Moog Inc (MOG.A) 2014 Q1 法說會逐字稿

Good day and welcome to the Moog first-quarter earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Investor Relations Manager, Ms. 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 January 24, 2014; our most recent Form 8-K, filed on January 24, 2014; 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. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at www.moog.com. John?

Good morning. Thanks, Ann. Thanks for joining us.

This morning, we report on the first quarter of FY14 and update our guidance for the full year. Our first quarter was a slow start to the year but we had a couple of unusual items which depressed our bottom-line earnings number. Let me start with the headlines for the quarter, update our thinking for the year, and then dive into the segments.

Headlines. Our operations delivered $0.88 per share in the first quarter. This is close to the middle of our guidance range. Sales were a little soft and R&D was relatively high. In the quarter, we redeemed our 7.25% high-yield bond and incurred an associated cost of $0.12 per share. This cost will come back to us over the next few quarters in the form of lower interest payments.

In our Industrial segment, we wrote down the technology investments in [the next early] Company, which resulted in a $0.06 per share non-cash charge. Taken all together, the EPS in the quarter $0.70 per share. Free cash flow in the quarter was very strong at $48 million.

Looking to the full year, we're moderating our forecasts based on our experience in the first quarter. There are three major adjustments. First, we're increasing our forecast for R&D investments in our Aircraft group by $10 million. This increased number is based on the expanded workload to get our equipment on the A350 qualified in a hurry, as well as an accelerated development scheduled for the E-Jet for Embraer.

Second, over the last 90 days, we've refined our cost estimate for our SAP business system implementation. When we announced this initiative 90 days ago, we had a preliminary cost estimate for FY14, based on a first-cut project plan. We now have a detailed breakdown of the expense in FY14 and we believe it will be about $7 million higher than our first estimate. Our original plan anticipated that more of the costs will be capitalized this year.

Finally, we're seeing some sales softness in three of our markets -- defense, space, and industrial. As a result, we're reducing our sales forecast for the full year by $45 million. We're very focused on minimizing the impact of this sales reduction on the bottom line through a series of cost reduction activities. As a result, the $45 million sales reduction will only reduce our margins by about $7 million.

Taken all together, we're now forecasting earnings per share of $3.65 for FY14. We're disappointed to report a change in our earnings outlook for the year; however, we believe the additional investments in Aircraft R&D and in SAP will provide benefits for our investors in years to come.

In the short term, while sales and earnings are a little softer, we continue to generate strong cash flow. We find ourselves in a slow growth, slow acquisition environment, and in the present environment, we believe returning excess cash to our shareholders will create the most value in the short term. Therefore, we're announcing today a 4 million share buyback program, which we plan to execute over the coming 12 months or so.

Now, let me move to the details, starting with the first-quarter results. I would remind our listeners that we have provided a three-page supplemental handout, which details all the numbers.

Q1 FY014. Sales in the quarter of $643 million were up 4% from last year. Sales were up in our Aircraft, Space and Defense, and Components segments, but were slightly lower in our Industrial System and Medical Devices segments.

Taking a look at the P&L, our gross margin is in line with last year; R&D is up, driven by our Aircraft segment; but total operating expenses are lower, as we benefited from the restructuring activities in FY13. Other expenses are up due to the call premium on our high-yield bond and the investment write-down in our Industrial business.

Lower interest expense and a slightly higher effective tax rate resulted in net earnings of $32 million and earnings per share of $0.70. Adjusting for the impact of the bond call and the investment write-down, earnings per share of $0.88 were 17% higher than last year.

FY14 outlook, we're moderating our sales forecast for the year by $45 million. There's no sales change in either Aircraft or Medical. Space and Defense sales will be $13 million lower, as our NASA business moderates and the military vehicle business slows.

Industrial Systems sales will be $10 million lower as a result of reduced flight simulation sales. Component sales will be down $22 million, primarily driven by reduced military vehicle activity and a softer outlook for the industrial automation market.

The lower sales outlook has a $0.10 per share negative impact on earnings. Higher R&D has a $0.15 per share negative impact on -- and our increased investment in SAP has an additional $0.10 per share negative impact.

Taken all together, we're moderating our forecast for EPS from a range of $3.90 to $4.10 per share down to $3.65 per share. This new EPS forecast is exclusive of any benefit of our share buyback program.

Now, let me move to the segments, starting with Aircraft. Sales in Aircraft in the first quarter were up 5% from last year to $265 million. This total is in line with the quarterly run rate in FY13. The familiar pattern continues -- strong organic growth on the commercial side, compensating for slower defense sales. Commercial sales were up 25% in the quarter, with strength in both the OEM and aftermarket segments.

Sales to Boeing and Airbus continue strong, driven by the 787 ramp, and the initial production units on the A350. The commercial aftermarket was also strong as a result of higher 787 initial provisioning.

In the military market, sales were down 8% from last year. F-35 production was up slightly in the quarter, but the development contract was down almost $6 million from last year. Helicopter sales were down as the V-22 production run rate moderates.

Other [administrative] OEM programs showed an uptick, driven by increased activity on the KC-46 tanker program. The military aftermarket was down, as fewer units were returned for repair.

Aircraft FY14. We're keeping our sales forecasts for the year unchanged from 90 days ago; however, we're adjusting the mix between commercial and military to reflect the experience of the first quarter. We're moderating our military aftermarket forecast by $10 million.

We've speculated in the past that the military aftermarket may be where we will notice the impact of sequestration and lower defense spending. While one quarter doesn't make a pattern, we think it prudent to moderate our military aftermarket forecast for the year by about 5% from our previous forecast.

On a positive note, we believe the strength we saw at both Boeing and Airbus in the first quarter will continue for the rest of the fiscal year. We therefore are increasing our forecast for commercial OEM by $10 million.

Aircraft margins. Margins in the quarter were 12%, slightly below last year's 12.3%. R&D was up 170 basis points over last year.

The spend on the A350 continues to run ahead of what we had planned given the amount of work required in the final phases of qualification. The Embraer E-Jet program also started to ramp up this quarter. When we adjust for the higher R&D load, we see that the operations continue to perform well, despite the adverse shift in the mix for military sales, both OEM and aftermarket, to commercial OEM sales.

We're moderating our margin forecast for the full year to 12.1%. Higher R&D is the driver. We think are Aircraft R&D spend in total will now be $10 million higher than our forecast from 90 days ago, or about 100 basis points. We believe the slowing in the A350 expenditure will not materialize as soon as we had planned. And in parallel, we're planning to accelerate our E-Jet activity to ensure we stay ahead of the program schedule.

Turning now to Space and Defense. Sales in the first quarter were up 15% to $100 million. Most of the growth was the result of an acquisition completed in the last 12 months. Organic growth for the segment was 5% in the quarter.

In the space market, sales growth of 21% can be attributed to the Broad Reach engineering acquisition. Excluding Broad Reach, space sales were flat with FY13.

We saw some shifts in the mix between various programs. Of note was increased activity on the Soft Capture system for NASA, a system for docking with the International Space Station.

At the end of FY13, we consolidated the management and reporting of our security market into our defense markets. Going forward, we combine these two markets for outside reporting. In the quarter, sales in this combined market were up 8% from last year. We had a pick up in sales on military vehicles in Europe, as well as higher sales in the security market.

Space and Defense FY14. First quarter was a slow start to the year in Space and Defense, and as a result, we think it prudent to moderate our full-year forecast. For the full year, we are lowering our forecast by $13 million to $420 million.

We think space launch sales, and in particular sales to NASA, will be lower than we had forecasted, and that sales in military vehicles will also be softer than planned. On a positive note, we booked several large orders in the first quarter, and our revised forecast assumes stronger sales in the second half of the year.

Space and Defense margins. Margins in the quarter were a disappointing 7.9%. We continue to struggle with some recent space acquisitions where the results continue to fall short of expectations. This quarter, we incurred another $2 million charge on various programs where the cost estimates to complete increased again. There is a lot of time and energy going into getting this right.

As I said last quarter, the difficulty with space program is when they run into trouble, it's not possible to cut costs to improve profitability. Actually, the opposite occurs. We have to invest significantly more costs to get them fixed.

We struggled on space programs before and we work our way through these difficulties, as unpleasant as they may be. Given the soft margin performance in the first quarter, combined with the reduced sales outlook, we're moderating our margin forecast for the year to 9.1%.

Turning now to Industrial Systems. Sales in the first quarter of $144 million were 3% lower than last year. Sales were down marginally in each of our three major markets -- energy, industrial automation, and test and simulation. The good news is that our incoming order rate is solid and that our profitability has improved significantly from the same quarter last year.

Sales in the energy market were mixed, with soft [win] sales in China, compensated by stronger oil and gas exploration sales. In industrial automation, sales in most markets were flat with last year, but lower sales into steel mills dragged the total down by 2%. In the simulation and test market, our automotives test sales into Asia were up nicely from last year, but our flight simulation sales were down as a couple of large customers adjusted their inventory levels.

Industrial Systems FY14. We're moderating our full-year forecast by $10 million to align us with the run rate of the first quarter. Relative to our forecast of 90 days ago, the reduction is all in our simulation and test market. Our customers in the flight simulation business are revising their outlook slightly and adjusting their inventory levels after very strong growth in FY13.

Industrial Systems margins. Margins in the quarter of 8.5% includes the effects of a non-cash write-down on the technology investments. Exclusive of this write-down, operating margin in the quarter of 11.3%, were up over 500 basis points from last year, despite the slightly lower sales. The restructuring activities we conducted throughout FY13 are showing through on the bottom line.

Let me provide a little more color on the investment write-down. Over the last few years, we've identified a market opportunity for very large, permanent magnet motors. These are motors of 3 feet or more in diameter, which are capable of replacing hydraulic systems in a range of heavy-duty automation applications.

The underlying driver of this shift in industrial applications is a push to improve efficiency. We know how much fuel efficiency drives the aerospace markets. Well there's a similar trend, albeit less dramatic, in the industrial markets.

10 years ago, we led the shift from hydraulic to electric in the flight simulation business. Today, we see the opportunity to do the same in a wide range of industrial applications.

Large motors are the key to this opportunity. Over the last few years, we've invested internally in developing large motor technology, and in parallel, we've made small investments in two technology companies who we believe had some unique capabilities.

Six months ago, we wrote down the investment in one such company when it was sold to a third party. This quarter, we're writing down the investment in the second company, which has run into cash flow problems and is ceasing operations. We're disappointed with the net result of our investments, but our association with both companies has supplemented our internal development activities, which will continue [at pace].

For the full-year FY14, we're forecasting margin of 11.3%, up from FY13 operating margin of 8.7% excluding specials. Our new FY14 forecast is down from our last forecast, based on the slightly lower sales, as well as the $4 million investment write-down this quarter. This write-down is equivalent to 70 basis points of margin headwind for the full year.

Turning now to our Components segment. Sales in the first quarter of $103 million were up 3% over last year. Our Aspen Industrial Motors acquisition, which we completed in March of 2013, contributed $9 million in sales in the quarter. Excluding acquisitions, organic sales were down 6% in the quarter.

Sales in the aerospace and defense markets were about flat with last year, while vehicle sales were a little softer, but missile sales a little stronger. In the non-A&D market, sales into the energy sector were down, as a major customer adjusted their inventory levels and we shipped fewer FPSO products.

FPSOs are floating production and storage offloading ships used in offshore oil production. We sell very large slip rings used on these ships, with average selling prices well north of $1 million.

The first quarter last year was an unusually strong quarter for FPSO shipments. We shipped 70% of the total FPSO sales for the year in that quarter. The first quarter of FY14 was actually a very good quarter for FPSO sales, just down from the boom quarter last year.

In our other non-A&D markets, medical and industrial, the additional sales from the Aspen acquisition contributed over 100% of the growth, with the underlying market showing some softness.

Components FY14. The first quarter was a slow start to year for our Components Group. The military vehicles markets continue to weaken and our industrial markets are showing little sign of improvement. We're therefore reducing our sales forecast for the year by $22 million. This new forecast still assumes a modest pick-up in the second half of the year, based on slightly higher foreign military sales, completion of some large projects in our energy sector, and a small improvement in industrial market.

Components margins. Margins in the first quarter were 15.8%, in line with the long-term average of this business. For the year, we're moderating our margin forecast from 15% down to 14.7%, based on the higher SAP business system project cost.

Medical. Medical Q1. This was a very strong margin quarter for our Medical segment. Sales in the quarter of $32 million were actually lower than last year. The difference in sales is due to the sale of the Ethox Buffalo facility, which we completed in June of 2013. Organic sales were about flat with last year.

There was a slight shift in the mix, with higher pump sales and lower set sales. Higher pump sales is a positive sign, as set sales are determined in the long-term by the population of pumps placed in the field. For FY14, we're leaving our sales forecast unchanged from 90 days ago at $137 million, but shifting the mix slightly to reflect the results of the first quarter.

Medical margins. Margins in the quarter were very healthy, at 11.4%. This is the first time we've hit double-digit margins in this business in many years. The improvement is a result of improving mix and the continued focus on cost containment. For the year, we're keeping our margin forecast unchanged at 7.1%. Given the strong showing in the first quarter, this may be conservative.

Before I leave the Medical segment, let me give you a brief update on our strategic review process. Unfortunately, at this moment, there's not a lot I can report apart from reassuring our listeners that we are spending considerable effort on this review.

Our Medical segment grew out of acquisition campaign between 2006 and 2009. In that period, we acquired five small medical companies and gradually merged them together into our present segment.

Given this history, we have a broad range of products and technologies, which are used in diverse markets. This diversity has made our review process relatively complex and time-consuming. The process continues and we would hope to provide our investors with a more specific update in the next quarter.

Let me finish with summary guidance. We're off to a slow start in FY14. In our first quarter, we've seen our defense markets weaken, and the outlook in our industrial markets has not improved as we had hoped. Commercial aircraft remains a bright spots and our Medical business is doing well, but they don't make up for the softness in the other two markets.

Therefore, we've moderated our sales forecast for the year by $45 million. We're now forecasting total FY14 sales of $2.63 billion, up about 1% over FY13.

We're also lowering our earnings forecast for the year as a result of three factors. First, the lower sales will have a negative impact on our EPS forecast of $0.10 per share. Second higher R&D in our Aircraft group will have a negative impact on EPS of $0.15 per share. And finally, higher costs on our SAP projects will have a negative impact of $0.10 per share.

The total cost of our SAP project this year will be about $0.20 per share, or equivalent to almost 60 basis points of margin headwind in each of our segments. Taken all together, we're now forecasting full-year EPS of $3.65 per share. We believe the second quarter will be similar to the first for our operations, but will have about $0.10 of additional SAP costs.

The net result should be Q2 EPS between $0.70 and $0.80 per share. The second half should be must stronger, with average EPS of $1.10 in each of the last two quarters.

On a positive note, we continue to generate strong cash flow. We plan to use that cash to enhance shareholder value through a four million share repurchase program over the next year or so. This equates to almost 9% of the shares outstanding. We estimate that the net benefit from this program in FY14 will be about $0.05 per share. If this estimate materializes, the year will come in at $3.70 per share.

Before passing you over to Don, let me offer some macro thoughts on the general market situation. We're a Company where long-term value is created through technology and product innovations applied to markets where performance really matters. Our focus is on long-term growth, while ensuring we're using our balance sheet prudently to enhance returns to our shareholders.

Today, we find ourselves in a slow growth, slow acquisition period. In time, that situation will change, and we're investing now to position ourselves to take advantage of that shift when it comes.

Short-term, we're focused on overhead reductions and improving our processes through the application of lean techniques. In parallel, we're investing in a state-of-the-art SAP business system to build a platform for future growth. In addition, we continue to spend on R&D to generate growth opportunities across all our markets.

Today, Defense and Industrial face particular market challenges. In Defense, we're pursuing additional foreign military opportunities, as well as investing in new platform technologies outside our normal field of applications. An example is small platform weaponization.

In Industrial, we're investing in next-generation systems for our major markets, including wind energy and flight simulation. We're exploring new technologies, which offer improved energy efficiency based on large permanent magnet motors. And we're creating new markets for our technologies, in areas like medical simulation.

Let me finish by saying that we continue to look for acquisitions which will complement our organic growth strategy. We've struggled with some of our recent acquisitions and we've taken a step back to review our due diligence process and learn from our experiences.

Going forward, we believe acquisitions will continue to be a key element of our long-term growth. We will evaluate them from the strategic perspective, as well as the potential alternative use of capital perspective. Our decisions in each case will be based on the best options and have long-term shareholder value.

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

Thank you, John, and good morning, everyone. We had a strong, free cash flow quarter of $48 million. This marks the fourth sequential quarter where our cash flow conversion ratio has been in excess of 100% of net earnings.

Our net debt decreased by $33 million during the quarter, with $519 million. The difference between free cash flow and the change in net debt outstanding is principally explained by the costs associated with the redemption of our high-yield debt that John talked about.

Back in December, you'll remember we called in our $200 million of outstanding debentures that were otherwise scheduled to come due in 2018. With that transaction, we paid a call premium to retire that high-yield debt, which carried an interest coupon of 7.25%. We are now using are available revolving credit facility, where we're paying less than 2%.

The first-quarter costs associated with the call were about $8 million pre-tax, or about $0.12 per share. These Q1 costs will be offset by lower interest costs throughout the balance of the fiscal year. [Also] the impact of this financing transaction will have a negligible impact on FY14's full-year EPS results.

The most significant positive cash flow driver on the balance sheet in Q1 was the decline in accounts receivable. This was due to the timing of collections related to last quarter's invoicing.

Inventories were relatively flat from three months ago, while accounts payable came down, reflecting a more normal level. Customer advances were flat quarter-over-quarter, at $147 million, and loss reserves decline by $5 million to $39 million.

Capital expenditures were $20 million and depreciation and amortization totaled $27 million in the quarter. We're leaving our forecast for CapEx and depreciation and amortization for all of FY14 unchanged at $105 million and $113 million, respectively.

Cash contributions toward defined-benefit pension plans totaled $12 million in our first quarter, in line with our projected contributions for all of FY14 of $52 million. The funded status of our principal domestic DB plan has improved in recent years, reflecting better asset performance and increasing discount rate used to value the obligations and a consistent level of Company-funded annual contributions.

At the end of our most recent fiscal year, the obligations on that domestic DB plan were 82% funded, compared to only 64% 12 months prior. Our effective tax rate in the first quarter was 31.5%, up just slightly from last year's 30.5%. In total, our free cash flow outlook for the year remains unchanged since our last forecast at $165 million, now reflecting the projected cash conversion ratio of just under 100%.

Our financial ratios at the end of the quarter reflect the strengthening financial picture. Net debt as a percentage of the total cap was just under 25%, down from 31% in last year's first quarter. Our leverage ratio is presently just under 1.5 times.

During calendar year 2013, we called in a total of $400 million of expensive high-yield debt and we replaced it with lower-cost revolving credit. As a result, at quarter-end, we had $300 million of unused borrowing capacity on our $900 million revolver that terms out in 2018.

We also have an option to increase the size of our revolver by $200 million at current market rates associated with an accordion feature. This will increase the size of the revolver to $1.1 billion if we chose to take advantage of that option.

In summary, our financial ratios are very strong and we're generating strong free cash flow. Although M&A is slow, we're confident that we have ready access to capital in the event we need it, particularly [through to pursue us to substantial] strategic acquisition opportunity.

As John already mentioned, we are focused on total shareholder return and the appropriate deployment of capital. Accordingly, we announced today, that our Board of Directors has authorized the purchase of up to four million Class A or Class B common Moog shares, or about 9% of our total shares outstanding. At this time, we intend to acquire these shares on the open market over the next year or so, using the available capacity under our revolver.

And, as John has said, we estimate that our FY14 EPS will benefit from this share buyback program by about $0.05 a share above our updated FY14 EPS guidance of $3.65.

So, with that, I'll turn you back to Shannon and then we'll take any questions that you might have.

(Operator Instructions)

Julie Yates Stewart, Credit Suisse.

Good morning.

Morning, Julie.

On the additional R&D in 2014 that's resulting in the impact to guidance, is this really just a timing issue in pulling forward R&D expense that you originally thought would be in FY15?

It's partially a timing on -- there's two drivers of it, Julie. One is the A350 and then other is the E-Jet. On the E-Jet, I would say, it is a timing issue. It's accelerating costs in 2014 that were planned for 2015.

On the 350, I couldn't say that. I would say it's just additional costs as we try to push through qualification of an awful lot of hardware. The 350 costs are still coming down from last year, but they're down from [closing] costs last year on the 350 is about $45 million, so this year they'll be trending just north of $30 million, so they are actually coming down significant and they drop off as we go to the year, but it's still up from what we forecasted, that is was going to do 90 days ago.

So I'd like to say that was an acceleration. I don't think it is. I think it is just additional costs associated with getting it all completed.

Okay, and is that being driven by the performance that you guys have seen on the program or is it more driven by the schedule you're getting from Airbus?

I don't think I'd attribute it to either. I would say this, Julie. It seems that it always turns out that it costs you more money to get a big program like this qualified than you anticipate.

The 350 has different technology. The 787 is a hydraulic -- 5,000 psi hydraulic -- and some electric actuation systems -- that's the architecture. The 350 is hydraulic and what's called an electric back-up hydraulic system that is a different technology.

The fact that -- the different technology means that you do an estimate based on past experience, based on the best you know, and then almost inevitably, it turns out that there's a little bit more to do than you had anticipated. At a time like this, what's absolutely paramount is maintaining the schedule with our customer.

So what we will do is, we will just [draw through] R&D to make sure we maintain schedule for our customer and we're not -- any kind of a delay on the program. The alternative is you can say, well, the R&D is flat and you delay the program, which of course, doesn't make any sense. So it's just one of those things that -- and I'm an engineer, so I can say this -- engineers tend to be a little bit more optimistic than it always turns out to be.

Okay, understood. Then, do you have any color on the commercial aftermarket, excluding the boost that you saw from the 787 spares provisioning?

Yes, it turns out, if you take out the 787 initial provision, the actual -- the rest of it is down a little bit from last year. If you want to do quarter-to-quarter, it's down from about [24 to about 22]. I mentioned in the past on calls like this that our aftermarket fluctuates up and down, 10%, 15%, one quarter to another, so I wouldn't read anything into that apart from it's not an upward trend.

The 787 initial provisioning was very strong in the quarter. It was over $7 million. That's what we were anticipating for the full year, but we haven't adjusted our forecast for the year up and that's because the rest of it looks like it's a little bit softer than we were anticipating.

Okay. Thank you.

You're welcome.

Cai von Rumohr, Cowen and Company.

Yes, thanks so much. If A350 R& D is coming down from $45 million-ish to high $30 millions, how much -- the E2 -- it looks like your overall Aircraft R&D is up some $6 million. E2 spending must be very large; how big is that likely to be?

Good morning, Cai. Let me correct you a little bit. It's mid-$40 millions down to low $30 millions on a the A350. Not high $30 millions is what you said.

Okay. Low $30 millions?

So the Embraer jet, we're anticipating mid-$20 millions spend this year.

Okay. And then, given their schedule, that's going to be essentially the same next year or higher?

It's likely to be a high for the next couple of years, yes.

Okay, and then the SAP, so the $0.20 equates to about $14 million by my math. How much was in the first quarter, how much is in the second, and in which divisions do we see this?

In the first quarter with only $0.01 or $0.02, if I do -- so you're right that $0.20 is about $14 million, but let me just do in terms of cents. The first quarter it was $0.01 or $0.02. We think in the second quarter, it will actually be the heaviest quarter; it will be about $0.10 or so, and then the rest of the year is $0.04, $0.05 for each of the last two quarters.

It is actually -- it is not in of the divisions at this -- let me be careful -- what we are in, is the design phase, where you do the overall design for all of the divisions, across the whole Corporation. So in a time like this, it is not that one group is picking up more or less than another group. It turns out that when we push -- we have to push those costs back into the operating margin so it affects the operative margins of all of the groups equally in this year and it's about 60 basis points of margin headwinds in each of the groups this year.

But it's this central design process. As we move out -- in about, at the end of next year and the following year, then you are into implementations in the different operating groups, and at that point, it will have a different expense profile by operating group.

Okay, and then, does it stay at this huge level or does it go down? How should we think about it trending next year?

Next year will be similar and then we'll see a trend down significantly and then after that -- year three, four, and five -- you start to get into seeing some benefits. Long-term, we think the benefit is about $0.50 per share when it's all done.

Okay. And then, I'm a little confused by the share buyback. You've authorized 4 million. How much of that do you intend to buy? And how much is in the $3.65 and how much is not in the $3.65?

There's no -- there's nothing in the $3.65 from the share buyback, Cai. Our intent is to buyback all 4 million shares. If we do it on in open market purchases, we estimate it will take about 12 months or so.

The impact, if you do that, on the average shares outstanding impact, the impact will be about $0.05 per share in FY14; obviously it will be a lot more in FY15. So it would be about $0.05 per share. So you'll therefore go from $3.65 to $3.70.

Got it. And the last one -- you mentioned $45 million down on the sales, $0.10 impact. That $0.10 presumably includes the $0.06 of the Industrial write-off, which was not in your prior guidance, correct?

That is correct.

So, okay, great. Thank you.

You're welcome, thank you.

Tyler Hojo, Sidoti.

Good morning, Tyler.

Hi, good morning. Just to follow in on some of the R&D questions you've gotten. I'm just curious, when you put all together, do you expect your FY14 R&D spend rate to be the peak?

Well, I think your question is do we expected to be the peak in the Aircraft business, because the other businesses all typically were on a fairly flat percentage of sales. It varies slightly between one and other but it's not significant, it doesn't vary a lot.

Yes. That's correct.

2014, in our Aircraft business -- 2014, we're anticipating will be about similar to 2013, given that the E-Jet will continue to ramp in 2015 and that the A350 will start to come down, but oftentimes with derivatives, it doesn't come down as fast as you think. I could imagine that in 2015, it might be similar, and then, assuming no other big program, it does start to come down significantly in 2016 and 2017, particularly as the A350 starts to roll out.

Okay, great. And then I'm just curious, in light of some of the reduced sales expectations in the markets that you all discussed, is there any restructuring expense now included in the guidance?

No, there's no, specific restructuring expense called out in the guidance. Last year, we did about $15 million of restructuring and then this year we will continue to focus on cost containments, managing staffing levels, et cetera, but at this point we're not anticipating a significant restructuring in the Business, so there is no restructuring included in the guidance at this time.

Depending on how the year, of course, unfolds, that may change as we go forward, but at the moment, we're anticipating that the second half will be stronger than the first half. And particularly in the Space and Defense business, we need staffing in place now in order to be able to respond to increased program activity in the second half.

These are engineers and program management type folks, it's not direct labor type folks, so we're carrying probably more staff now in the first two quarters where the sales are relatively softer than the average for the year, and we have those in place so that we can ramp up significantly in the second half. So if we didn't see that ramp up, then we might be facing a restructuring, but we don't want to not be able to meet our customer requirements and meet that sales pick-up in the second half, so for that reason, we're probably carrying a little bit more staffing than we would need for the present run rate but we anticipate that the run rate is going to accelerate.

Okay. Understood there.

Maybe just lastly from me, I did notice that your backlog was up nicely on a sequential basis. Just curious if there was any particular product area that you would call out there? And maybe just more broadly speaking, what's your expectation in regards to backlog as we move through the rest of the fiscal year?

When you say backlog [and stuff], are you doing backlog up sequentially, quarter over quarter, or are you talking about year over year?

Quarter over quarter? $1.4 billion from $1.3 billion, it was?

The big shifts in the backlog, quarter over quarter, are in the Aircraft business and in the Space and Defense business. That really has more to do with the timing of orders. It's not structurally different, it's a timing of orders, because in both of those businesses -- in the Space business, for instance, we booked some very large orders in the first quarter, which we have been expecting for a while, and they just play out over the next 12 to 18 months.

So you'll see that backlog drop over the next couple quarters as we start to work those programs down. I would use the sales guidance that we provided you as a much better indication of what we think will happen rather than the guidance, particularly given that it's in the long-term contracting areas, the program areas, and it's really more a timing of orders.

Tyler, this Don. I just want to add a point of clarification to that -- that backlog that we disclosed is the 12-month backlog. It is not our total backlog. I think you understand that.

Right. Okay. Thanks, that's all I had.

Thank you.

Ron Epstein, Bank of America.

Good morning, Ron.

Good morning. So, John, question for you.

I was an engineer too. If that engineers are going to be overly optimistic, why get caught that same trap again and again and again and again? Why--?

That's a really good question. We ask ourselves as the engineers [on it] -- do we learn from the previous experience and do we try to adjust as we go forward? And engineers do and they try to do better the next time around and they try to make the best estimate they possibly can.

I wish I could give you a simple answer to that; it may be the nature of the beast. We could be -- we try to be conservative as best we possibly can and then it turns out that it's a surprise on the downside, I would say, in terms of expense in engineering. Sometimes you have nice surprises on the upside, that markets grow more or costs come in lower.

If you know the answer to that, Ron, as the engineer, we'd be happy to do it. But we try -- we work very hard to get the estimates as best as we possibly can. They are based on a roll up from the folks who know the details. We do a quick back-of-the-envelope check at Corporate to say does that make sense to us, but it's based on the folks that are doing the detailed project work and then we trust that those folks are the folks that know best what of the future is, taking into account all of the history that they have themselves with what's overrun in the past.

Okay. And then on the E-Jets you mentioned that it's accelerating quicker than maybe you guys originally had planned. Why is that?

Is it program moving forward quicker? What shifted around the program?

Not in the program. I would say, what we've decided, Ron, is that we believe that we need to accelerate our activities to make sure that we keep ahead of the schedule. So I wouldn't -- the program hasn't change. As we've got into, the feeling is we need to spend more earlier to make sure that we don't find ourselves spending a lot more later where you get behind, which of course, is the other reason that costs go up significantly, is if you start to slip based on -- relative to the schedule of the customer.

Okay. And that program in particular, is that all new stuff for Moog, or is there systems on that, that you can take from previous developments and do some form of derivative on?

Every aircraft for the flight control system is -- you learn from the previous one and you do something different so it's not -- [E-Jet air world] isn't a technology challenge -- it's not particularly differentiated technology, it's pretty standard hydraulic technology. Having said that, the challenge is always associated with the envelope and the performance and making sure it meets exactly the requirements of that particular job.

So, it's not a technical challenge in that there's new technology that's unproven, but inevitably the costs driver is the fact that each airplane program is different. I don't know if that answers your question.

Unfortunately you cannot pick up an actuator from a previous one and basically just either shrink it or grow it and say, we plug this one in. It always takes more effort than that. It's not like the electronic side, I would say; electronics is probably easier to do that.

Sure. Okay, great, cool. That's all, great thanks.

Thanks, Ron.

(Operator Instructions)

Michael Ciarmoli, KeyBanc.

Good morning, guys thanks for taking my questions.

Good morning, Michael.

How are you? Just to stay on this theme of R&D within Aircraft. You guys had talked about and we've been looking forward to maybe some of this R&D [holiday-end] margins to be back to a mid-teens level or so or just at least grinding higher.

Help me understand. It sounds like the E-Jet is here, but then SAP is going to move into the implementation phase and we've all seen SAP before so that might be a bit of a headwind. But even after A350, shouldn't we be thinking about -- we've got the different variants for the 87, you still have the [Commack], I'm sure the 777X by the 2016, 2017 time frame, is going to ramp up. Are we in a perpetual elevated R&D state?

No I don't think so. Let me give you a couple of thoughts, Michael.

Let me, first of all do the -- Aircraft margins have gone from 7.9% in 2009 to 12% last year. We're forecasting just north of 12% this year. So we have seen 400 basis points plus of margin expansion over the last five to six years. That, despite the fact that we -- you're right -- R&D has remained elevated.

R&D this year is going to run at about 8% to 9% of Aircraft R&D, so if you do ex-R&D, margins in the Aircraft business are 20% -- north of 20%. So it's a very healthy underlying business. What has happened is, as -- when we talk about R&D, we always talk about the program that we have -- 87, then we went to 350, then we went into E-Jets -- and each one of those decisions is based on, is this decision the long-term right thing to do for the Company.

The roll down in R&D has been -- assumes that, well, we won't win another program. And part of the strategy has to be is the program a good financial bet in its own right, and secondly, how much do I want to keep -- or how much of the team do I want to keep in place so that I can continue to stay in this long-term.

Long-term -- that's over the next, I would say, three, four, five years, I believe the Aircraft R&D should come down to about 5% of sales on average. That doesn't mean that there will not be ups and downs. You've mentioned that 777 X. We do not have -- the 777X has not come out for our type of stuff for bit yet. We don't have a position on the 777X and if we were not to be on the 777X, then we will see the R&D rollout.

The C919 is not a particularly big one. A350 will start to come down; we saw the on the 87. You do have some derivatives so you continue for -- there's a tail on it, but it's significantly below the peak levels. The E-Jets will be high for the next two or three years and then that will also roll out. So we will start to see that rollout probably not in 2015 -- 2016, then definitely 2017 and 2018, if we weren't to book a major new program, like something like a 777.

So you think -- this segment used to run 15%, 16%, 17% margins. Do you think it's still possible to get back up to those levels if their R&D trends down to 5%?

Absolutely. If you do the margins on this segment ex-R&D, you'll find that they've always been in the very high teens and early 20%s. And I would say that the segment is -- at the moment -- as I say -- if [I think] margins ex-R&D are north of 20%, in a time frame where the military business is coming down and it is being replaced of commercial OEM business, which is not the most profitable early on in the cycle.

We haven't seen the commercial aftermarkets pick up but that will pick up as the 787 fleet grows and you get out of the warranty period. Long-term, this will be, I believe, a very profitable business, and it will be able to sustain an R&D level of 5%, which will allow it to continue to grow.

We still find ourselves in that period where we keep -- we decide we will take the next program because we think it's the right long-term investment for our shareholders so that keeps us in this elevated position. So that's the way it's unfolding. As I say, if we don't put -- have a position on the 777X, we will still see in the next two to three years, that we start to see that roll out.

Right, got you. Okay, that's helpful.

And then, maybe Don, just a couple of housekeeping. What are you guys expecting for full-year interest expense in Corporate this year?

Interest, right now, we're forecasting that coming down from our last forecast. Now we're forecasting at about $16 million, that's because of the bond call.

Okay.

And Corporate expense, depends on how you define it. The way we define it, our last forecast, we had it in there at about $28 million. We're still right around there, about $27 million.

Okay, perfect. Thanks a lot, guys.

Thanks, Michael.

It appears at this time, we have no further questions in queue. I would like to turn the conference back to today's speakers for any closing or additional remarks.

Thank you all for listening, and we look forward to updating you again in 90 days time. Thank you. Thanks, Shannon.

Thank you and that does conclude today's conference. We do thank you for your participation. Have a great rest of your day.