Moog Inc (MOG.A) 2015 Q1 法說會逐字稿

Good day and welcome to the Moog first quarter FY15 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 ma'am.

Good morning. Before we begin we call your attention to the fact 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 30, 2015 and our most recent Form 8-K filed on January 30, 2015 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 our webcast page at www.moog.com. John?

Thanks. Good morning. Thanks for joining us. This morning we report on the first quarter of FY15 and update our guidance for the full year. Overall, it was a mixed quarter for the company. On a positive note, although sales were about flat, earnings came in slightly over planned and cash was very strong.

However looking to the balance of the year we're introducing some caution in our forecast today as several macroeconomic forces are starting to weigh on our business.

Starting with the headlines. First earnings per share in the quarter came in slightly over planned. We delivered this performance despite the challenge of seven feet of snow in November in Buffalo which resulted in a one-week shutdown of our facilities.

Second, it was another quarter a very strong cash flow. We continue to put the free cash to work our share buyback program. Third, our medical segments continued to improve with great margins in the quarter.

Fourth, three macroeconomic forces are starting to have an impact on our projection for the year. These are the strengthening US dollar, the general industrial malaise outside the US and the fallout in the price of oil.

The stronger US dollar had an adverse impact on our sales in several segments but total operating profit should be relatively unchanged. The major impacts are in our industrial segments and in our aircraft segments.

Sales and operating margins in our industrial segments will weaken as the dollar strengthens. But conversely, sales in our aircraft segment will be essentially unchanged but operating margins will strengthen.

Next, the industrial stagnation in Europe and the continued slowdown in growth rates in Asia are having a negative impact on our industrial segments. And finally, the sharp and sustained drop in the price of oil is unwelcome news for our energy businesses particularly in our components segments and, to a lesser extent, in our industrial segment. The impact of these macroeconomic headwinds combined with the minor shift in our underlying markets is a reduction in our sales forecast for the year of $95 million and a reduction in our earnings per share forecast of $0.30 to $3.85.

Let me move to the details starting with the first quarter results. Sales in the quarter of $631 million were down marginally from last year. Adjusting for currency effects, sales were essentially flat for 2014. Sales in our aircraft and space and defense segments were unchanged, but sales in our industrial systems components and medical devices segments were slightly lower.

Taking a look at the P& L, our gross margin is down almost 200 basis points driven by an unusual quarter in our aircraft business. R&D is down 60 basis points on lower activity on our major aircraft programs particularly the A350.

There's no change in SG&A expenses. Our effective tax rate was relatively low at 28.7% as we benefited from the reinstatement of the 2014 R&D tax credit in the US. The overall result was net earnings of $35 million, earnings per share of $0.86 and that's an increase of 23% over last year on a lower share count.

FY15 outlook. We're moderating our sales forecast for the year by $95 million, principally due to the impact of the three macroeconomic headwinds I mentioned earlier.

First the stronger US dollar will result in a negative translation impact on our foreign sales of approximately $40 million concentrated in our industrial systems business. Second the industrial malaise outside the US will have a negative impact of $30 million on our industrial system sales and finally we estimate that the drop in the price of oil will adversely impact sales in our component segment by about $20 million. In our other markets we are adjusting our military aircraft forecast down sightly while, on a positive note, we're seeing strength in our medical devices segments and are increasing our sales forecast in that segment modestly.

In terms of earnings, we estimate that the stronger dollar will be essentially neutral to earnings with the negative translation effects canceled by the positive transaction affects. The $55 million lower real sales however results in a negative impact of $0.30 per share. The overall result of total sales for FY15 of $2.57 billion and earnings per share of $3.85.

As in previous quarters, our guidance does not include the positive impact of further share repurchases over the coming three quarters. Should we continue our buyback program on a pace to conclude our 9 million share authorization by the end of this year, then earnings per share would be $3.95.

As to the segments, I'd remind our listeners that we provided a two-page supplemental data package posted on our website which provides all of the detailed numbers for the models. We suggest you follow this in parallel with the text.

Starting with the aircraft segments, Q1. Sales in the quarter of $266 million were flat with last year. It was another quarter of strong organic growth on the commercial side compensating for slowing defense sales.

Commercial OEM sales were up 12% with growth at Boeing, Airbus and in our business jet product line. The major increases were on the 787, A350 and on our Gulf Stream Cobras The commercial aftermarket was flat with last year.

In the military markets sales were down 8% as a result of lower OEM activity. F-35 sales slowed around development revenues and a relatively light production quarter. Sales to foreign customers were also down this quarter and sales on the KC-46 tanker program were lower as the development work starts to wind down. On a positive note, we had a very strong quarter B22 shipments as we caught up on some overdues from last quarter.

Aircraft FY15. We're reducing our full-year forecast by $10 million. The reduction is all in the military markets.

Based on the first quarter results, we believe the KC-46 tanker program will be about $5 million lower this year than our original forecast. We also believe that some foreign military programs will be weaker so we've adjusted that forecast down by $5 million.

On the commercial side we're not changing the forecast in total, but we're adjusting the mix slightly. We're increasing our forecast in the aftermarket by $5 million driven by continued strong 787 issue provisioning and we're reducing our A350 OEM forecast by the same amount on a slightly slower production ramp rate.

Aircraft margins. Margins in the quarter were 9.2%. This was a relatively unusual quarter for our aircraft group so let me provide a little more color. Although R&D was down this quarter from an elevated level year ago, the gross margin was also down from last year.

In Q,1 our gross margin was about 200 basis points below the average gross margin for this business. This lower gross margin was a result of an adverse mix of military programs in the quarter and, in particular, lower sales on some foreign military platforms. This will correct as we go through the year so that our full-year gross margins will be close to last year.

For the year there is no change in our operating profit forecast, but given the slightly lower sales our margin performance will take up to 10.6%. There are two factors influencing our operating profit- one positive, the other negative.

On the one hand the stronger US dollar results in a positive transaction impact to the operating profit of about $3 million for the year. But on the other hand, the $10 million reduction in our military sales forecast will have an adverse impact on operating profits of the same amounts. So net-net, no change in operating profits.

Turning now to space and defense Q1. Sales in the quarter of $100 million were flat with last year with stronger defense sales compensating for lower space sales. In the defense markets the production rates on our midsize programs continue to strengthen while in the space market we saw lower demand for our avionics products.

For FY15 we're keeping our full-year forecast unchanged from 90 days ago at $403 million. Space and defense margins. Margins in the quarter were 8.7%.

These margins are an improvement but they're still not where we want them to be. And we continue to take actions to approve the underlying performance.

One of those actions has been the combination of two facilities involved in our security markets into one. As a result of this consolidation, and an associated review of the product portfolio, we determined that we should write down the value of our inventory by $2 million, suppressing margins by about 200 basis points. For the full year, we're keeping our margin forecast unchanged at 10.7%.

Turning now to the industrial systems business, sales in the first quarter of $133 million were down 7% from last year. There are two major effects impacting our industrial business. Stronger US dollar and the general industrial malaise outside the US.

For the quarter, two-thirds of the sales drop was due to foreign currency movements and one-third was lower activity. The lower sales were primarily in our non-wind energy business and in our simulation and test markets.

In the energy sector we had lower sales on steam and gas turbines particularly in Asia, as the economies there continue to slow. In simulation and tests, some orders we had anticipated booking in Q1 have moved out into next quarter.

FY15. We're moderating our forecast in the industrial system segments to reflect the twin headwinds we're facing. We're reducing our full-year forecast by $70 million, $40 million due to currency effects and the other $30 million due to slowing activity at our customers.

The reductions are spread across each of our major markets: energy, industrial, automation and simulation and test. Our new forecast assumes business continues at about the run rate of the first quarter with some slight improvement in the simulation business as we move through the year.

Industrial systems margins. Margins in the quarter were 9.9%. We had been anticipating higher margins in the quarter but lower sales and the adverse impact of the stronger dollar did not help.

Looking to the remainder of the year we believe margins will improve as we move through the year and we adjust our cash base to align with the lower forecast in sales. We're now projecting full-year margins of 11.5% down from 12.1% 90 days ago.

Components, Q1. Sales in the quarter of $100 million were down 3% from last year. Within our non A&D and markets our industrial components continue to perform well as we benefit from the ongoing improvements in the US markets.

Sales into the energy market were lower in the quarter as we shipped fewer FESO products than last year. FPSOs our floating production and storage offloading ships used in offshore oil production. We saw very large slip rings used on the ships with average selling prices of over $1 million.

Given the high sales value and low quantities, sales from quarter to quarter can vary significantly. Sales with our medical markets were also lower as one of our major customers adjusts their inventory levels as they work some regulatory issues.

Sales in the aerospace and defense markets were down slightly. We had some positive gains in the military aircrafts aftermarket, which partially offset weaker demand for commercial helicopter, de-icing slip rings.

Component systems in 2015. We're moderating our forecast for the year by $20 million to $420 million. The reduction is in all our energy markets as we try to anticipate the impact that lower oil prices will have on demand for our products in the second half of the year.

Margins. Margins in the quarter were 14.7% on a slightly adverse sales mix. For the year we're moderating our margin forecast to 14% from 14.8% based on our lower forecast in the energy market.

Medicals. Medical, Q1. This was an excellent margin quarter for our medical devices segments despite slightly lower sales. Strong demand in our other category mostly compensated for lower sales in our enteral pumps and sets This other category is made up of a range of medical sensors and components sold to medical devices OEMs.

FY14 outlook. Given the strong first quarter sales, we're increasing the full-year forecast by $5 million to $125 million. The increase is all in this quarter category.

Margins. Margins in the quarter were very strong at 14.9%. The favorable mix combined with continued operational improvements drove this performance. Based on the strong first quarter we are increasing our margin forecast for the full year to 10.9%.

Let me provide a summary. Q1 was a slow start to the year but in line with our guidance. During the quarter we saw our industrial markets soften however and the outlook for our energy businesses weaken significantly.

Commercial aircraft is very strong and our medical devices segments continues to improve but they don't make up for the macroeconomic headwinds we're facing. So, therefore, we've moderated our sales forecast for the year by $95 million to $2.75 billion and we're also lowering our earnings forecast for the year as we see the impacts of the global industrial weakness and the sharp drop in oil prices filtered through to the bottom line.

We will be continuously in adjusting our cost structures as we go through the year in response to the changing sales outlook. Taken altogether, we're now forecasting full-year EPS of $3.85. Comparing this total with our $4.25 from 90 days ago, there are four impacts of note.

First, the net impact of our first quarter high-yield bond issuance combined with our share repurchases will decrease our EPS by about $0.07 per share. Second, the slowdown in our industrial markets will have a negative impact of about $0.13 per share.

Third the lower price of oil, and the associated reduction in exploration activity, will have a negative impact also of about $0.13 per share. And finally we're forecasting a higher tax rate on a less favorable mix of taxable earnings that results of the other two macro-effects which will reduce our EPS by about $0.07 per share.

The second quarter should be slightly better than the first with earnings per share of about $0.90 while the second half should improve to just over $1 per share in Q3 and Q4 as sales pick up slightly. As I mentioned earlier this total of $3.85 does not include any impacts from further share buyback activities through the next three quarters.

Before I pass it to Don I'd like to provide our listeners with some general thoughts on our business. Last year at this time we revised our forecast from FY14 downwards based on the experiences of our first quarter. It is very disappointing to have to go through a similar revision this year.

When we put a forecast together, we work very hard to provide the market with the plan which we believe is both realistic and achievable. This quarter our plan has been impacted by three global forces--exchange rates, oil prices and the continued weakness in our industrial markets. We've always prided ourselves that the diversity in our businesses has allowed us to show sales and earnings gains even in periods of weak demand in one or other markets.

Unfortunately we find ourselves in a situation today where growth is challenging and most of our markets-- defense, industrial, space and medical. Our growth engine is commercial aircraft OEM, but we're in the early production phase of this business and therefore the margin contribution is muted.

In challenging times we find it helpful to remember our primary goal and remain focused on the long-term. Our overarching objective is to generate shareholder value.

On an operating level we focus on sales growth margin expansion and cash flow. Over the last few years sales growth and margin expansion have been challenging but cash flow has been very strong. We've continued our search for acquisitions by remaining disciplined in our capital allocation process.

We decided to return cash to shareholders through our buyback program rather than overpay for top-line growth in the presence of (inaudible) acquisition environments. We continue to restructure our operations and focus our portfolio on the best performing sectors. We're investing in R&D to fuel future organic growth and focusing on lean initiatives to improve operations.

In time our markets will improve and our internal initiatives will bear fruit. In the meantime, we continue to respond to the changing market conditions to provide the financial community with the best possible information to help you understand our company.

Let me finish with this thought. Despite the challenges we are facing, FY15 is forecasted to be another year strong cash flow and a record year for the company in terms of earnings per share.

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

Thanks John, and good morning everybody. Free cash flow in the quarter of $58 million is a great start to FY15. We have very strong receivables collections in the quarter. This equates to 165% cash conversion ratio.

Although we don't expect this conversion ratio to persist throughout the balance of 2015, we are affirming last quarters forecast free cash flow for all of 2015 of $190 million. This is despite our moderated earnings projections which John's just described and will result in the conversion ratio for all of 2015 of 121%.

Our net debt increased by $69 million during the quarter to $711 million. The $127 million difference between our positive free cash flow and the increase in net debt outstanding is principally the result of our share buyback program.

Our 9 million share repurchase program that we initiated in January of 2014, so just a year ago, continued during this first quarter. During the three months ended December 30, 2014, we acquired an additional 1.46 million shares for $103 million or an average price of just over $70 per share.

At the end of December we've still got another 3.5 million shares remaining under the existing authorization. Our present plan is to continue buying back these shares programmatically on the open market throughout the duration of 2015. Our EPS projection for 2015 does not include approximately $0.10 per share of positive impact associated with our plan to continue repurchasing shares during the next three quarters.

On November 21 we closed on the sale of $300 million of eight year high-yield debt with a coupon interest rate of 5.25%. Our strategy was to term out some of our variable rate debt under our revolver and increase our borrowing capacity. This will allow us to comfortably continue our share buyback program as well as consider any moderately sized acquisitions when they, opportunistically, come along.

At the end of the quarter we had $952 million of total debt outstanding with more than half either priced or hedged at fixed interest rates. Also as of the end of December, we had $535 million of unused capacity on our $1.1 billion revolver before considering the $200 million unexercised accordion.

Capital expenditures were $20 million and depreciation and amortization totaled $27 million in the quarter. Were leaving our forecast for CapEx and depreciation amortization for all of FY15 unchanged at $100 million and $114 million, respectively.

Cash contributions towards global defined benefit pension plans totaled $9 million in our first quarter. These Q1 contributions were low relative to our forecast for all of 2015 due to us pulling in $10 million of domestic planned contributions in the last year's Q4.

We are currently forecasting $61 million of global defined benefit plan cash contributions for all of FY15. The discount rate used to determine our domestic BBB pension expense for 2015 was 4.4% down from 5% used last year.

Lower discount rates, as you know, cause global BB pension costs to be higher. And in 2015 versus 2014 this increase is $6 million which is already recaptured in our EPS projections.

Our effective tax rate in the first quarter, as John mentioned, was down 28.7% compared to last year's 31.5%. Included in the Q1 2015 rate is the retroactive R&D tax credit benefit given the credits extension passed by Congress in December. This benefit does not repeat in future quarters resulting in a projected effective tax rate for all of 2015 of 31.4%.

This 2015 rate is higher than our last forecast which was 30% as we are now projecting softer results from our non-US operations. This results in proportionately more US taxable income which is taxed at relatively higher corporate tax rates.

Our financial ratios at the end of the quarter are solid. Net debt, as a percentage of total cap, was 36.5% up from 24.8% in last year's first quarter because of our share buyback program. And our leverage ratio was 2.07 times at the end of the quarter.

In summary our balance sheet is strong. We're generating strong free cash flow which is feeding our current share buyback program. M&A activity has been quiet in recent quarters however we're continually active in looking at opportunities.

A couple of perspective deals have gotten close but have simply not crossed the finish line. Our due diligence includes making sure we've got a solid strategic and financial study. Eventually we'll have something to report.

So despite challenging market conditions, we're still projecting improved bottom-line financial performance this year. EPS in 2015 of $3.85 will be a record year as John said reflecting an increase of 9% over last year.

After consideration for the continuation of the share buyback program that is estimated to add another $0.10 per share in 2015, the increase in EPS over 2014 will be 12%. And this is all happening in a year when our top-line revenues are forecasted at the present time to decline by 3%.

So with that, I'd like to turn it back to John for any questions that you may have.

Thanks Don. Jamie can we go to Q&A now please?

(Operator Instructions) Robert Spingarn.

Good morning.

Hello Rob

Hi there. So John when I look at the change in your operating income between the current forecast for 2015 and the previous. You spoke to the $0.26 in and industrial and oil impact on the earnings and that is about 6% or so and I notice that you drop in EBIT shows some pretty high decremental margins for both components and medical actually. Let me stick with components to begin with-- what's going on there exactly?

Let me see Rob if I have the question. You're asking me what's happening in the components group?

It seems to be the most extreme impact. So is it very negative operating leverage? Is it high-margin products that aren't selling through in this environment?

Yes. The answer is yes to both of those. Our components business, the oil exploration part of that business is a separate facility. It's a facility in Halifax so it's not as if it's integrated with other parts of the facility. It's grown over the last few years. So we have an infrastructure there designed to support the business that's in the $80 million range. That business we see dropping off to about $60 million. There is obviously some cost reduction opportunities that you can get but you do have relatively high operating leverage combined with the fact it's a nice contributing product line. And that's why you get decremental margins in the 30% range which is approximately the number we provided.

Right and what I was attempting to say is that you have the opposite effect in medical where the sales go up a few million but the profit goes up nicely with the 60% incremental.

Yes, but you have to be careful. There are so many moving pieces in a business. So the medical business is $120 million. We're increasing it to $125 million. The mix in the first quarter, the margin in the first quarter were way ahead of what we thought. You look at the experience in the first quarter, you look at the mix going out. Yes, we're increasing the sales but it would be a mistake to say $5 million sales increase, $3 million profit increase-- it's all just due to higher activity. That is definitely not a line that you can draw. There are too many other moving parts.

It's better mix, better cost control reflecting on the performance in the first quarter outlook for the rest of the year. Even if the sales weren't going up we'd be increasing the margins which is an infinite increase in margin contribution. So it really is a lot of different pieces and, as I say, you've got to be a little bit careful about drawing that line.

Okay, and then just on the sensitivity to oil prices. In your new forecast is there a particular level of oil price that you've embedded and, frankly, can you even get comfortable yet that you can really frame the impact for the year?

No, we can't Robert. We're like the rest of the people that are involved. It's not a huge part of our business, but it is a nice piece and, as we talked about, it's a nicely contributing piece of the business. So 90 days ago we did a call and at that time the share price was in the low 80s.

And we said, one of the risks as we look out to FY15, might be that oil continues to drop and then that might have a negative impact. Or we felt like the year will probably be okay because the type of stuff we're on, a lot of it is capital investments. Those are probably set 12 months out with most of the oil guys and therefore any impact might be definitely towards the end of FY15 and probably we feel it more into 2016. While 90 days ago we didn't anticipate, nor did anybody else, that oil today would be in the $40 range and seems like it's going to stay there.

Of course all the pundits can now explain why it's dropped which nobody could have forecasted so who the heck knows? So what we're doing is we've made a guesstimate. We've said based on our customers, based on what we've seen and based on past history, because oil price dropped into the $40s back in 2009,this is what we think. It could have a 20% to 30% impact on our top line and then the associated bottom line.

Having said that, back in 2009 they dropped into the $40s range but then they started to recover reasonably quickly, so it really depends on how oil prices develop. So we've made our best estimates. We've always said that oil prices above the $70-$80 range usually means expansion and that's really positive for our business. Clearly we're under that and every oil services company and all the oil guys start to take drastic action in terms of reducing their costs.

But this is our best guess. In 90 days time, we'll know more and we'll provide the market with what we know. Backlog in the second quarter looks okay so we think that this is a second half effect but it's our best guess.

And then just lastly it looks like you've built-in a little bit of improvement commercial aftermarket. Is that oil-driven? Are you seeing some benefit there yet or maybe later in the year?

No, that's not oil driven. That's the fact that the 787 initial provisioning which we had an absolute bumper year last year we anticipate that this will be much lower. We thought that what happened was a lot of people got ahead of the curve, put it in place last year and there wouldn't be a lot of it this year.

In terms of the first quarter again was stronger than we were forecasting so for the year we bumped that forecast up by about $5 million but it's definitely not a play-through of underlying oil prices. If that happens probably again in six, nine months and I think, given hedging that the airlines and everybody has, it would take a while for all that to filter through.

So, no, it's not a macroeconomic impact. It's more what we've seen just in 787 initial provisioning,

Right thank you John

You're welcome. Thank you.

Cai von Rumohr.

Thank you. To follow-up on Rob's question, if you have a good backlog at Marine for the second quarter-- have you seen the cutbacks for the second half because basically isn't your business keyed to production where the spend is more likely to hold up than exploration where it's clearly going to be hit?

Good morning Cai. It's kind of both. We do sales as I described, these FPSO's, the huge slip-rings that go on major ships. Then we also do a lot of work that goes on remotely operated vehicles. Remotely operated vehicles are a combination of maintenance for overhaul type stuff-- monitoring offshore oil rigs.

But it's also driven by the count of oil rates and if there's new stuff going but as it goes offshore and gets deeper they need new technology. And then the FPSOs, those are very large capital investments and they are linked to production but it's a very long capital cycle.

I think what we're concerned about is that in the past, when we've seen a situation like this, even though we have backlog our customers have come back to us and said you know we don't think we want that stuff right now. Can you hold onto it; can you slow it down? And while you contractually have backlog, there's no point in telling a customer they have got to take it if they're not going to want it. And in the end, you're going to upset the customer.

History has told us that we could see a reaction like that. So the combination of we may see our present backlog soften, to some extent or be not as firm in terms of the actual shipment date, plus the fact that on some of the stuff with shorter lead time. It's not 9 to 12 months. It's much shorter and we anticipate that could slow down.

Terrific. And then if we turn to the aircraft sector, you mentioned the R&D was low in the quarter-- A350 down. Are we still looking for $85 million for the year and $135 million for the Company in R&D? Is there any change in the mix now that A350 is relenting?

No. Not really. If you look at our R&D quarter to quarter, even last year, it went $24 million in the first and then $25 million. This is aircraft R&D and then it dropped to $20 million. So this quarter was $19 million so it was a little bit soft or lower. But it kind of reflects the way some of that activity plays out. And we think for the rest of the year, it'll pick up back into that average of $21 million, $22 million. So it's not really a significant shift. It's really on plan with what we thought, that this quarter would be a bit lighter.

And then you'd mentioned the $10 million decremental sales and $3 million, so 30% in decremental margin. How can it be that big because if you drop off $5 million of development work that's clearly not going to have that kind of margin?

I would offer the same thought as I offered the last question which is there is a piece of it that is the decremental sales but there's also a piece of it that you just look at the overall business. There will probably be some other little mix shifts reflecting on the first quarter and looking out. That's the best estimate of what we feel.

It's not one for one. Clearly a $10 million decrement is a negative. Part of it is, as you say, cost plus developments which has some margin. It's not typically 30% although in cost-plus development you do have this phenomena that you have engineers that go from generating revenue to going directly into your cost line. So to some extent it's actually an even much higher multiplier. They go back into the R&D so we end up spending more on R&D.

And then there is a drop-off in some of the military programs which are strong particularly the foreign military. So it's the decrement in sales but it's also looking at the overall portfolio and seeing how we think that will play out.

Great and then a last one for Don. So great job on the cash flow and maintaining the number in the face of lower net income. So what are the offsets that get us to still stay at $190 million?

Meaning so if we annualize the [$58 million] we should be a lot better than that right? It may prove to be the case Cai, but we decided at this juncture it's not worth trying to get ahead of ourselves. We have one quarter behind us.

I mentioned that receivables collections were really strong in the quarter. Some of that is timing but we are continuing to work on working capital and I think we're seeing some progress there. But we've also got the aircraft group continuing to build up ramping up run rates on the A350 which puts pressure on inventory.

So there's a lot of mixed parts. I'd like to think we could beat the $190 million but like I said, we have one quarter under belts. Let's not get ahead of ourselves.

Actually the question was you've had this dropout of net income, so you have less net income and yet you are still at $190 million so something is occurring to complement. Like you are doing a great job, something obviously is a plus to offset the loss of net income. What is it? And what are you doing in terms of improving it?

I'm not used to the compliment sorry. I think the offset is on the working capital side. We are focused on the lean activity that John's continued to talk about. We think we're getting some traction. There is an increased focus on cash performance throughout the Company. Capital expenditures, we're holding at forecast right now but it was light in the first quarter relative to our forecasting for the year. So all that plays through and I do think we can do the $190 million.

Terrific thank you.

Okay. Thanks

Tyler Hojo.

Hi, good morning. So just a first question. In the prepared remarks you guys talked about the fact that the snowstorm led to a one-week shutdown of your facilities up in Buffalo. Just curious if you could quantify what the sales impact was?

We did go through about a one-week shutdown here in Buffalo and there was a little bit of a negative impact. We had the quarter was a little bit longer for us than previous quarters as the way the dates fell. And there was a real focus on a lot of overtime, a lot of folks really chipping in to try and help it out. So there probably was a few million dollars that we had a negative impact. On the other hand we responded to it. People all pitched in. So we've really not tried to quantify it because the quarter we thought out, we saw.

If we didn't have the snowstorm would it have been a little bit better? Maybe, but I have a friend that says that's like saying it would be a nice day if it didn't rain, but it did rain. It's not really material. That's the way I would leave it. If you were here, there was a lot of snow that's for sure.

Okay that's fair. And in regards to simulation and tests down 16% year on year in the quarter. I know you talked about some of the push-outs of orders but I'm just trying to gauge your confidence level in context with the fact that, for the year, you're only expecting simulation and tests to be down 4% or 5%.

So the simulation and tests is kind of built as a couple of large customers flight, CA, Flight Safety, they're some of the big guys. And then there's a lot of smaller customers that buy one or two systems for various types of testing applications, simulation applications. As an example we sold one in a Formula 1 simulator a few years ago.

And the bigger customers are looking pretty solid. It's really the smaller customers we had anticipated that some of the orders that we've been chasing would have come in, in the first quarter. They didn't. We're still thinking that for the year it will be a very solid business pretty much in line with last year. But we have reduced what we thought from what we said 90 days ago.

We'll know a lot more at the end of the second quarter. We're anticipating that we will get orders in the second quarter that will help solidify that outlook for the rest of the year. This is again based on what we're seeing right now. We have reduced it. We saw a softer first quarter, but we think the year is looking pretty okay.

Just out of curiosity what was your expectation for Q1 volumes? Just to frame it, was it flat? Was it down 5%? Just some sort of order of magnitude?

We don't typically break out the forecast into sub-markets. We don't break out the forecast quarter by quarter. I can do that. The whole business was $133 million, which was down 7% from last year. And we were forecasting for the full year that our year this year would be in line with last year. So if you wanted to do a round number, you might say sales were up by about 7% from what last year was and we were anticipating that this year would be somewhat of a redo of last year. So that then is spread across all of the markets. So simulation was probably a little softer than we'd anticipated. A little bit of that would be forex. Some of it would be real orders we might have expected. So it's softer and, as I say, rather than get into specifics Q1 by market, I think that gets into a level of detail which will not be helpful long-term

Okay that's fine. And lastly for me-- obviously nice to see the strong results in medical. I assume not but just curious if the strengthening fundamentals of that business is making you guys rethink the strategy to sell?

Let me give a little perspective on that. So when we said we were going to sell it back in 2013, we launched the process, went out to the market and went through nine months of our process. As we described about nine months ago, got a buyer to the altar and it fell apart.

And we learned a couple of things in that process. We learned that we had acquired a series of businesses that had different product lines and individual buyers were interested in one or other product lines. But because it was a little bit of a mix we saw, we felt we couldn't get the value for the business that we felt was justified if you did with some of the parts calculation.

On top of that, the business, while it hadn't been performing particularly well, and when we decided well, we're going to break off. The buyer walked away. We decided we needed to do some fundamental restructuring.

Over the last nine months that's what we've been doing. We restructured the business. We've restructured the management. We've taken a lot of cost out. We've really focused in on improving the margins.

At the same time we've been working to try and make sure that the next time around we can separate the business into what seems like the logical product lines that potential buyers might be interested in.

We're probably going to spend another couple of quarters really doing that and then we will go out and we will test the market again and see if we can get the value for the business that we believe it's worth.

In the end our focus has to be on making sure that we're doing the absolute best in terms of shareholder value for you folks that hold the stock. And we do not want to sell the business at what we believe is a significant discount.

Just looking at the performance over the last nine months. If we look out at a 12 month EBITDA, it's probably a $5 million improvement over what we were looking at 12 months ago based on where we're sitting right now. And if I do a multiplier 8 or 10 on that, that's a $40 million to $50 million value creation that has happened by us holding it rather than selling it at the wrong price. So we'll go back out we will test the markets. We want to make sure that if we can get the best value for the assets, then we will sell it. But we're also looking at what is the best way to make sure we create the maximum value.

Got it. I really appreciate the color.

Thank you.

Steven Cahall, Royal Bank of Canada.

Good morning Stephen.

Thank you good morning. First question, you talked a lot about what you are thinking on oil for the rest of the year. I was wondering if you could let us know what your underlying assumptions for the FX and the macro industrial growth side. And basically I'm asking do you think that things stay where they are now and that's what you are planning for? Or do you assume that things possibly get worse from here on FX and industrial growth?

The industrial growth or contraction that we are forecasting at, we described it as $30 million real on call it $600 million of business. So call that 5% relative to what we thought 90 days ago just as a round number. I'll pass you to Don to do the FX one, but let me offer you this thought.

We forecast based on what we know today because we haven't the foggiest notion what the rates are going to do tomorrow, no more than I think anyone else has. So we always work with the best information we've got right now. And we don't assume that we know where rates are going in the future.

Having said that we look at the mix of our business. Let me pass you to Don to get a little bit more specific.

I think we believe that the forecast over the three months the assumptions that we built into our outlook last quarter versus this quarter. Obviously, the dollar has strengthened and I would say in the assumptions we had built-in, it's in the mid to high single digits of strengthening of the dollar.

And we haven't tried to outsmart or outguess the market and say well we know that rates will go up or down. So essentially we're assuming that at this juncture rates are relatively consistent with where they are now. I would say this, and John touched on this earlier -- from a macro perspective our business is relatively well-hedged.

We talked through the top line drag on our outlook of about $40 million related to currencies. But John also said that net-net our bottom line or impact on operating profit is essentially nothing. And that's the result of us paying a lot of attention to our cross currency exposures. We're scattered all around the globe. We have a robust quarterly process where we take a look at our exposures.

We've got hedges where hedges make sense and net-net we do think that we're doing the right thing. So that as we do have these swings in currencies we are not reporting some dramatic results on our bottom line. I think what we just reported is a testament, I think, to what we are trying to do is actually working.

Would it be logical for us to conclude that if currency, the dollar, gets a lot stronger or a lot weaker between now and the next quarter that we'll be revising accordingly as it moves, assuming it moves a lot?

I think the answer would be yes. I think it would be foolish to do it the other way. So if the dollar weakened 10% back to where it was three months ago, would we be changing our outlook for the balance of the year? Probably to some extent. But, again, it's more likely than not going to be top line impact as opposed to the operating profit impact.

That's very helpful. And then also on the aircraft margins, you talked a bit about the mix and a little bit less contribution from FMS contracts. As we look at the remainder of the year in the guidance does that factor in FMS contracts that are yet to be awarded or is this just the timing of the OEM that's already on contract and how they are working with you to procure?

It's a little bit of both. Having said that, the paramilitary stuff is on old platforms, established platforms. So it's not as if this is more a question of just having a normal run rate in terms of supporting some foreign military platform. It's not that it's a brand-new program that has to be awarded. It's more business as usual.

Okay. And then just a final one. If we look at the change that you made to the wind energy forecast for the year, I would think that would be less impacted by oil. So is that just the impact of the broader slowdown in the macro?

We actually did not change the wind energy forecast for the year.

Okay. Thank you.

Before I do that I apologize I have to go to the previous speaker. We actually did adjust our wind energy forecast but it's forex energy. So it's a forex impact of the wind energy. It's not a real change so I apologize. That was my mistake.

Just to clarify, it's a modest change. We've dropped it down $5 million. So now it's down to $71 million is our current forecast for wind.

Michael Ciarmoli.

Maybe the aircraft margins. I know you guys talked about the mix, but they are at the lowest level since 2009. If you look at the individual line items, the commercial is up. It's really just that military OE. I'm surprised we haven't seen anything like that before. Was it truly the case of just higher margin legacy? Is there anything else you can give us in there? Just again surprising that they were so low and we haven't seen them that low in quite some time.

It was low in the quarter Michael but for the year we are anticipating that they'll be in line with last year pretty much. Actually it's marginally up in the 10.5% range.

Last year, if you look to the quarters, they tend to bounce around as well. Our second quarter last year was 9.4% higher sales and then they jumped up to 10.3% in the next quarter. So there is volatility that played through in the gross margin and of course the R&D varies as well.

The macro thing is that the defense sales have been slowing down for the last couple of years and the growth is all commercial OE. And as we've said we're early phase of production and you're not getting a lot of contribution from that.

So you just have lower sales with nice margin replaced by higher sales with low margin and you get that impact. But we look to the year, we think we are on plan with what we had said before -- margins in the mid-10.5%, 10.6% range. So this particular quarter was unusual.

Okay that's fair and the other one. You guys talked about oil and some of the energy but if I go back you guys used to expand out the reporting on that industrial segment. There was clearly some metal-forming, some steel. Is that an area where you could potentially see additional weakness from these lower oil prices? And how have you captured the impacts there to the metal exposed businesses in your forecast?

We've taken down that whole industrial automation piece, all those metal-forming plastics, all that stuff is within the industrial automation side of the business. And we have taken that forecast down. A lot of that, as we've said in the past, is European OEM machine builder type business so the two effects it has here is euro sales so you have the translation effect and the underlying business which is softer.

How much of that is oil? At this stage I don't know that we could tell you that European machine builders are affected directly yet by the price of oil. Hopefully as you look out, lower euro (inaudible) in Europe, lower prices of oil improving consumer sentiments in various parts of the world starting to drive capital investment and you see those guys starting to pick up. So lower oil longer-term should be a positive for Europe as should the lower the forex impact in terms of the competitiveness.

So we'd hoped that we would actually see a pick-up in that business but that's out a ways. And right now we're just seeing a slowdown and it's reflecting the slowdown in Europe, the slowdown in Germany, slowdown in the major export markets into Asia and the currency effects. So I think we're seeing the first wave which is the downside and hopefully Europe starts to recover.

But our industrial business, and particularly that industrial automation business, the way like to characterize it is you read the headline in the journal and it says Europe is stagnant. China is slowing down Asia's on a go-slow. The US is doing better but a lot of our business is outside the US. So the consumer is depressed, no GDP growth and the cycle is you start to see GDP growing. Six to 12 months after that the capacity utilization rates are going up. People start to invest more in CapEx and then you see a high data, a multiple of the GDP growth in our industrial business as we feed product into the capital investment cycle.

We're not seeing that. I'm not reading that headline, unfortunately, that anybody is bullish about GDP in Europe or in terms of stronger GDP in Asia. So right now we're thinking the risks are the downside. Eventually we hope to see that recover significantly.

Got it. And just a last one. Should we expect that if the conditions stay the same, get a little bit worse, should we expect or have you incorporated or starting to plan for any restructuring in that industrial segment this year and some of those specific businesses or even in the components?

As I think you can imagine all of this, particularly (inaudible) is all happening very much real time and we're looking at what we are projecting for the year. What we're now projecting for the year and to some extent, as I described in the oil, our second quarter we have some solid backlog. So we're anticipating what might happen in the second half but we're not yet sure.

We were projecting sales growth in our industrial business and in our components business a little bit as we went through the year. So the first line of defense, there's probably going to be some extra resources we were going to add to realize that sales growth. Clearly we won't be doing that.

There's a national attrition that happens in the business. If we continue to see sales softness we will take the necessary actions but as we sit here today, we're not putting a reserve in place for restructuring because we are not yet at the point where we've actually seen this. This is projecting what the future might look like more than we've seen exactly in this quarter.

In the business where we are seeing a little bit of challenges, we are going to respond, but it's not material that we're calling out at this stage. If in 90 days or 180 days we continue to see some significant challenges, we may report that we've had to do some restructuring. But as of today, as we sit here right now, we're not making a big reserve for that.

Got it. Thank you very much guys.

Thank you.

J.B. Groh.

Good morning, JB.

How are you doing? I have a housekeeping question for Don. Don, what's embedded in the forecast on the interest line? What should we use as a run rate there and also on the corporate non-cash comp?

Interest, thanks for the softball. Interest line -- because of the high yield we increased (inaudible) quite a bit and we're up to $28 million of estimated or forecasted interest cost in 2015. And then the equity-based comp, we've got an estimate in our model right now of about $6 million.

That's the same. Okay that's all I have. Thanks a lot.

Thank you.

There are no more questions over the phone.

Thanks Jamie. Thank you very much to all of our listeners. We look forward to updating you again. Thank you. Thank you for your participation. This concludes today's call.