Moog Inc (MOG.A) 2019 Q1 法說會逐字稿

Good day, and welcome to the Moog First Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of January 25, 2019, our most recent Form 8-K filed on January 25, 2019, 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 webcast page at www.moog.com. John?

Thanks, Ann. Good morning. Thanks for joining us. This morning, we'll report on the first quarter of fiscal '19 and affirm our guidance for the full year. Overall, it was a strong start to our new fiscal year.

Let me start with the headlines. First, it was a good quarter for our operations. Sales were up 8% and earnings per share were up 25% relative to an adjusted first quarter last year. The Q1 '18 adjustment is the factor of the onetime negative impacts of U.S. tax reform.

EPS this quarter of $1.25 was at the high end of our guidance from 90 days ago.

Company operating margins were up 100 basis points relative to the same quarter last year, and free cash flow conversion was 90%, which was a good start to the year.

Second, on the technical front, Moog hardware performed flawlessly on 2 key NASA missions in the quarter: the successful landing of the InSight mission near the Martian equator, and the OSIRIS Robotic Explorers journey to within 12 miles of the Bennu asteroid some 76 million miles from Earth. The products we delivered to our customers on these programs were made several years ago, long before our products had to perform in space. But as our tagline goes, when performance really matters, that's when our customers choose Moog.

Finally, our major markets continued to perform well. Defense is particularly strong across all our applications, and we continue to see opportunities for growth.

Commercial is also very healthy as both Boeing and Airbus deliver planes at record rates, and our Industrial markets remain solid with our book-to-bill over 1.

Now let me move to the details, starting with the first quarter results. Sales in the quarter of $680 million were 8% higher than last year, driven by strong underlying organic growth. Sales were up in each of our operating groups, ranging from 2% growth in Industrial to 17% growth in Space and Defense.

[Making you look at] the P&L, our gross margin was flat with last year, reflecting higher margins in Industrial as a result of our exit from the wind business, offset by a slightly less favorable mix across our A&D portfolio. Both R&D and SG&A were lower as a percentage of sales, while interest expense was $1 million higher on higher rates.

Last year, there was a lot of movement in the tax line in the first quarter as a result of U.S. tax reform. Excluding the onetime impact of tax reform from the fiscal '18 Q1 results, adjusted net earnings last year were $36 million and adjusted earnings per share were $1. The effective tax rate this quarter was 24.3%, resulting in net income of $44 million, up 22% from last year's adjusted number and earnings per share of $1.25, up 25% from last year's adjusted number.

Fiscal '19 outlook. We're keeping our guidance for all of fiscal '19 unchanged from 90 days ago. We anticipate full year sales to be up 6% at $2.88 billion, operating margins of 11.7% and earnings per share of $5.25 plus or minus $0.20, an increase of 15% over last year's adjusted EPS.

Now to the segments. I'd remind our listeners that we provided a 3-page supplemental data package posted on our website, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text.

Beginning with Aircraft. Sales in the first quarter up $304 million or 9% higher than last year. On the Military side, sales were up over 70% on the F-35 program relative to a year ago. Sales in this program tend to vary quarter-to-quarter based on the timing of orders and deliveries. Last year, the first quarter was unusually soft, while this year, the first quarter was particularly strong. For the full year, we anticipate the F-35 will be up 16% relative to last year. Excluding the F-35, the remaining OEM book of business was about flat with last year, while the Military aftermarket was up on increased V-22 activity.

On the Commercial side, sales were up marginally from last year. OEM sales to Boeing were flat, while slightly lower Airbus sales were compensated by higher Embraer sales. Sales into the Commercial aftermarkets were in line with last year.

We're keeping our full year sales forecast for the Aircraft group unchanged from 90 days ago at $1.3 billion, up 6% from fiscal '18. We anticipate Military aircraft sales of $625 million and Commercial aircraft sales of $640 million, also unchanged from last quarter.

Margins in the quarter of 10.9% were down marginally from last year, but are in line with our plan for the full year. The sales mix this quarter resulted in over 100 basis points of lower gross margin with lower R&D and in line SG&A brought operating margins close to last year.

First quarter R&D up $15 million in the Aircraft group is more or less in line with the run rate of $65 million we expect for the year. We're maintaining our full year margin projection at 11.4%.

Switching now to Space and Defense. Sales in the first quarter of $156 million were 17% higher than last year, driven by huge growth in our Defense sector. Sales into the Defense market were up across all our major business lines, including missiles, vehicles, components and security. Sales into missile applications were up over 40% as production programs continued strong and activity unfunded R&D programs for the next generation of missiles increased. Sales on our new turret system, the Reconfigurable Integrated-weapons Platform or, or RIwP as we call it, of $9 million were up from $2 million a year ago. Finally, security sales were higher, driven by our acquisition of Electro-Optical Imaging last year and the emerging demand for more effective drone detection systems.

Sales into the Space market were up 2%. We saw increased activity on launch vehicle systems and strong avionics sales, but work on NASA advanced missions was down from last year. For the full year fiscal '19, we're leaving our forecast unchanged. We anticipate full year sales of $680 million, up 17% over last year. The sales total is a combination of approximately $220 million in the Space market and $460 million in the Defense market.

Space and Defense margins. Margins in the quarter of 11.8% are in line with our forecast for the year. However, they're down slightly from last year as the workload shifts from mature production programs to funded development and growth in newer production programs. For the full year, we're keeping our margin forecast unchanged at 11.8%.

Turning now to our Industrial Systems business. Sales in the quarter up $220 million were up 2% from last year. Sales were relatively flat across most markets with some shift in the mix between end applications. The 2 biggest movers in the quarter were increased sales of about $10 million from our motor's acquisition in the Czech Republic last year, offset by about $10 million of lost sales as a result of our exit from the wind pitch control business.

Sales in the simulation and test applications were slightly lower than a year ago, but sales in the medical applications were slightly higher. In general, our Industrial business has continued to show strong performance and our book-to-bill remains healthy, supporting our forecast for increasing sales as we move through the year.

Industrial Systems' fiscal '19, as with the other operating groups, we're keeping our full year sales forecast unchanged from last quarter at $930 million. Close to half of the sales are to industrial automation customers, with medical about a quarter and the ballots divided equally between energy and simulation and test.

Industrial margins in the quarter of 12.6% were up nicely from 9.2% last year. Our exit from the wind business, combined with a better mix and the absence of some onetime charges in last year's first quarter, accounts for the improvement. In addition, we sold a small product line in the quarter, which contributed just over 100 basis points of operating margin.

For the full year, our margin forecast is unchanged at 12%.

Summary guidance. Though we're pleased to get off to a good start in Q1, sales were up 8%, supporting our target of 6% sales growth for the full year; EPS was up 25%, at the high end of our guidance; operating margins expanded 100 basis points; and free cash flow was in line with our expectations.

Our Defense businesses are very strong across the board. The F-35 is our largest military production program and our missiles, vehicles and security businesses are all growing. Defense spending in the U.S. looks poised to continue strong for the next couple of years, and we believe we're well positioned to capitalize on the future needs of the armed forces. Across all our Defense markets, we're engaged in funded development work for the next generation of planes, vehicles and missiles. Indeed, our major challenge today is not winning new development programs, but rather finding the talent required to realize all the opportunities.

Our Commercial book continues to mature with R&D coming down, production programs continuing strong and the aftermarket growing. This year, we see the Embraer E2 sales start to ramp up, and both the 787 and A350 will have higher sales than last year. Our focus across the portfolio continues to be on operational excellence.

Finally, our Industrial business is much stronger this year as a result of our decision to exit the wind pitch control business a year ago.

Each of our sub-markets is healthy, and our book-to-bill remains positive. However, political uncertainty in the U.S., the government shutdown, Brexit and tariffs continue to weigh on sentiment. There seems to be a general consensus that we're in the late stages of the present expansion with differing views about when we'll see a slowdown. Recent news suggest growth in Europe and Germany in particular, as well as growth in China, is slowing, while the U.S. continues to show signs of strength. Our Industrial business is a global business and is affected by growth in all the major markets around the world. Typically, a slowdown on our Industrial customers lags the GDP slowdown by about 12 months, so we're comfortable that fiscal '19 will remain solid. But at this stage, we're a little bit more cautious about what fiscal '20 might bring.

Taken all together, we believe the diversified nature of our portfolio across Defense, Commercial and Industrial should give our investors great confidence in the overall performance of our business looking into the future. There are always upside opportunities and downside risks associated with our forecast. As we close out our first quarter, I believe there are opportunities for further gains in our Defense business, although the availability of talent is a potential constraint on future growth. I think we're not alone in this challenge with record low unemployment in most of our major markets. It's a good problem to have.

On the risks side, longer-term industrial outlook is a little cloudy, mostly the result of political turmoil driving economic uncertainty. The optimist in me would hope that when we report on Q2 in 90 days, the government shutdown will be long over, there will be a sensible Brexit strategy and the trade dispute with China will have been resolved.

As always, we try to provide the markets with a forecast which balances these pluses and minuses. Our forecast for the year is holding firm with sales growth of 6% and earnings per share of $5.25.

For the second quarter, we expect earnings per share of $1.25 plus or minus $0.10.

Now let me pass it to Don, who'll provide more details on our cash flow and balance sheet.

Thank you, John, and good morning, everyone. Free cash flow in the first quarter was $40 million or a conversion ratio of 90%. So we're off to a good start in what is traditionally a softer quarter. We're forecasting $185 million of free cash flow for all of 2019 or a conversion ratio of 100%, unchanged from last quarter's forecast.

Net working capital, that's excluding cash and debt, as a percentage of sales at the end of Q1 was 25.6% compared to the 24.9% last quarter and 26.7% a year ago. The adoption of the new accounting standard for revenue recognition inflated this ratio in the first quarter of '19 by about 70 basis points. Excluding that impact of the new standard, these comparisons would have been a little bit more favorable.

Over the better part of the last decade, we've reported a rather steady decline in this working capital metric since we peaked at almost 34% of sales in 2009. Throughout the balance of 2019, we believe we'll see a modest continuation of this trend despite the upward pressure on this metric from our growing businesses. The $40 million of free cash flow in the first quarter compares with a decrease in our net debt of $30 million, and the $10 million difference relates primarily to the payment of our quarterly dividend.

Capital expenditures in the first quarter were $24 million and depreciation and amortization totaled $22 million. For all of 2019, we're forecasting $95 million of CapEx with D&A of $89 million, unchanged from 3 months ago. We believe that our normal sustaining level of CapEx is between 3% and 4% of sales, and in 2019, our spend rate will be within that range.

Cash contributions to our global retirement pension plans totaled $8 million in the quarter, comparatively low to last year's strategy of accelerating contributions to fully fund our U.S. DB pension plan. For all of 2019, we're planning to make contributions into our global retirement plans totaling $34 million, unchanged from our forecast 3 months ago.

Global retirement plan expense in Q1 was $15 million compared with $14 million in 2018, and our expense for retirement plans for all of 2019 is projected to be $62 million, an increase over the prior year's $57 million.

Our Q1 effective tax rate of 24.3% compares with our forecast for all of 2019 of 26.0%. The lower rate this quarter is due to the utilization of tax loss carryforwards associated with a gain on a divested business. Last year's Q1 tax rate of 97.3% reflected the significant impact of the Tax Cuts and Jobs Act that was enacted during that quarter. Excluding the onetime effects of the Tax Act, last year's adjusted Q1 tax rate was 24.8%.

Our leverage ratio, that's net debt divided by EBITDA, was 2.1x compared with 2.2x 3 months ago and was 1.9x a year ago. Net debt as a percentage of total cap was 36%, down from last quarter's 38%, but up from 32% a year ago. The increase in both metrics from 12 months ago largely reflects last year's funding strategy for our U.S. DB pension plan. At quarter-end, we had $499 million of available unused borrowing capacity on our $1.1 billion revolver that terms out in 2021, and our $300 million of 5.25% high-yield debt matures in 2022.

12 months ago, at the end of December 2017, we had just under $400 million of cash in our balance sheet. Most of that cash was offshore. At the end of December 2018, our cash balance was down to $111 million. Changes related to the December 2017 Tax Act allowed us to repatriate much of our offshore cash, resulting in the precipitous drop. Most of the decrease was used to pay down our outstanding revolver debt, while some was used for an offshore acquisition. As far as the associated interest savings from paying down our debt, it won't be apparent on the P&L in 2019.

Interest expense for 2019 is forecasted to increase to $37 million compared with $36 million in 2018 because of higher interest rates on lower borrowings. Interest expense in the first quarter was $10 million. There are 2 accounting changes that we adopted beginning in 2019 that don't have -- that do not have a material impact on the comparative numbers. First, as I mentioned earlier, we adopted ASC 606 for revenue recognition. There are plenty of footnote disclosures in our 10-Q that will be filed later today, providing you with more details, but the effect on our comparative numbers is not material. This rather uneventful end result masks the massive effort that occurred behind the scenes over the last couple of years, and our dedicated Moog team, who has made this transition appear seamless, deserves a huge shout-out.

The second accounting change affects the presentation of pension expense. We're now showing non-service-related pension costs below the operating profit line. This below-the-line element of pension expense was $3 million in the first quarter of 2019 compared with $2 million in last year's first quarter.

Lastly, capital deployment. We've previously shared our target leverages between 2 and 2.5x, defined as net debt divided by EBITDA. We're within our target range of 2.1x levered at the end of the first quarter, with strong free cash flow forecasted for 2019 will be below our target range by the end of the year, everything else unchanged.

Over the last couple of years, we've acquired a couple of smaller acquisitions, which are actually doing very well. We continue to see a lot of M&A pipeline activity, but -- however, we remain disciplined and patient.

As John described, we're off to a very solid start in -- to 2019 and we're looking forward to a successful year with our continuing focus on strategic growth, margin improvement and strong free cash flow.

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

Thanks, Don. And, Kaily, if you can schedule any questions, that would be great. Thanks.

(Operator Instructions) We will now take our first question from Kristine Liwag of Bank of America Merrill Lynch.

John, the Embraer and Boeing joint venture continues to progress towards completion, and the deal has a provision that Embraer will benefit from Boeing's purchasing power. This is applicable for both the joint venture, which includes the E2, and for Embraer (inaudible). How should we think about pricing risks for the E2 once this deal closes? And how does this consolidation affect your long-term strategy?

So on the E2, Kristine, we have a contractual arrangement with Embraer, which is a life-of-program arrangement. And so I think any change in conditions on that would mean that there was some quid pro quo and so at the moment, we were -- obviously, none of those types of discussions have happened, but it is a life-of-program pricing. So that's the answer to that question. And then on the longer-term strategy, I don't know, Kristine. We're down from 4 or 5 OEMs to maybe 2 OEMs and the Chinese. Hard to see how that's all going to play out over the coming years. On the supplier side, we've had this enormous consolidation. And so I think that the OEMs will want to have multiple suppliers for the types of hardware we supply. And so I think it creates both opportunities and risks. And clearly, Boeing has stated over the last year or 2 their desire to do more actuation in-house as they said with other key commodities, including, I think, some of the avionics stuff. And so how that will all play out, I don't know. I think part of that is when is the next real airplane program coming along? That'll obviously be the -- potentially the middle of the market. But I think it's the 777 and the 320 replacements are when -- I think, we'll all learn more about how the markets, the suppliers have shaken out in the aerospace industry. And I think that's probably 5, 6, 7 years away. And so for the moment, our focus is on operational excellence on the 350, the 87, the E2. We continue to work on the 919, and we're very comfortable with the broad book of business that we have. I think the other thing I would say, Kristine, is what we've emphasized again and again is the diversified nature of our portfolio across Defense, Commercial, Industrial; and while we have some very important and very large customers, that our focus is making sure we are meeting all of their interest and needs, we're not just a one customer or a one program business, no.

And, Don, the balance sheet is conservatively levered, and you have plenty of liquidity. If you guys are not able to find any acquisitions this year, what's your appetite for paying a special dividend?

Well, we've got a couple of choices. We're already paying a dividend -- a quarterly dividend. We announced, I think, our third new OEM. Is that right? Third quarter in a row, we announced our dividend. This quarter, $0.25 a share. So we're happy to be actually starting that and announced -- having announced that. We're also, as I tried to capture in my remarks, more actively looking for acquisitive growth. I mentioned that we're disciplined and patient, but that doesn't -- maybe that does mask the activity that we've got going on. So I'm not sure how to plan for those opportunities, but there is a fair amount of activity that's going on. And lastly, you've got either special dividend or buying back shares. And I think we look at that as opportunistic. The special dividend, we've not done at least in the history of the company, as I can remember, and I'm probably not, as an individual, not all that much in favor of the special dividend. Buying back shares, we have had a demonstrated history recently of being in the market on and off opportunistically doing that. So that's a possibility. But we don't tip our hands to that kind of activity. We'll let you know if it's a fact when we've actually been in the market and so we'll report that kind of thing quarterly. Hope that helps.

We will now take our next question from Robert Spingarn of Crédit Suisse.

John, I wanted to start with the Military side. You talked about the variability in the F-35 from a quarterly perspective. But I am curious, with the 16% full year increase that you're looking for, which would be about $148 million according to your projections, where is that relative to peak on the program? In other words, what's your rate of production relative to, I guess, Lockheed's target peak of around 160 units a year?

Yes. I think the way you want to think about it is our shipments precedes Lockheed shipments by probably 12 months or so, give or take. And so I think Lockheed is anticipating that their production rate peaks in next year, not -- kind of -- maybe it's 2020, maybe 2021. But it's starting to be that the growth is decelerating. And so we're probably a year ahead of their production schedule. So in terms of understanding when we might peak, what I would suggest is looking at Lockheed's plan and kind of pulling that forward 12 months and that's kind of a reasonable proxy for our sales.

And given the strength of your first quarter here, I mean, would it be wrong to think about this as peak for the year for the F-35?

Definitely, in terms of the sales for the quarter, yes, because the quarter came in at $40-plus million and for the year, we're anticipating $150 million. But the growth, you got it -- so last year in the first quarter, we were explaining that it was particularly low. It was $23 million and then we averaged in the mid-30s for the rest of [the year. So] there are real aberrations depending on when you book orders, materials you have on hand, what goes to receivables, when you ship stuff and so you've got to kind of look at the year. So the 16% growth for the year, we're comfortable with, but the run rate from the first quarter is going to come down through the last 3 quarters to -- and that still gets us to our targets.

Okay. And then just on flipping this around, you were a little flatter in the other Military OEM. You did comment that military has been strong across the board. But on the other military, kind of flattish in the quarter, but a targeted growth rate of 9% for the year. Can we talk about some of the pieces in there?

Yes. So again, part of what happens in the Military, it's a little bit like the F-35 story, is you get fluctuations in the quarters. We think -- as we look across the year, we think the V-22 will be up a little bit, not an awful lot. Some of the foreign businesses, we think, will be up. And a lot of that is based on the timing of when you made shipments and stuff. So it's a mixed bag, although F-18 will be a little bit softer, the Blackhawk is going to come down a bit. But overall, we think that we're comfortable with the forecast for the year, and I discourage folks from taking too much out of a particular quarters and focus on both our guidance and what we think for the year. That's -- [I tell you], that's a better estimate. So we think overall, the Military business is looking very solid, the big growth is on the F-35, but we will see a little bit of growth for the year across the rest of the portfolio.

Okay. Taking heed of what you just said, I only have one more question in that area, which is Airbus. Where the quarter was quite different than what the full year should look like.

Yes, yes. And again, there was some -- again, Airbus, their -- we've had an anomaly in the past as well. It's unusual timing between deliveries, receipt of orders and the way the accounting accounts for the way inventory is absorbed and [stuff]. So nothing to worship and on every [350-day build], we're -- our product is (inaudible). So there are -- these anomalies have more to do with accounting anomalies than they have to do with actual production of parts and deliveries. So...

Okay. And I just had a couple of other sort of quick things. On the KC-46, where you've got a nice position, we've just seen so many fits and starts with timing on ultimate delivery to the customer and so on. How is this affecting, if at all, your revenue cadence on the program? Or is that pretty steady at this point?

We're pretty steady at this moment. I mean, we're anticipating that, for the year, it'll be kind of in line with what we saw last year, which was up a little bit from '17. It's not a -- it's a nice program for us, but it's not a huge program for us. It's in the scheme of our Military business, it's only a couple of percents. So it's a nice program. We like all these programs, but it's -- if it goes up or down by a -- it'll go up or down by a couple of million dollars and it won't have a major impact on the top line or the bottom line.

And so you don't see much acceleration here? Once they get some of these inventory to Aircraft down, start getting into more of a production rate?

Well, we're not anticipating an acceleration in '19. I gathered from stuff I just read this morning, I know they took delivery of the first airplane, but I think there's still a lot of retrofit work and some other things that are going on. And so it doesn't appear as if the airplane is quite yet ready for prime time. So we're thinking this year will about flat with last year. Maybe as we get into '20 and '21, we'll start to see that ramp up. But again, this is a -- it's in the $10 million to $20 million range in total sales for year and so, again, it's a nice program, but it's not the major driver of the top line.

Okay. And then lastly, I wanted to ask you about -- and then I have a quick one for Don, but bizjet. But we saw shortfall out of Embraer, I know you've worked on the E2. I don't know what your exposure is there on bizjet. We heard from other suppliers yesterday. How is bizjet looking for you? Any concerns there? Is it relatively steady?

Right now, it's pretty steady. We do not necessarily think of the Embraer E2 as a bizjet, but...

No, I wasn't suggesting that. I just meant are you on Embraer bizjets?

No. We're on -- mostly it's Gulfstream business and then some on the Challenger. And so both of those -- [I think] the Gulfstream stuff is doing pretty well. I think we've seen that. And the Challenger is doing just fine. So it's pretty steady. Our bizjet business is in the $40 million to $50 million range. And it was that last year, it was that in '17, and we're anticipating it's that in 2019. So no major changes, up or down in the bizjets.

Okay. And then just on -- quickly, you did $40 million in free cash in the quarter. You're looking for the $185 million. How do we think about the cadence here? Does it just sort of grow a little bit every quarter or is there a -- is there some volatility?

I don't have anything special that would be the key to tell you exactly how that's going to be play out because there are so many variables, but it's probably relatively smooth. I don't see any significant aberration in any particular quarter, but there might be some ups and downs. I think, again, because cash is so volatile based on when we

(technical difficulty)

and John just mentioned advances as well, when is the timing on those things. I think it is better to look at the bigger picture, and the $185 million is the number we're targeting and we're on track to do that.

We will now take our next question from Cai Von Rumohr of Cowen & Company.

So, John, book-to-bill a little over 1. How much over 1? And give us a little color by your businesses in terms of where things are strong.

We're -- I'm always cautious, Cai, about the book-to-bill on the Defense and the Commercial side of the business. And the reason for that...

No, I mean, just -- I'm only asking about Industrial.

Okay, all right. So the Industrial book-to-bill was strong in the quarter, was about 1.1, but I got to temper that with it was a little bit low one in Q4. And so it's running at 1.05, 1.06 at the moment, if you just average over the last several quarters. And so that supports the plan that we have for the fiscal year that we've got. We had -- if you annualize the first quarter, you come out at $880 million of sales for the year, and we're projecting $930 million. So we've got a $50 million pickup in the run rate over the next 3 quarters, and our book-to-bill supports that. And so we're comfortable about that. It's over 1, which is nice and says the business is still expanding, but it's not at the point where I'd say it's just going gangbusters and we're just -- we should be pushing that forecast up. It's supporting the forecast that we have, which shows that production ramp as we go through the year.

Got it. And then so the other commercial aircraft OE was $26 million. Your projected $88 million for the year implies a pretty big slowdown. How come?

That is a combination, Cai, of everything from, as you know, 777 -- well, I guess, no, sorry, we're outside of the Boeing OEM stuff. So it's all of the bizjets. It's also a lot of components-type stuff where we sell [servo valves], we've got some other equipment that we sell to a variety of customers. And so it's not as easy to just connect us. I don't think there's anything in particular special there. Again, we see this business go up and down quarter-to-quarter. So I wouldn't read anything particularly significant into this. You're right, it does show that it will slow down. We did $26 million, $27 million in the first quarter and we're anticipating about $90 million for the year. Maybe it'll be a bit better, but I wouldn't read too much into it at this stage.

Got it. And then -- so in the first -- fourth quarter, you mentioned M-SHORADs, that program, and also clearly you've got a fair amount of classified work. Could you tell us anything that you legally can about those areas?

Well, let me do the classified stuff first.

Or illegally.

Partly legally, yes. The classified stuff, Cai, I mean, all we do at the corporate level is we just collect numbers. We also are not read into the programs. You're only read into classified programs -- even though I hold the top secret clearance in the event that you actually need it. So not only -- can I -- could I not tell you about it, I actually don't know and that's the way these things operate. We obviously know the financial side of it and stuff. But we don't talk about the programs internally and get into it. So I can't give you anything apart from saying that there's -- we won a lot of business over the last couple of years and our funded R&D on the Military side is pretty strong. So the other stuff that you asked about, the turret stuff, I can. I quote a number in the text, so that's gone from about $2 million in sales this quarter -- same quarter last year to about $9 million this quarter. And we are on track to what we said. We said we think we'll do about $50 million in the year and we're on track to do that. I think the only -- the thing about that is there's -- a good portion of that is in backlog, but some of it is orders that we're anticipating and particularly with some of the shutdown activity and the volatility and the way the army or the other forces out of these types of things, that could move in or out a little bit, but we're feeling pretty good. It's a nice program, it's got a lot of potential. Looks like it's going to be a nice year for it. And we think it's got growth opportunities for the future. And fundamentally, it's a platform beyond what we've done in the past. And so we're very excited about the potential that it creates. So it's looking pretty good, $9 million in the first, $50 million anticipated for the year. We're seeing the ramp on this. So we're feeling pretty good about this. It's not just -- by the way, the M-SHORAD is one piece of it, Cai. There's also -- it's really a platform and there's other counter drone pieces to it as well. So we have 4 or 5 different kind of early-stage couple of units, development-type programs on that particular target. It's not a one-program product.

Got it. In the fourth quarter, you talked about R&D for the year, I believe, of $140 million. You gave us the aircraft, but that would imply that the other sectors were about $16 million. Looks like they got to ramp pretty sharply to get to the implied $75 million. Is that realistic or is that number maybe a bit high?

Well, I think the biggest -- that the lender that we have right now on our R&D line is, we've got stuff that we think is very important that we should be spending money on. But we also have a lot of military development opportunities, which absorb essentially the same engineering talent. And so as I mentioned in the call, our challenge is to actually find enough engineers to do all of the things that we think are important right now and to fund future growth opportunities. And so on some of the Space and Defense and the Aircraft side, Space and Defense in particular, what we had hoped to spend in R&D in the first quarter is a little bit less because more of those engineers went to fund the development opportunities, we are looking to hire. And so if we can get the folks on board, we will spend that R&D on the Commercial -- on the Industrial side at a run rate that we think we could spend it. So is there a possibility that at the end of the year, it may come in a little bit lower? Perhaps, but there's -- rarely have we managed to underspend our R&D budgets on most programs. So I'm being an engineer myself, I completely understand why that's the case. So maybe we won't be able to spend it, but it'll be more that we won't be able to spend it rather than we choose not to spend it, because I think the stuff that we've got lined up are important long-term developments for the future of the company.

Got it. And then, so in terms of cash deployment, if you don't buy stock and you indicated that, that's sort of -- you do that opportunistically. I mean, are you satisfied to let just -- to pay down debt and to let the cash -- and/or let the cash build? Or do you feel that you really want to stay within this 2 to 2.5 and so, therefore, you would buy stock if there were no other alternatives?

We're mindful that the lower down we go on that curve, we're further away from our optimal leverage, so -- and that's where the 2 to 2.5x comes down. I don't know that we're likely to find ourselves in a panic mode where, if we get down to 1.5x, which based on the projections we've provided, that's probably where you can get the math to, 1.5x levered by the end of the year. I don't know that we find ourselves in a pressured or panic situation that, boy, we have to do something. So we'll behave responsibly and some of it will be dependent on what we're seeing from an M&A perspective. And as I mentioned, we are actively looking the pipeline ebbs and flows, but there's plenty of activities that our folks are looking at and, boy, if we could control when those opportunities could come across the finish line in our favor, that would be great. It'd be a much easier question to answer. But that's why the share buyback alternative is opportunistic. I think we'll take all those factors into consideration and do what we think is right. And it certainly is giving us plenty of capacity for some M&A if we found the opportunity. So we'll behave -- continue to be disciplined, patient, as I said, but we'll keep you posted as those situations unfold.

Yes, I think as Don said, Cai, any decent acquisition size, if you get into an acquisition that's in the several hundred million dollars, you've got a turn of EBITDA right there. So you go from 2x to 3x overnight, and so we're -- there's a lot of opportunities out there. As Don said, we're being very cautious, and who knows if one or another will convert. Our objective, though, is not to get to where we're in a situation where we just have no leverage and stay there for several years. We're not in -- we appreciate that -- I mean, the leverage ratio in that 2 to 2.5x range is both conservative, but also is a sensible thing to do in terms of returns. And over the long period of time, that would be what we would try to do. But just because we're now at 2.1 and maybe we drop, as Don says, by the end of fiscal year to 1.5x if all things turn out the way we anticipate, we wouldn't panic about that and feel like we got to immediately go out and lever back up unnecessarily, but we will be very prudent, and I think we've demonstrated that over the last several years and making sure that we're either returning capital or investing capital for our shareholders and trying to make sure we get the best possible return for shareholders.

(Operator Instructions) It appears we've no further questions at this time.

I'd now like to hand the call back over to any additional or closing remarks.

Thank you very much indeed for your time. Thank you for listening. Kaily, thank you for your help. And we look forward to speaking with everybody again in 90 days' time, at which point I hope we've got a shutdown long behind us, we've got Brexit all sorted out and the tariff war with China is finished. So we look forward to that.

Thank you very much. Bye-bye.