million in restructuring margins in the quarter were a healthy 12.3%, this is up over 400 basis points from the fourth quarter of fiscal 2012 on similar sales. Continuing the comparison of margins ex- restructuring we've seen a quarter over quarter improvement in margins throughout fiscal 13 with the low point of 6.1% in the first quarter. Margin for the year was 7.1%, compared with 10% in fiscal 2012. Exclusive of restructuring and an effective write-down in the third quarter, underlying operating margins in fiscal 2013 were 8.7%. In fiscal 2014 we are protecting margins of 12.2%. Fiscal 2013 has been a year of considerable adjustment but we believe we take in the necessary steps to make fiscal 2014 a more successful year.

Turning now to the components group. Sales in the fourth quarter were up marginally from last year. Component sales into the Industrial markets were up almost 50%, driven by the recent acquisition of Aspen Motion Technologies. The Energy and Medical markets were about flat with last year. And sales on the AMD side of the house were down 6% in the quarter as we encountered technical issues on a couple of defense programs which delayed shipments into the next quarter.

Components fiscal 2013. For the full-year, sales were up 11%. -- in energy up combination of organic growth in the market and (Inaudible) acquisition completed in fiscal 2012. Components were also up due to acquisition. Industrial sales were down from fiscal 2013 reflecting softness in this market. Medical sales were up slightly for the year. Sales were pretty much flat with last year. Fiscal 2010 was the high point for sales into these markets and over the following couple of years we've seen a significant decline in various platform operated (Inaudible). Sales level out in fiscal 2013 and we're optimistic that they will make it up slightly next year.

Components fiscal 2014, fiscal 2014 is unchanged from 90 days ago. We're projecting sales increase of 11% next year to $460 million. Component sales into the Aerospace and Defense markets will be largely higher than fiscal 2013 but sales in Industrial Automation will be up nicely as we enjoy the benefit of a full year of Aspen acquisition.

Components margins. Margins in the quarter were 15.4%. Full-year fiscal 2013 margins were 16.5%, above the average of the last few years. This year we had particularly nice mix of business and also had the benefit of an earnings reversal in our first quarter on our Proto Craft acquisition. This roughly contributed $2 million in operating profits and boosted full-year margins by 50 basis points. For fiscal 2014 we're projecting margins of 15% on slightly less favorable mix of sales.

Finally, Medical. Q4 was another eventful quarter for our Medical business. As I mentioned at the start of my remarks, we took a $24 million after-tax Goodwill impairment charge this quarter. Setting this non-cash charge aside, our Medical segment had strong sales and good profitability. The underlying performance of this business continues to improve nicely.

Sales in the fourth quarter of $39 million were up 9% from last year. Last year sales included about to $3 million of the F Ox Buffalo operations that we've closed. So, on a same-store basis sales were up 17%. We had nice growth in both our pump and set sales.

Medical fiscal 2013. For the year sales were up 5% with growth across three product categories. In the past, we've described the focus of this group on developing a culture of compliance. In other words, we wanted to become the model at the FDA for how a medical device company should operate. That strategy bore fruit in fiscal 2013. We enjoyed a clean bill of health from a regulatory perspective and could focus our attention on sales growth.

Medical fiscal 2014, full-year sales in fiscal 2014 are projected to be $137 million, down $10 million from fiscal 2013. The drop is the result of the sale of the F Ox Buffalo operations. We should see a mix shift with higher pump sales and lower set sales. Growth in pump sales will come as our sales efforts continue to gain traction. Set sales will be lower due to a change in our contract with a large customer who is shifting from the sale of our components to a (Inaudible) structure.

Medical margins, margins in the quarter exclusive of the Goodwill charge were 6.6%, up from 2.8% last year. Strong sales and the continued focus on cost containments contributed to the improved performance. Fiscal 2013 full-year margins. Adjusting for both the F OX Buffalo sale and the Goodwill charge were 6.4%, a 250 basis point improvement over fiscal 2012. For fiscal 2014 we are projecting full-year margins of 7.1%.

For summary guidance, with fiscal 2013 behind us, we're looking forward to a much better fiscal 2014. We are reiterating our guidance from 90 days ago for full-year sales next year of $2.67 billion, a 2% increase over fiscal 2013. Aircraft sales will be even with fiscal 2013 as commercial growth will compensate for military softness. Components and Space sales will be higher on full-year acquisition sales. Industrial sales will be about even with fiscal 2013 and Medical sales will be down as a result of the divestiture of the F OX Buffalo facility.

We're projecting earnings per share in the range of $3.90 to $4.10. At the midpoint range net earnings will be $185 million, net margins will have improved a record 6.9% and adjusted earnings per share would be up 14% from fiscal 2013. As usual, we think the year will start out slowly with earnings in the first two quarters in the $0.85 to $0.95 range. Second half should be better with two quarters over $1 a share.

Looking at the risks and opportunities for next year, sequestration remains our major concern. Our leaders in Washington may have reached a bargain which addresses this concern but I don't think we should hold our breath. On the opportunity side, we have seen a slight pickup in our Industrial market in the second half of 2013 and perhaps that bodes well for the future. In addition, our Space business could have a better year than we are planning.

As always we try to provide a forecast which balances these pluses and minuses. In the past it's been suggested that we hedge our forecasts to come in better than planned. Fiscal 2013 was one of those years where we got it wrong and we came in under forecast. We hope in fiscal 2014 were back to getting it right. Now let me pass you to Don who will provide some color on our cash flow and balance sheets.

Thank you, John. Good morning, everyone.

As John already much of free cash flow in the fourth quarter was strong at $61 million. Our net debt declined by $71 million for $552 million. The difference is explained by the proceeds associative the sell of our FX Buffalo medical operations that came in during the fourth quarter, in addition to a couple of movements in currencies. For the year, our free cash flow was $158 million compared to net earnings of $120 million, resulting in a conversion ratio of 131%. After adjusting net earnings for the significant non-cash charges that we described the conversion ratio was still in excess of 100%.

Networking capital declined during the fourth quarter, largely due to higher customer advances in Accounts Payable, and lower inventories, offset by some higher receivables. The increases in customer advances and receivables are the result of timing, mostly in a number of Commercial Aircraft programs. Our losses balance declined by $1 million to $44 million. Capital expenditures were $30 million in the quarter, compared to $28 million of depreciation and amortization. Capital expenditures for the full fiscal year were $93 million, while DNA was $108 million. Our Global Defined Benefit pension plan expense for all of fiscal 2013 was $51 million, while our cash contributions were $43 million.

Last quarter we provided our first look at our forecast of the free cash flow for fiscal 2014. We're leaving our forecast at this time unchanged at $165 million or a cash conversion ratio that will be about 90%. We are forecasting $105 million of capital expenditures, and $113 million of depreciation and amortization. Both of those are unchanged from last quarters forecast. We're currently forecasting our Global defined-benefit pension plan expense for fiscal 2014 at $36 million. While our contributions will be $51 million. Compared with this past year the pension plan expense in 2014 will be down due to principally because of higher discount rate assumptions.

Our total debt outstanding at the end of the year was $709 million, and our cash balances were $157 million. Our year-end ratio net debt to total cap was 26.4%, down from 32.1% last year. Our leverage ratio, which is net debt divided by adjusted EBITDA, was 1.56. Year-end unused available capacity on our $900 million revolving-credit facility was $482 million. Interest expense, it was $27 million in 2013 and we are forecasting that to come down to $24 million and 2014 as we called in our 6.25% debentures in January earlier this year.

Our effective tax rate in the fourth quarter of 2013 was an unusually low 14.8%. Before the tax effects of the Goodwill impairment charge, the effective tax rate was a more normal 30.2%, up from last year's 20.8%. For the low rate in 2012 last year was due to our statutory tax decrease in the UK, and the reduction of a valuation allowance associated with the European deferred tax asset. For all of fiscal 2013,the effective tax rate was 27%, the same as last year.

Looking ahead to fiscal 2014, we're leaving our effective tax rate unchanged at 31.7%. The 2014 rate is up from our 2013 rate for a number of reasons, including the effective Goodwill impairment charge that we took this year, last year's large R &D tax-credit benefit and because we are forecasting less favorable mix of global taxable earnings. It has been a tough finish to a challenging 2013. We have made the appropriate restructuring decisions to respond to soft-market conditions in our Industrial and Space and Defense businesses. We're working through the review process for Medical that will settle out in the coming quarter or two. And we are committed to leaning out our core business processes, including moving to a new company wide ERP system using SAP. We are taking these initiatives with a focus of achieving our long-term strategic growth in return goals, and we've now begin turning are full attention to 2014.

Thanks for listening. I'll now turn the call back over to the moderator and take any questions you may have.

(Operator Instructions)

Our first question from Cai von Rumohr.

Thank you and nice quarter.

The Boeing sales looked particularly strong. Was there any recovery from this 787-9 R &D or things like that, non-recurring things, there?

There wasn't any real R&D issues in the quarter. More a combination, Cai, of ramping on 87, the underlying business and then the timing of orders. The way the business actually comes in and the absorption of inventory -- that has a significant effect quarter to quarter on some of the excellent sales.

Okay, and then in Space and Defense, you mentioned you had a number of issues. How is that one problem contract you had at Bradford? Is that one pretty much under control now?

We believe so. It was a big charge. That was a $5 million charge in the third quarter. There was no significant additional charges in the fourth quarter. As I mentioned in the text, it wasn't any one particular program. It was a long litany of programs that, after more detailed review, all turned out to be not quite as profitable as they were on the books for.

I think one of the problems and one of the challenges in the Space business is when it turns out that your programs are less profitable, what you have to do is invest more resources to fix them, unlike in another business where you could say, let's take resources away. In the Space business you have to but a lot more effort into make sure you have systems and the structures and the project management to actually get it done. To some extent it's a double whammy. You find a problem and the [re IQ] is going to be higher, and then you end up putting in even more expense in to make sure you fix it.

But, it's the type of business that, when we buy a company or we commit to a program we have to be sure we deliver the program. And over the long term we will definitely get these businesses squared away, Unfortunately these are issues that we would prefer hadn't happened but we're working our way through them.

Okay. And then, I was interested that you made absolutely no changes to the guidance that you came out with in late July. If you were to take a fresh look and say, this is an area that looks like it has maybe more opportunity, like Industrial -- maybe comment on that. And also areas where you might have a little more risk, like overall military.

Yes. We did take a total relook at the business, and as you can imagine, there is hundreds of moving parts with all the different programs. In the end, the major categories rolled up pretty much the same as what they were before.

Now, last quarter, on the Industrial business we said our projection for fiscal 2013 was $585 million, and we said nothing in the macro picture that would make us think that it would be any better in fiscal 2014. We stuck with that forecast. We actually came in, in the quarter, the fourth quarter, a little bit better. So, we finished the year about $593 million, but we're still staying with the $585 million next year.

In the quarter, our Industrial automation business was up a little bit. It was a nice fluff up in the quarter. That may be a sign of positive development. Actually, almost all of the markets under that heading -- plastics, metal forming, et cetera -- they were almost all up a little bit. It's real early to say that, that's the trend. Again, if you read the macro headlines, there's nothing that would tell you that Europe is about to take off in a big way. It seems like the underlying structural problems in Europe are still there. Rather than get ahead of us, we said, we think, there's still not enough evidence to suggest 2014 is going to be better than 2013 in Industrial, but maybe it will be.

On the military side, we have looked over that. We had some work on the F-15 side of [beetle] and that's obviously slowed down because of the decisions in Korea. That was a little bit of a drop out there. We think some of the helicopter stuff will be a little bit better than we had planned. All in all, it comes in pretty much at what we were thinking last year.

If you do look at the total for Military, Military Aircraft is up about 6%. It's pretty much evenly split between the OEM and the aftermarket. Could it be worse than that with sequestration? Clearly, it could. It is our best guess, Cai -- and unfortunately, the customers [our work] forecast goes up by having detailed discussions with our customesr. The biggest risk is that they don't know themselves. It's not so much that they're telling us something that's wrong; it is that they actually don't know and they can't protect us.

If you worry about government shutdown again in January, February -- how could that play out? Hard to say. I would say that the shutdown that happened a couple of weeks back did not have any material impact on us. The first week of that shutdown they had actually sent home the defense contract agency inspector folks, and that would've had an impact if that kept going. But in the second week they brought all those folks back.

Helicopters as being up, that's a little surprising. United Technologies took their plan for Sikorsky down for 2014, and Bell has had some execution issues. What part of the helicopter business was up? Was this some slip from this year?

No, it's actually the B-22 [stuff] that we think is up a little bit from what we were forecasting 90 days ago. It is still down 20%, 25% from what we did this year. It's not that it's up on this year. (multiple speakers). We think that's probably going to be a little bit better. Maybe we were too pessimistic last quarter.

Last question. Does your fiscal 2014 plan, John, include, assume any restructuring? If so, where?

It doesn't assume any restructuring, Cai. Our assumption right now, going into the year, is that we have the restructuring essentially behind us. There will probably be a little bit of a tail, a small amount here or there, but it's not going to be something that we will probably even register. It will just be kind of a clean up of some activities. Particularly in some of the areas, like Europe, where you've got some stragglers. Or we have a couple of facility moves and there will be some expenses associated with the move, just to get all of that behind us. We are not anticipating anything of note.

Thank you very much.

Thank you.

We'll take our next question from Robert Stallard.

It's Steve Cahall on for Rob at RBC.

Maybe just a quick question on the aftermarket. It was down maybe more than some other peers in the quarter. Can you maybe give us a sense of what some of the underlying trends that you are seeing there, both sequentially mix? Also with your guide for FY14, it looks like Commercial aftermarket in Aircraft control down 2%. What gives you confidence about some of the improvement from where we were in the fourth quarter going into next year?

I'm thinking your whole question is about the commercial aftermarket.

That's right, yes.

First of all, our commercial aftermarket, any one quarter to another varies by plus or minus 10% to 15%. If you look back and did a quarter plot of the quarterly of the commercial aftermarket, it varies from 18%, 20%, 22%, plus or minus 10% or a little bit more variation from one quarter to the next. It's just the result of the way the orders and the actual product flows. I would never take one quarter, multiply it by four, and say that's a pattern. I think you really want to do a four-quarter kind of run rate, or a fiscal year of one year to the next as a guide. That's the fourth quarter versus next year.

Next year, if I look at this year versus the previous year, we were down about 3%. That really is the result of two things. The 787 initial provisioning was marginally lower in 2013 than 2012. But the underlying business was also a bit softer. That is because our aftermarket right now is more dominated by some of the older platforms -- 57, 67. We have relatively little under 37. We've got work on the 777, but a lot of our 777 work is pilot stuff which does not have as much aftermarket.

So our portfolio in the aftermarket right now is just not great. That's going to change dramatically in a couple of years' time when the 87, 350, 919, and the E-Jets come on board. We have an after market that I would say over the next couple years we won't see much growth, if any, because it's a balance of all the platforms and not being on some of the platforms that are really going gangbusters right now -- the 320, the 737. We have very little content on those. But we are anticipating a kind of quasi-flat aftermarket for a couple of years until we start to see the real uptick as the 87, 350, et cetera, come on line.

And for next year, the drop from this year is all on initial provisioning adjustment. Sales next year drop about $3.5 million, $4 million from this year. That is all assuming that initial provisioning of the 87 next year will be down about $4 million -- about that amount -- from this year. The underlying business is flat, and the initial provisioning will be off slightly.

Thank you. That was very helpful.

On the medical devices, it was mentioned that you are expecting to settle that transaction out in the next couple of quarters. Could you give us any feel of what the process is that you are going through, both with the revaluation? Was that the result of some of the bids you'd received? Or are we now entering into the formal bid phase and maybe you can give us some key gates without any of the detailed stuff about the bidders, et cetera?

We're in the midst of the review process. We have not decided yet whether or not we will or will not sell the business. That is clearly one of the potential outcomes. It is not an asset that is held for sale, and that is important. It is not an asset that is held for sale. Therefore, goodwill impairment is not a result of, these are the bids that we have for it. The goodwill impairment process is, as you are aware, something that you do on an annual basis. You do a range of discounted cash flows. You look at the carrying value versus the projected value.

I would say that over the last year, as we've gone through this review process we have moderated, I would say, our long-term outlook for the business. The result is that the carrying value was slightly higher than the fair value. Now, it was a very small difference. It turns out that the accounting requires goodwill accounting (technical difficulty) and value.

If you take a macro view of what actually happens -- when we bought these businesses between 2006 and 2009, at the time medical devices was a very strong industry, very strong growth rate, and very strong profitability. For the businesses that we've been in over the last 5 or 6 years, two things have happened. One, the FDA -- and we talked about this in the past -- has made it much more difficult to introduce new products, affecting the new product pipeline and therefore the growth opportunities for a company like ours.

Secondly, Obamacare -- the Affordable Healthcare Act -- introduced the sales tax on medical device products. You put the two of those together and our projection, as we went through that goodwill impairment testing this year versus our projection a couple of years ago -- we had to moderate that. That's what caused us to trip the goodwill impairment trigger. It's not a reflection of the bids that we have or anything like that. It is more a reflection of the projections for the business based on the change in the macro picture.

In terms of where we are in the process, we started the process about 3 months ago. A process like this from beginning to end typically will take 6 to 9 months. So we are in the middle of that process. I think that we would hope to come back to the market in a quarter or two with a conclusion, whatever that conclusion may be. Beyond that, I don't think it's appropriate to get into detail exactly where we are in the process.

Okay. Thank you very much. Maybe a final housekeeping one.

With your FY14 sales guidance, can you say what percentage of that is already in the backlog? Do you know that number?

Yes. Our backlog -- I think we reported it at $1.3 billion, and that's our 12-month backlog.

It's about 50%. Typical of what would see. And of course, that varies dramatically between short term and long term.

Yes. That's great. Thank you.

You are welcome.

We will take our next question from Tyler Hojo.

Good morning, Tyler.

Yes. Good morning everyone.

First question pertains to the Partnering for Success initiative at Boeing. Kind of curious how you think about that in context with some of your ambitions to get the margins up within the Aircraft business?

I think the Partnering for Success, the objective or the approach there is about working with the suppliers to find opportunities to reduce costs and to share those gains. Over the years we all have had an active program with Boeing at identifying opportunities or taking costs out of our products. It is always a challenge on their side because they have a long list of potential opportunities and it's a question of taking the 80/20 rule and they will pick the ones that maybe have the most opportunity.

While we would see Partnering for Success in our discussions with Boeing as working together to look at where our opportunities for cost reductions, how quickly can we do those and how quickly can Boeing incorporate them into the airplane, and then making sure that the cost savings are appropriately apportioned in that. We are in that process. It is not new in that sense. That's not something new. I think perhaps the shift at Boeing is more that they are dedicating more resources to looking at those potentials for taking cost out of existing projects as they wind down, perhaps, some of the R&D on the 87. So, maybe shifting some of their resources into that. Kind of improving the cost picture rather than developing and getting the products out the door.

Got it. Would you say with some of the increased level of conversations there have been increased business opportunities that have come up? Or is that not necessarily the case?

That is always held out as one of the opportunities. For our type of stuff, that is a really tough thing to do, and here is why.

We are not on the 737. We've got some small stuff. Let's just assume that Boeing said, Boy, if you Moog could take the aileron, the rudder, [picket] on the 737 and reduce the cost, we'd love you to sign up. The problem with that is that, unless it is a different design, we would compete with the incumbent in the aftermarket and that makes no sense for anybody because the aftermarket's where all the money is. Boeing, in that particular case, would have to say, we're doing a different design, which is no longer compatible with the previous design; so that you, Moog, have an opportunity to recover your cost in the aftermarket. That makes no sense from Boeing's perspective.

It's not as if our products and our competitors' products can be easily changed out; and because the money is in the aftermarket, you cannot have a situation where you are going to compete with somebody else in the aftermarket, because that destroys the business model. It's more, I can say, for our stuff it might be opportunities on future platforms rather than, here's a take-away opportunity. I think that's the same for our competitors as well. It is really hard to displace somebody, given the business model with huge upfront cost. Because the OEM space, where it's not particularly profitable and then the aftermarket, where it is very profitable but that's the recovery period. You can't be competing with somebody in the aftermarket because it makes sense for nobody.

Got it.

Does that help?

Yes it does. Thanks for the additional color. Maybe just one more for me.

You mentioned the rollout of a new ERP system. I think in your prepared remarks you mentioned that you did expect somewhat of an earnings headwind next fiscal year from that. I was wondering if you knew enough to potentially quantify that?

I don't know that I want to quantify that, specifically. There is two elements to a headwind if you do a system like this. One is the actual dollar cost that you spend on the software, consultants, et cetera, to start it off. The other is the costs associated with folks in the operating groups that end up getting seconded onto a project like this. And there's probably some (technical difficulty). If you did all this, the headwinds would really be more on the actual out-of-pocket expense, which for the first couple of years can be fairly significant.

Having said that, we announced this in the fourth quarter. We haven't changed our guidance for next year, in the $390 million to $410 million range. We think that we can absorb that cost through the other operation like (technical difficulty).

Okay, great.

It is not something that we'd like to quantify, because we get into quantifying it quarter on quarter then, and I think it only causes confusion in the market.

Okay. Fair enough. I appreciate it and thanks a lot.

You're welcome.

We'll take our next question from Julie Yates.

Good morning.

Good morning, Julie.

John, a few questions on 787. What rate are you shipping at today? How is your profitability trending? And then, will you need to make any investment to accommodate the recent production ramp to 2012 and ultimately to 2014?

No. In the year, Julie, that we just completed, we shipped in dollar terms about $84 million, $85 million. We have about $1 million of contracts. That is a very rough way of saying it is probably about 85 ship sets, give or take.

You've got to understand, Boeing does not order ship set by ship set. We have hundreds and hundreds of parts and they order all of the parts individually. We could not physically calculate exactly how many ship sets, because it would be 100 ship sets for one part and 72 ship sets for the different part. The number I'm giving is kind of a round number. What I would say is, we're fully in line with Boeing's production plan. We're not in any way behind.

The easiest thing to do is to say, we are shipping in line with them, but with a 6-month lead-time ahead of that. You can call it 84, 85 systems in fiscal 2013. Next year we're looking at about 100 systems. Keep in mind, of course, Boeing already has quite a few of them on the tarmac. For them to ship 120 next year doesn't require them to get 120 systems from us, because we've been shipping for the last 4 or 5 years. That is the shipping rate and, as I say, keeping up with Boeing.

I think their interest in going to 12 and 14 ship sets per month would require some additional capital investments on our part. But not a huge number that it would be a dramatic shift in our capital expenditures one year to the next. In our case we don't have very large pieces like an autoclave or something, that you buy 1 autoclave and it can go 5 a month. And the next autoclave can get you to 10. Then you need to make a huge investment to get you to 11, because it is another large piece of capital equipment.

Our cutting equipment for various machinery and is assembly and test stuff, and it's really an increase in order. We can go 10 to 11 and then there's an investment in capital, and then 11 to 12 and the same investment, et cetera. We have plenty of time to ramp up that capacity as we go forward. We're not anticipating that, that would be a major additional investment. There will be some investment, but it will be part of the normal capital expenditures cycle.

Your first question was profitability, was it?

Yes.

How did you phrase your profitability question?

Just how is the profitability trending? Is it below average? And how is that improving as you're coming down the learning curve as the production increases?

Julie, we don't give out profitability by platform. It is getting better as we make more of them.

Okay. And then next, on the military aftermarket, it looks like it held in a little better than other peer reports we've seen in this earnings season. Why do you think that is? I realize visibility is very limited here. But what do you expect over the next 2 to 3 quarters? And how confident are you in your forecast for 2014?

Well, how confident are we? At the end of my text, I said I think in the past folks on the outside have thought, Well, these guys hedge and they always do better. I think we demonstrated in 2013 that maybe we don't always hedge as much as we think.

In terms of the forecast for next year, we are as confident as we were on the forecast for this year on the military aftermarket. This year we actually did better, I think, than we had forecast; it came in very strong. Next year we've toned it down from $230 million this year to $220 million. We're talking about taking a 5%, 6% haircut next year. This is the one area, Julie, that it could just dry up and we could see that drop off. At the depots, our folks are working with the depots; we do work for the depots. There is some foreign military stuff. (technical difficulty). That was actually one of the real nice ones. We got some nice [extra team] work in this particular year. That was part of why it did better.

It is really hard to say. We do the best effort we possibly can in forecasting it. 5% to 6% down next year -- seems like that's a reasonable number in terms of the overall reduction in spending. But could that be less? I think it could. I wish I had that crystal ball. This is the one we watch quarter on quarter, month on month. Unlike, say, F35 production rate or B-22 production rate. That's pretty steady. You have multi-year contracts. We don't have multi-year contracts in the military aftermarket.

I would recommend the best way to judge it is, look at wheat these forecasted over the last 4 or 5 years, and how did they actually do? I assume that we're using the same process, but the macro environment has changed. Therefore, how good is the process? It's as good as we can do right now and we will adjust it as we go through the quarters. I wish I could give you a better answer, but that's as good as we can do.

I understand. Thank you.

We will take our next question from J.B. Groh.

Good morning, J.B.

A couple of questions.

Obviously, the balance sheet is in good shape, and you've got some available capital and the cash flow is very good. Can you talk about -- and looking at your supplemental information, obviously you don't have a number in there for 2014 acquisitions, but I presume you're still active in the market. Maybe you could address what you're looking at and how you see valuations trending, and those sorts of things?

Yes. We are still looking for acquisitions. Although I would say we're probably a little bit more cautious that we have been in the past. Given the story I just told about some of our space acquisitions, our [win back] acquisition, and the fact that we are doing a review of our Medical business, I think if I were in your shoes I would welcome that caution.

That's not to say we've done some very nice acquisitions. There was a (inaudible) acquisition. Most of the Component acquisitions we have done have performed very nicely. It is not a black-and-white picture. I think we're trying to be a little bit cautious and make sure that our processes are as good as they possibly can be.

We are still in the market; we're still looking for acquisitions. I think, right now, if I walk down through the businesses on the commercial side, property prices are very high. I think it is real hard to justify the prices. Our friends at TransDyne, if they want to buy a business, they are willing to pay a very high number. That is not something we're going to try to bid against. There's nothing that strategic that we feel that would be worthwhile doing.

Defense is actually pretty slow. There just doesn't seem to be a lot of properties that are of particular interest to us. Industrial -- last year has really been a year of trying to consolidate a lot of the stuff we already had. We've probably been distracted with the in-house activities and therefore there has not a lot in the pipeline there. Space -- we've done a bunch of them. I think we want to spend the next year or two bedding down what we've got rather than expanding much beyond that. Medical -- we're not doing any acquisitions at the moment, anyway.

It is a little bit of a mixed bag. I think generally a slower environment in Defense, an expensive environment in Commercial, and in Industrial we've got to strike. We're still in the market and with use of proceeds and use of free cash, acquisitions are one of those areas we'll still consider seriously.

Okay. Good. Maybe you could talk about what you see as the opportunity set on 777X?

I think it is a little bit early yet to say that we know about the 777X. There has not been a lot of activity yet between us and Boeing. I think they are very early on in the process. I guess the opportunity, if it's an all new wing, would be to have a new set of flight controls. If that were the case, then it would be an opportunity as big as a 350 or an 87.

Whether or not they will elect to do that and how much that would change the configuration, we don't yet know. I think that would be over the next 6 to 9 to 12 months before we have a clearer picture on that and how that process will go on and whether we could be successful.

Can you remind me again what the A350 content is? If you have said that I can't recall.

It is similar to an A7.

Okay. Thank you for your time.

Next to Kristine Liwag.

Good morning everyone.

Good morning, Kristine.

There's a follow-up on M&A. You mentioned the valuation in Commercial Aerospace and your M &A history in the Q&A section. Some traditional A&D companies are expanding into oil and gas. Can you talk about your appetite for expanding through M &A into adjacent industries?

I can. We have the advantage that we have been in industrial businesses for about the last 50 years. I think diversification offers in a situation like this is, we are not trying to take military or commercial engineers and try to put them into the oil and gas business that they have no experience of. We actually have quite a significant business in oil and gas. It's $100 million, north of $100 million, between our offshore, what we call, Energy business, Marine business in the Components group. And a downhole business we have in the Industrial business.

And we have business in the oil and gas turbine businesses, as well as, obviously, the wind business. Our energy portfolio, if I put them all together, is probably somewhere between $200 million and $300 million of business already. That does, actually, present opportunities. There are a variety of initiatives that we are working within that sector. It turns out in that business, that if you manage to come up with something that the big guys want -- because they are all big guys -- whether it's the Schlumbergers or the Schlumberger/Haliburtons, then it has very large potential.

On the other hand, it's a very demanding set of applications. It takes a while before anything matures. We do see that as potential growth for us. If you listened to my presentations, when I talk about our focus is when performance really matters. That's one of those environments where performance really matters in the sense of, it's a very tough environment. You don't want stuff to fail. You don't want to have to pull something out of the ground because you've got to shut down a well for a day or two or more.

That fits with our approach. Our approach is to bring technologies and solve problems for customers in difficult applications. That is the fit for us. This is not a question of, okay, try to diversify away from A&D. This is just opportunity to build on what we already have and continue to grow.

Great. Thank you.

You are welcome.

It appears we have no further questions at this time.

Thank you very much, Marquita. Thank you, everybody, for listening. We will talk to you again in 3 months' time. Thank you.

That does conclude today's conference. We appreciate your participation. You may now disconnect.