Moog Inc (MOG.B) 2012 Q3 法說會逐字稿

Good day, and welcome to the Moog earnings conference call. Today's conference is being recorded. (Operator Instructions) At this time, I 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 July 27, 2012, our most recent Form 8-K filed by July 27, 2012, and in certain of our other public filing with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepare 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. Thank you for joining us. This morning, we report on the third quarter of fiscal '12. We update our guidance for the remainder of this year, and we provide our initial projection for fiscal '13. Our story today is one of strong performance in the quarter and a solid finish to the year. We're also projecting growth into fiscal '13 but with a cautionary note given the uncertainty in global markets.

Q3. Q3, was another good quarter. Sales were up 5% to $611 million, net earnings of $39 million were up 15%. And earnings per share of $0.85 were up 16% from last year. Sales and operating profit were up in four of our five segments. Taking a look at the P&L, our gross margin was up slightly on the higher sales. R&D is also up, driven by the A350 program. SG&A is in line as percentage of sales and interest expense is down marginally. Our income tax rate came in at 27.2%, up from last year due to lower tax credits. The overall results was a 6.4% net margin, and as I mentioned, earnings per share of $0.85.

For fiscal '12, we are nine months into our fiscal year. Sales are up 7%. Net earnings were up 13%, and the year is on track for a 12% increase in earnings per share. Today, we are refining our sales forecast for the full year slightly with a net reduction of $21 million. Our earnings per share forecast is unchanged at $3.31 with fourth-quarter EPS of $0.89. Looking out to next year, we are seeing some real positives in our businesses as well as some real concerns in the macro-economic picture. Our underlying businesses are strong, and our ongoing investment in new technologies and products is yielding growth opportunities at customers around the globe. If the global economies hold up, fiscal '13 will be another strong year for the Company, double-digit earnings growth.

However, there are two storm clouds in the horizon which we need to consider. First on the defense side, we have the issue of sequestration. The forecast we will provide today assumes that sequestration will not happen as it is presently written. Our forecast for fiscal '13 is based on military spending in line with the present budget plans. No one knows whether sequestration will happen or if it does happen, how to will be implemented. There is the possibility that the Office of Managements and Budgets will empower the Department of Defense to use judgements in making program cuts. If this is the approach, our book of business may be largely unaffected.

In any event, we have been through budget cuts before. We'd ready to react when we know what is going to happen. And in the meantime, we are working hard to meet our present commitments to our customers. Second, on the Industrial side, we have the financial crisis in Europe and the slowing economies in Asia. For the last year, we have told you that the US was strong, Europe steady, and China soft. The key question for us was whether our Industrial business in Europe, driven by German machine builders feeding the export market, would affected by the European turmoil.

Late in the third quarter, we saw some slowing of incoming orders at a couple of our European customers. It's too early to tell if this was just some customer-specific issues or the start of a more structural slowdown. Our forecasting model is based on a rigorous process of building up our sales projection, customer by customer, and market by market. Our outlook is based on what our customers are telling us and what they believe will happen. We learned however in 2009 that our customers forecast don't always materialize.

So in the present environment, we think it's prudent to plan for a range of possible outcomes in 2013 and manage accordingly. Note that, in the event of an Industrial slowdown, we are still projecting sales and earnings growth for the Corporation in fiscal '13. Though we have a strong underlying business, but there are macro effects which we will have to ride out. The Industrial uncertainty is captured in our fiscal '13 projections which we will present shortly.

Now to the quarter. Starting with our Aircraft business. Q3 was another strong sales quarter in the Aircraft with growth in both our Military and Commercial product lines. We are forecasting continued strength in Q4, and consequently are revising our full-year sales forecast up $11million. For fiscal '13, we are projecting further sale increases, a combination of double-digit growth on the Commercial side and a modest increase on the Military side.

Q3. In the third quarter, total Aircraft sales were up 10% to $242 million, another record sales quarter for this segment. Military sales were up 6%, with a handful of mix shifts from a year ago. Foreign Military sales on fighter Aircraft were up nicely, and our Navigation Aids business almost doubled as work on some major contracts for the US. Navy and US Air Force ramp up. On the other hand, our Military aftermarket was off 10%, mostly the result of lower B-22 aftermarket activity relates to the timing of shipments. Production activity on our F-35 program continue to increase up 10% from last year.

Turning to Commercial. The growth story continues. Commercial OEM sales were up 13% with strength in most platforms. Two items of note are slightly lower 787 sales in the quarter and no sales in the Hawker. Last year, in the third quarter, we settled open scope change negotiations with Boeing on the 787 which resulted in a significant catch-up adjustment to sales in that quarter. On the Hawker, we had sales a year ago up $2.5 million and no sales this year. As we described last quarter, we have no lingering financial exposure to the Hawker program. And to be conservative, are assuming nothing further sales in this airplane. The Commercial aftermarkets had a very strong quarter, up 25% from last year.

75% of this gain was the result of higher initial provisioning sales for the 787. Aircraft fiscal '12. With three quarters behind us, we are increasing our sales forecast for full year by $11 million to $952 million, with the increase coming predominantly on the Commercial side. Looking out to fiscal '13. We are projecting a sales increase up 8% for the Aircraft segments to just over $1 billion. The Military business will be up marginally with three items of note. Sales in the new KC46 tanker program and in the aftermarkets will each be up by about $10 million, while OEM helicopter sales in the B-22 will be down by about $10 million.

Commercial sales will be up 17%, driven by strength at Boeing and Airbus. We are assuming flat sales for business jets and a slightly lower aftermarket as 787 initial provisioning slows. Aircraft margins in the quarter were 11.5%, up from 10.4% a year ago. For the year, we are maintaining a margin forecast of 11%, up from 9.9% in fiscal '11. Margins in our Aircraft segment vary quarter-to-quarter, but the general trends of increasing margins continues. For fiscal '13, we were forecasting further margin expansion to 11.5%.

Now to Space and Defense. Sales in the quarter were up nicely, but strength in the Space markets and Defense markets, offsetting lower Security sales. Despite the strong quarter, we are moderating our forecast for the year slightly as some programs push out. In fiscal '13, we are projecting a 5% increase in sales. Q3. Sales in the quarter were up 9% to $87 million. In the Space markets, sales were up almost 20% from last year with Commercial programs up strongly and $2 million of additional sales from our Bradford acquisition.

On the other hand, NASA was down in the quarter as the space launch program continues to refine their technical concepts for the next generation vehicle. Defense was up 15% over last year as our major Missile production programs continue strong and work on the light armored vehicle ramps up. Finally, Security was down in the quarter as DVE sales of over $3 million last year drops to zero this quarter. We believe the DVE party is over and are anticipating very modest sales in this program as we look to the future.

Fiscal '12. We are reducing our sales forecast for fiscal '12 by $10 million to $355 million. The reduction is in Missiles and in Security. Our tactical Missile team had been anticipating some new wins for foreign military programs this year. And it now appears that the gestation period for this work is longer than we had anticipated. In the Security markets, the uptick we had been anticipating in Commercial programs has not yet materialized.

For fiscal '13, we are projecting a 5% increase in sales to $373 million. The increase will come in our Missile business as sales for Missile Defense programs increase and some of the foreign military opportunities we have been chasing comes to fruition. We recently announced the signing of a deal with AMPAC to buy their In-Space Propulsion business. We have not closed on that deal, and hence the forecast we are representing today does not include any sales our contributions from this potential acquisition. We anticipate that the acquisition will close by the end of our fourth quarter.

Space and Defense margins. Margins in quarter of 11.4% were up from 11% a year ago. For the year, we were anticipating margins of 12.1%. As we look to fiscal '13, we believe that the mix of business will be similar to fiscal '12 and our forecasting margins up 12%. Industrial systems. Dollar sales in the quarter were essentially flat with last year. The stronger dollar this quarter resulted in a negative translation effect and exclusive of foreign currency effects, real sales growth was [7%] in the quarter.

As a result of the weaker euro and some slowing of incoming orders in Europe, we were moderating our forecast for the remainder of the year. For fiscal '13, we believe we will see some real growth. But given the uncertainty in global economies, we will provide a sales range for your consideration. Q3. Sales in the quarter were up 1% to $158 million. Real growth of $10 million was last in the translation from euro to a stronger dollar. Starting with the energy markets, sales were up 5% as strength in the gas and steam markets more than compensated for slightly lower Wind Energy sales. The Wind Energy story remains unchanged with strength in Europe but weakness in China.

In the Industrial Automation markets, sales were down 7%, primarily the result of translation effects. We are seeing some slowing of our incoming orders in Europe. But on the other hand, we are seeing strength in general automation applications in the US. Finally, Simulation and Tests remains a real bright spot with sales in quarter, up 16% as the demand for simulators continues to grow. Fiscal '12. We think Q4 will be slightly weaker than Q3 and reducing our sales forecast for the year by $15 million to $635 million. The reduction is in two main areas. Wind Energy sales in Europe and Test sales in Asia. The lower Test sales in Asia are on our large contracted India for automotive test facilities and due to the delayed completion of government facilities.

Fiscal '13. We have been reporting for several quarters that our Industrial business was strong in the Americas, steady in Europe and slowing in Asia, particularly China. Late in this quarter, we started to see a shift in Europe with incoming orders starting to show signs of weakness. The weakness was confined to some specific customers, and it is too early to tell if this is just a blip or the start of a more prolonged slowdown. This may be an early warning sign. And given the general economic malaise in Europe, we think it is prudent at this point to be cautious in our outlook. We do not believe we are heading into a situation similar to 2009.

We are looking to the future as a range of possibilities rather than a specific sales projection and planning accordingly. For fiscal '13, we are projecting sales between $624 million and $674 million, $50 million gap. It is important to note that our high end projection is based on our detailed rollup of information from our customer base around the world. This is what they think will happen. Under this high-end scenario, we would see modest growth in energy sales with flat Wind Energy sales and slightly higher nonrenewable sales. We would have 7% growth in Industrial Automation sales with strength in the US and modest increases in Europe.

Finally, we would see 9% growth in Simulation and Tests, fueled by investments in new automotive test facilities in Asia. On the lower end of the projection, sales of $624 million would be down $11 million from fiscal '12 and in line with the run rate of the second half of this year. This scenario still assumes growth in Simulation and Tests but sharply lower sales in Wind Energy and Industrial Automation. The folks who run our Industrial systems group describe the present challenge as driving one foot on the brake and one foot on the accelerator. We have customers demanding products and we are racing to keep up but at the same time try to plan for a possible slowdown. This is the Management team that worked through the 2009 crisis, and they will be watching carefully as events unfold, ready to take the necessary steps to optimize our overall performance.

Margins. Margins in the quarter were 10.1%. For fiscal '12, we are moderating our margin forecast 30 basis points to 10.3% to reflect the slowing sales outlook. In fiscal '13, we a margin range associated with the sales range. At the higher sales level, we are projecting margins of 11.4% as we benefit from the higher sales. At the lower sales level, margins should be around 10%. Now to the components group. Sales in the quarter were up slightly from last year, the result of sales contributions from acquisitions. The mix shift from Aerospace and Defense to Industrial marks continues although the pace of this shift is slowing. Sales for the year will be in line with our last projection. Looking to fiscal '13, we are anticipating 6% sales growth.

Q3. Sales in the quarter were up 3% to $90 million. On the positive side, we continue to see strength in our Industrial markets -- Marine, Medical and Industrial Automation. Marine remains strong as investment in offshore exploration continues. Medical was up marginally in the quarter as increased sales through Respironics compensated for slight low lower CT scan sales. Industrial Automation was as up nicely, with most of the growth coming from our Animatics acquisition.

On the Aerospace and Defense side, sales were lower in Military Aircraft as programs continue to wind down. Sales and Defense programs were actually flat with a year ago. We believe that we have hit the bottom in this market and are anticipating some further future growth due to foreign opportunities. For the full-year fiscal '12, we are adjusting the mix of sales between the various markets slightly with the overall result of the full-year forecast is down marginally about $2 million from 90 days ago. For fiscal '13, we are projecting a 6% increase in sales to $393 million. Fiscal '12, sales are split 50/50 between Aerospace and Defense and Industrial. In fiscal '13, we are anticipating a similar split with increases in both major markets.

On the A&D side, we believe our Aircraft sales will be down slightly from fiscal '12, but our Defense sales will be up and work on our Missile Defense programs ramp up. And the Industrial side of the growth will be primarily in the Industrial Automation. In our components group, our Industrial Automation sales are principally in the US and this market continues to show signs of strength. Margins. Margins in the quarter were 14%. For fiscal '12 we are forecasting margins of 15.5 %, up slightly from our last forecast. In fiscal '13, we projecting margins of 15.6%.

Now to medical. Our medical business continues to perform to plan. Sales and profits were in line with the last four quarters. For the year, we were moderating our sales forecast slightly to reflect the year-to-date experience. And looking to fiscal '13, we are projecting modest sales growth. Q3. Sales in the quarter were $34 million, down from $38 million last year. Sales this quarter were in line with the average for this fiscal year. Sales in the third quarter last year were a record high for this business and with the results of some unusual factors.

Both Pumps and Set sales benefited last year, ironically as the result of product recalls which had slowed sales prior to Q3 and then resulted in catch-up shipments in that quarter. Last year, we were coming out of issues with the software on our IV and some quality issues associated with our Sets. I'm happy to report that we are no longer struggling with these types issues this year and our business is improving.

Our Sensor business was also inflated last year as a result of increased shipments to a major customer who was capturing market share from another competitor who was also struggling with the product recall. We sell sensors to a wide range of medical pump manufacturers. You may remember that our Sensor products are used to detect air bubbles in administration sets. For the full-year fiscal '12, we are moderating our sales forecast slightly to $139 million. This assumes a fourth quarter in line with the run rate for the year. Looking out to fiscal '13, we are projecting a 4% increase in sales to $146 million.

The increase will come in our pump products as our IV sales channel gains traction in the US. Our Set sales will be down slightly as we change our supply arrangements with an international customer from a parts sale to a commissioned structure. Margins. This quarter, we had an operating profit of $1.4 million or 4% of sales. This was similar to the last two quarters. For the year, we were keeping our profit forecast unchanged at $6 million resulting in operating margins of 4.4%. For fiscal '13, we are projecting margins of 6%. Fire sales we will yield margin improvements. However, under the Affordable Health Care Act, there is a new medical tax on the manufacturers of certain medical devices being introduced in 2013. We estimate that this will be a head wind of about 100 basis point of operating margin for the Business next year.

Our medical business has improved dramatically from last year and is now stable. We are pleased with that progress. We recognize however that we have a long way to go to make this a real success. Improving performance will be based on higher sales as we develop our dedicated sales channel and develop new products. This is be a slow process. And we think we will need another year or so of steady, albeit modest performance before we start to see some significant improvements.

In summary, after all the various adjustments, our fiscal '12 sales forecast is $21 million lower than our forecast from 90 days ago. Total sales in fiscal '12 should be $2.45 billion, up 5% from last year. Compared to our forecast last quarter, sales in four of our five segments will be up slightly as we factor in the results of the third quarter. On the other hand, sales in the Aircraft group will be $11 million higher as Commercial problems grow. We are maintaining our operating margin forecast at 11.3%. The results would be earnings per share of $3.31 and 12% increase over fiscal '11.

In fiscal '13, we are projecting both sales and earnings increases. Just to remind you, in this projection, we are not assuming that sequestration will happen. We are however providing a $50 million sales range in our Industrial business in recognition of the uncertainty in global markets. At the high end of the range, sales for the Company will be up 7% to $2.61 billion and earnings per share is up 12% to $3.70. At the lower end of the range, sales will be up to $2.56 billion and earnings per share will be up 6% to $3.50.

As in most years, our quarterly earnings will start out a little slower and then accelerate through the year. Assuming we hit the high end of the range at $3.70, we anticipate quarterly earnings of $0.85 in the first quarter, $0.85 in the second quarter, $0.95 in Q3, and $1.05 in our fourth quarter. Now, let me pass you to Don who will pass us some color on our cash flow and balance sheets.

Thanks, John and good morning, everyone. Free cash flow in our third quarter was strong at $43 million. And our net debt declined by $40 million to $582 million. The difference is mostly related to foreign currency translation effects on the balance sheet. Through the first nine months of fiscal '12, our free cash flow was $64 million compared to year-to-date net earnings of $111 million. After a slow first half, largely due to the timing of receipts, cash flow is showing the second half strength that we have been forecasting. We expect our fourth quarter free cash flow to be similar to what we just achieved in the third quarter to our last forecast for all of fiscal '12 that showed a range of $95 million to $110 million. It is still a pretty good forecast.

This will result in a cash conversion ratio of about 70% in fiscal '12. Averaging the last three years, our cash conversion ratio will end up being a respectable 90% over that time period. Focusing on the balance sheet compared to three months ago, receivables and inventory levels were flat. Customer advances increased by $5 million to $112 million, largely related to Military aftermarket orders on the C-5 program. Capital expenditures were $25 million in the quarter and $75 million for the first nine months of the year. We are still forecasting that our CapEx will come in around $105 million for all of fiscal '12.

Finally, depreciation and amortization totaled $25 million in the third quarter and $74 million year to date. We are forecasting depreciation and amortization for all of fiscal '12 to be about $101 million. For fiscal '13, we are forecasting $100 million of capital expenditures. And depreciation and amortization should come in around $114 million. Regarding pensions, we've previously described how last year we doubled up on our contributions into our US defined benefit pension plan, making our forecasted contributions in fiscal '12 on the lighter side.

In our first nine months, our global defined benefit pension plan expense was $26 million while our contributions were only $6 million. We are estimation our full-year '12 global DB pension plan expense and contributions to be $35 million and $8 million, respectively. For fiscal '13, we are planning to resume the funding of our domestic DB plan with $30 million of contributions throughout the year. And for all of fiscal '13, we are estimation our global DB plan expense to be approximately $38 million, and our contributions will be about $39 million. So putting the pieces together, we are forecasting our fiscal 2013 free cash flow to be $135 million or cash conversion ratio of about 80%.

Turning to our finances. We had debt outstanding at the end of the quarter of $721 million and our cash balances were $139 million. Our total book equity was $1.3 billion. Our quarter end net debt as a percentage of total cap was 30.9%, down some from last year's 32.9%. Our leverage ratio was 1.7 times. And the net -- I'm sorry. The quarter end unused capacity on our $900 million revolving credit facility which turns out in 2016 was $651 million. We have plenty of capacity to handle the pending acquisition of AMPAC and In-Space Propulsion that John referenced earlier and flexibility to pursue other opportunities.

Our effective tax rate in the third quarter came in at 27.2%, up slightly from last year's 25.9%. For the first nine months the effective tax rate was 29.1% compared to 27.4% last year. That is up primarily related to lower foreign tax credits and research and development credits. For all of fiscal '12, we're forecasting our effective tax rate to come in at 29.1%. And looking ahead to fiscal '13, we were forecasting effective tax rate of 30.6%, up slightly from this year due to the mix of global taxable earnings. To reiterate John's summary, our first three quarters have been pretty solid. Our fiscal '12 sales will end up being by 5% to $2.45 billion while earnings per share will be up 12% to $3.31 per share. And with that, we are ready to answer any questions you may have. Thanks for listening. Caryn.

Yes, sir. Thank you.

(Operator Instructions)

Tyler Hojo.

I was hoping that maybe you could talk a little bit more in detail in regards to the aftermarket, commercial aftermarket growth you saw this quarter. Just wondering how much of it was -- how much of that growth was predicated on 787 provisioning? I know that was part of the growth you saw last quarter. And that's my first question.

The commercial aftermarket was up 25% in the quarter. And of that, 75% of that was essentially initial provisioning of the 787. So if you exclude the 787 it was up about, call it 7 -- 6%, 7%, 8%. I would caution you that our aftermarkets, as we said over the years, tends to fluctuate up and down. It can go up and down, plus or minus 10%, quarter-to-quarter without it actually being a trend that is easy to put your finger on. The underlying shift of 7% or 8%, I would say. I don't know if that pulls a particular trend up or down. I would say that's within the normal range of fluctuation that we might see quarter-to-quarter. The big difference was the 787 initial provisioning. As I said, for next year, we are forecasting that initial provision, the aftermarket will actually be down slightly from this year. And really, the difference is that we think the 787 provisioning would slow next year.

Okay, great. Appreciate that additional color. And the other question I had was just in regards to the Components group. To get to that 15.5% up margin than you are guiding to for fiscal '12, looks like you need to do something like 17% in the fourth quarter. Just wondering how you get there, just on a sequential basis in terms of the improvement.

Well, if you go back, we did 17% in the first quarter. So, it's really a mix issue in the Components group. It's all short term sales. It's no long-term contracting in there. And it's just a question of mix issue, the way the business comes in and the projections that the folks have for the fourth quarter. So we did 17% in the first quarter and 14.1% in the second. And the same question reverse would say how do you get from 17% to 14.1%? But as I say, that's the mix. So we go 17% Q1, 14.1% Q2, 14% Q3, and we think we'll do 16.9% in Q4 to come out at an average of 15.4% which is in line with the average that we have seen -- sorry 15.5%, in line with the average the we have seen in this business over quite a few years. We feel comfortable that the business is lined up to do that.

Okay. Then maybe you could talk about specifically what products in that division have the higher mix -- or the higher margins. What kind of strength do you need to see in certain products to get there?

I don't want to go into -- I don't want to get down into margins at the level below the segment operating level. We don't provide margins, product line by product line within the segments.

Okay. That's fine. And just lastly for me. I don't know if I missed it. But I understand your outlook for the Wind market going into fiscal '13. But just curious what you saw this quarter in terms of Wind's.

So this quarter was more or less flat with a year ago in terms of the Wind sales. We are seeing -- the wind story continues to be the same. It's the same in that the volatility continues. There is a lot of volatility in China. And we have seen our Wind business in China really come up from a couple years ago. It's down 50% from what it was two to three years ago. On the flip side, we have seen nice growth in Europe. But there is some volatility there as well, all this potential volatility in Europe as we look out to the future. That's why when we provided a range we said part of that range would be lower Wind Energy sales if it doesn't materialize the way we are thinking.

It's the same story as it's been before. It's fairly significant volatility. We are trying to manage our way through that as best we can. But given the big shift quarter-to-quarter, we are constantly in the catch-up mode. Some of it is it's large customers that place large orders. So if you get the order, you have to run to try and keep up. If you don't get the order, you are looking to see how do I size the business to make sure I'm at the right level. I would say it's a volatile business that continues to be a Management challenge. Having said that, longer term, we believe that this is exactly the type of business that we are very successful Company at. It's a high reliability, tough environment, difficult application.

And that's the type of thing that we as a Company, generally speaking, excel at. What we are going through right now I would say is a dramatic shift in the Wind Energy markets rather than a shift in our position within it. We were riding the waves up and down as the market consolidates, growth rates slow over production capacity is taken out in China and perhaps to some extent in Europe. And we are essentially trying to ride our way through that wave with the view to, when that all settles down, this is really the type of market we think we would be very good at.

Okay. And you know, you mentioned in Wind the expectation -- or I guess at the lower end of your guidance that Wind is down pretty substantially. Just wondering. Do you need to take some cost out in regards to your current footprint. How should we think about that?

Well, if the Wind Energy sales are down, we will adjust accordingly. But we have quite a large temporary work force in this business because of the volatility that we seen in it. We think we will be able to react pretty quickly to a downturn.

Great. Thanks a lot.

Thank you.

Cai von Rumohr.

Could you give us a little more color on Aircraft profitability in the quarter. It looks like your contract reserves, loss reserves went up. And give us some color on how the Wolverhampton move has ended?

Let me do the second one first. The Hampton move, that's almost on. There were still some hanging costs, I would say, in the third quarter, but nothing particularly significant. And there is probably going to be a small little bit in the fourth quarter just as they do a little bit of clean up. But again not as significant as we saw last quarter. (inaudible) portfolio of contracts, development contracts production and as the quarters unfolds, that contract last resort fluctuates with activities in the various contracts. The shift this quarter is not something of -- out of the ordinary in terms of what happens in the business. As I say, it lines it up from where we started the year.

Right. But I mean, basically that's a charge against earnings in the quarter. Isn't it?

Yes.

And what contracts in particular? Is it anything notable because it like $4 million or $5 million?

It's over the entire portfolio of contracts, Cai. That's why we didn't call out something specifically in the quarter. There wasn't a major charge against a particular contract.

Got it. And maybe update us on where R&D was for Aircraft and where you expect it for this year and next year?

So in the quarter, R&D runs -- it's about half of what we do for the whole Company. So the whole Company R&D was about $28 million. Aircraft is about 50% of that. And for the year, we are projecting that it's going to be around $62 million. Which is in line with what we have been projecting all along this year.

So that's no change? And where does that go next year?

Next year, it will be down about $5 million or $6 million. And that's really the 350, starting to see a slowdown in the 350 effort.

So I'm really quite confused now because your Aircraft volume is up, and your R&D is down, and contractor reserves are normal this year, and Wolverhampton is behind you, and your margins are only up marginally. How come?

Are you talking about into fiscal '13?

Fiscal '13, yes. The margin in Aircraft. You have lots of big benefits -- $5 million from R&D down, Wolverhampton is down. Why aren't the margins better?

Margins next year will be up 50 basis points from this year is what we are projecting. We like to see the margins stronger, but we were still in the early phases of a lot of the commercial ramp ups and the major Defense one, which is the F-35. And in that ramp up phase, in the early phase -- the [A7], the 350 which starts to kick in next year in terms production, some of business jets and the JSF, the initial margins just aren't proving to be quite as positive and supportive of margin expansion as we would have hoped.

Having said that, there is margin expansion. We came from 9.9 last year, to 11 this year, to 11.5 next year. We are confident that trend will continue. It's just perhaps unfolding a little bit more slowly than we anticipated, given -- as I say -- the start up costs associated with those major production programs.

And then, where are you in renegotiating the Boeing contract, and also business jets next year looks flat. But I assume Hawker's already out. How come that's not up a little bit more?

Let me do the business jet piece for you, first. Let me just look up the specifics of it. What's happening is Hawker is down next year -- one second here. Hawker, this year, Cai, is going to be $2 million to $3 million. And that's gone next year. And that gets compensated next year with some of the other newer programs coming in.

Got it. Okay.

Is the last of $2 million there. What was your other question?

And the Boeing contract.

Oh, yes. So, we have a wide range of contracts with Boeing on the commercial side, and they are renegotiated over periods of time. And I would say that's an ongoing process over the next couple of years. It's not a specific one-offered event. It's a series of different negotiations, and it will happen over the next couple of years.

And the last one, you know, your fourth quarter margin in medical. How come it's not better given the lift in the admin sense?

The fourth quarter medical, Cai, the margin will be in line with what it's been for this year. Essentially it's a fourth quarter sales and margin forecast around sales, $35 million and $1.5 million in profitability. And I think your underline question -- your assumes that there is a significant difference in the margin contribution from the sets and the pumps. And I wouldn't assume that the margin different is significant enough that you would see the type of margin shift that you are talking about for the delta in the sales numbers.

Thank you very much.

You're welcome.

J.B. Groh.

Don, I had a question on the corporate line. That looks like it's down quite a bit. What am I missing there in terms how it's changed?

You looking at quarter-to-quarter?

Yes.

I'm looking at -- let's see your corporate expense -- hold on a second. I don't -- let me look at -- let me get calibrated here.

5/7 versus 8/5. And I know I combined the comp in there, too.

I'm looking at numbers in front of me and this is off the press release information that we sent out that had corporate and other including equity based compensation at about 5/8 or so this quarter, third quarter. And it's about the same a year ago --

I'm just talking sequentially. I think it's down sequentially. The question behind the question, is what are we baking for 2013? How is that for rephrasing. (laughter)

Our forecast of corporate expenses as we look into '13 -- let me do '12 first. So 2012 we are forecasting our corporate expenses and this would be including equity-based compensation and some miscellaneous things. '12 is going to come in at about $29 million. And 2013 will come in at about $31million.

$31million. Okay. And then could you guys talk about maybe -- are there still incremental opportunities on planes like the Max or is that pretty much all set?

I think there is the potential for some surfaces on -- you are talking about the Max and Neo, I guess?

Yes.

Boeing and Airbus haven't, as far as we know yet, settled exactly on the actuation architecture on the suppliers for both of those airplanes and there are open RFPs of RFQs floating around. Having said that, it's for a surface here and a surface there. They are not, as far as we understand, that planning a wholesale change out of the flight control systems. You would do that if you were getting a new wing. But I think they are trying to minimize that change. So it might be a surface here or a surface there. It's a relatively small -- if we were to win something, it's probably a relatively small effort, and it's probably spread out over the next couple of years.

At the moment, it's still not clear to us. We haven't won anything, but I'm not sure that we know we have lost anything either. But as I say, it's probably going to be a smaller effort. It's not a whole new flight control system and a program -- say on the scale of something like the 350 or 787. I think they will probably go vastly with the incumbent that it may well be we are just doing financial gymnastics to see whether or not they can put a price pressure on the incumbents.

Right. And could you address A350? I know there has been a couple of little issues with the program. How is that trending and what is your outlook there?

Our program is -- we were doing okay on the program. And we are working to the schedule that Airbus has. We haven't had any significant hiccups on our end. I don't know that if it's from our perspective. As I say, we are marching to the schedule that Airbus has published. And we are pretty much on plan.

Great. And maybe you could talk about your attitude towards acquisition and cash flow deployment? What things -- what areas would you be looking at?

Our history in acquisitions follows in line with the overall diversity in the Company in terms of -- each of the operating groups typically is looking for opportunities to grow their business. If you go back over the last 10, 15 years, you will see that we have acquired at irregular intervals. And that's based on opportunities as they arise in each of the operating groups. We would be open and interested in acquisitions that fit from a strategic perspective, a product and technology perspective and from the financial heart of perspective in any of our businesses except the medical business for a period of time. Until we convince ourselves and convince the market that we have a solid plan in medical and that we can see our way to double-digit earnings, I think we need to let down what we have and make sure we find that.

But in the other businesses. I guess if we pick them out. Defense. Obviously, we would be very cautious in Defense and particularly over the next six months or so until we all know what's going to happen with sequestration and perhaps the future of the budget. But if the ideal opportunity came up in Defense because we still will be open to looking at it. And I would say the same in each of the other businesses. You have seen we've signed a deal that hasn't yet closed for an expansion of our Space business, the In-Space Propulsion business. So we are open. We'd be open in the Industrial business. We're open, I'd say we're open for business. It's a matter of can we find the right opportunities at the right price that with our strategic direction.

Sounds good. Thanks for your time.

Julie Yates.

John, on Defense. For FY13, if you are not including additional cuts in your formal guide, can you offer some sensitivity to further cuts? I ask this because clearly the bias leans heavily toward some level of incremental cut against no more cuts even if sequestration is avoided.

So I'm not quite sure of your question, but let me do this for you. If you take our total Defense business for next year, it's just short of $1billion. Let's call it $2.5 billion and $2.6 billion, so in the mid 30% to 35% range. Of that, about $800 million is DoD funded in one way or another -- through primes. We don't supply directly except in the aftermarket of the DoD. $800 million of it is DoD. Of that, 50% of it is on the Aircraft side and then the other 50% is a combination of Defense Space stuff. So you can use that as a calibration. If there is a 10% cut and it's just a straight cut across the board, that would be $80 million of potential exposure.

On the other hand, I think the real difficulty, Julie, for all of us -- you guys and us included is so how are they going to cut the money? If it were major cuts to the JSF, that would have a disproportionate effect on us. On the other hand, if it's a military thing or guns and bullet type of thing, that wouldn't have such an effect on us. So I think that's as much as I can -- in terms of sensitivity. Hopefully, that gives you enough to at least think about us. The devil will be in the details, of course.

Right. Okay. And then just back to the A350. The schedule you mentioned that Airbus had provided, does that include the additional six month delay that Airbus announced today? How does that impact you?

We would have -- when you are involved in these programs, typically from the inside, you get to see how the program is coming together I think our folks internally would have suspected that the program was probably going to be delayed. So the push out today -- in terms of our work on the program there will probably be a relook at where we are versus what they are doing. Typically what happens, Julie, unfortunately is when programs get delayed you just keep spending at the same level because the program discovers, well, we can now optimize a little bit more or change a little bit, something else.

From a supplier perspective like us, what happens is you keep spending at the rate you were spending at pretty much. So I think the delay today, as I say internally, is probably something that folks were thinking was going to happen. I don't think it has -- it doesn't have any major change that I would say to you. Yesterday, we were thinking R&D next year was going to be this and today we're thinking it's going to be that. It will just be that we will probably have an extra six months of spending R&D, more than we thought we were going to have. And it wouldn't have been yesterday, originally say when the program got kicked off.

Okay. And then just another question on aftermarket. This week, a lot of your peers have cited weakness. And ex the spares provisioning, are you seeing any weakness or trends that differ from what you were expecting?

I think that general -- if we look at what we are forecasting for next year at a time when I think the OEM site is going very strong, as we are forecasting that our aftermarkets ex the initial provisioning will be probably be flat to maybe marginally down. I think that lines up with what others are generally saying and that the aftermarket, to some extent we are seeing a little bit of a softer outlook than others. So I think it's not increasing next year in line with what we thought. I think for this year it's pretty much on track with what we were expecting.

Okay. Great. Thank you.

You're welcome.

(Operator Instructions)

Michael Ciarmoli.

Maybe just a follow-up on the topic of some of your Defense exposure. What would be the most damaging cuts that would negatively impact your current revenues or profitability? You threw out the JSF. Are there programs that you are looking at where you would really see some disproportionate pressure?

Well, Mike, maybe a different way of approaching it is to say is, how is our military business built up, if you talk about the Aircraft side. And as we explain it to people, there's four major OEM programs and there's the aftermarkets. The JSF, the F-18, V-22 and the Blackhawk Seahawk. At the back of an envelope, I can't do exactly how much that adds up to. But I would say that's probably that's a little bit, 50% to 60% of our Military Aircraft budget -- of our Military Aircraft. And then with aftermarket -- the military aftermarket is about $200 million, and that's whole collection of various platforms. So, we are planning for lower V-22 rates as we look out to the future. So we have already baked that in.

We are planning for JSF rates in line with what Lockheed is and the government is telling the world. I mean slightly time shifted just in terms of the work we would put in. But we're not second-guessing those folks.F-18 seems like it's solid. If the F-35 dropped down, the F-18 might pick up a little bit. That would be a little bit of an offset and then the helicoptering on the Blackhawk Seahawk business, again. We line up with what the Defense procurement folks are saying that they are going to buy. If any one of those programs took a major hit, then we would see that disproportionately.

And if the aftermarket is tougher I think, because as I say it's a very wide range of programs. And it's would depend on -- you could make the assumption or you could think, well if they are not going to buy as many new platforms maybe they going to have to keep the old ones flying. So maybe the aftermarket won't be as adversely affected. Or they can just decide that they are going to reduce fleet capability and not have as many repairs and overhauls done and just suffer the loss of capability that might go with that, at least temporarily. Does that help? This is one of the things we keep asking ourselves. And as I say, the devil will be in the details once we know how the Department of Defense is going to allocate the cuts if they go through.

Yes. That is perfect. That's helpful. And then maybe just shift to the other side of the business. On the Industrial market and even for your planning next year. Can you maybe take us down a notch into some of the specific end markets? I know you touch a lot of different markets from plastics and what have you. Maybe where you are seeing some of that slowness specifically and what are some of those swing factors?

Let me calibrate you. We have a $50 million range on our Industrial business for next year. The low end is in line with the second half of this year. And the high end was forecast $50 million of growth on $630 million of sales. It's up single-digit percentages. So we break the Industrial business into three major categories -- Energy business, Industrial Automation, and Test and Simulation. Let me start with the Energy business. Energy is two pieces -- renewables which is Wind and nonrenewables. The nonrenewable business in the next year, which is mostly gas and steam -- controls we do for gas and steam turbines, that's actually looking pretty good, more or less flat with this year. And then we have some -- actually no, it's up $2 million.

Then we have some oil and gas exploration businesses where we do a variety of products for the Schlumbergers and Haliburtons of the world. That's solid, up marginally next year. Right now with our forecast, we are seeing Winds will be flat with 2012 at about $115 million, more or less. So Wind flat but the other Energy pieces up a bit. So you get some growth in the Wind or in the Energy business.

If you look at Industrial Automation on the low end, we would see it down a little bit from this year. But the Industrial Automation is also a couple of pieces there. A lot of it is driven by machine manufacturers in Europe -- plastic injection molding manufacturers, metal-forming machine manufacturers. And we think we would see some weakness there. On the other hand, at moment at the Americas, our business in the US in Industrial Automation is looking pretty strong. Now will that hold up forever? I'm not sure.

If you think -- if I remind you of my comments in the prepared text on our Components group, Industrial Automation for our Components folks is looking pretty good for next year. They are feeling -- and that is US based business. They are feeling good about that. So the Industrial Automation, we think, Europe -- if there is a softening -- Europe could see that, the Americas might hold up pretty well.

Keep in mind that as we go through these businesses, we are constantly bringing out new products and looking to expand our scope of supplies. It's not just a response to the market. It's also how we were doing with introducing new products extending our scope of supply at a variety of customers. So the business shifts gradually as we move forward. You have the down -- the headwinds of perhaps market forces. Hopefully, we have the tailwind of new products and a larger scope of supply into various customers.

Then the third piece is the Test and Simulation business. And that's driven -- the Simulation business is going very well. That's really flights training simulators. And the Test business next year, we think will be stronger. And that's on the Auto Test side, and there's two reasons for that. One is, if you remember we described, we have a large contract in India to equip three government Test centers that they are building there to essentially put in indigenous capability to test new cars. And that has shifted to the right. Nothing to do with us. That's just the Indian government in terms of procuring land and doing buildings. That's shifted to the right and perhaps to some extent we might have been able to anticipate that. So that's shifting to the right. That moves a little bit more sale into next year.

But we also believe that there is actually an investment in Asia starting to emerge in automobile capabilities, like the Indian thing that we described, that in China and some of the other Asian economies there are opportunities for Auto Test facilities that we think we are well positioned to capture those. We should see growth on the Auto Test side next year. You put it together. You have a little bit of strengthening on the Energy side driven by nonrenewables -- oil and gas, and then steam. You have Industrial Automation, some strength in the US which hopefully will hold up, maybe some weakness in Europe but against that, some positive in terms of new products, and then Test and Simulation which continues to look strong. Simulation strong with some growth in auto test in Asia.

Like so many of our businesses, it's mix picture at diversity across markets, across products, that makes it difficult just to take a single trend and project that is what's going to have the impact. The other thing I said in the text which I think is important is our high end forecast is based on a detailed roll up by customer of what the customers think is going to happen. So it's not something that we cook up at the corporate level. It really is based on a grounds-up approach.

The difficulty we saw with that back in '09 was that we thought our customers were seeing positives, and then suddenly everything changed. And that's why we put in the range this time to through to say well, even though that's what the customers are telling us and that's what traditionally we would be passing on to the outside markets. We think that maybe we're all potentially overly optimistic. Therefore, we would like to put this range in. And internally, we would be managing with that in mind.

So we are trying to -- we would be watching very carefully for shifts. As I said, our Industrial folks describe it as driving with one foot on the accelerator and one foot on the break because we have a lot of business that were working hard to get to customers. At the same time, we are trying to anticipate would they slowdown. It's a challenge. But we have diversity across markets and geographies, and we think we will be able to ride through it over the course of the next year.

Perfect. That's extremely helpful. Thank you, guys.

(Operator Instructions)

Ladies and gentlemen, looks like we have no further questions at this time.

Thank you very much for listening, and we look forward to speaking to you again in 90 days.

Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation