Moog Inc (MOG.B) 2012 Q4 法說會逐字稿

Good day and welcome to Moog fourth quarter fiscal year end conference call. (Operator Instructions). At this time I would like to turn the conference over to Ms. Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of November 2, 2012, our most recent Form 8-K filed on November 2, 2012, and in certain of our other public filings with the SEC.

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

Thanks, Ann. Good morning. Thanks for joining us. Before I go into my prepared remarks, I would just like to say we recognize it has been very tough week for folks living on the East Coast. We were luck in Buffalo we were spared the brunt of the hurricane, but we hope all of our friends and acquaintances living in New York and New Jersey have been spared the worse of the devastation and your family and friends are all safe. And we hope that you and your communities will have a speedy recovery and that life gets back to normal in short a period as possible.

Let me go back to my prepared remarks. This morning we report on the fourth quarter of fiscal 2012 and reflect on our performance for the full year. We will also reaffirm our guidance for fiscal 2013. We have a good story to tell today. The fourth quarter finished strong and the full year results show a very healthy improvement over fiscal 2011. In addition we are anticipating further growth in sales and earnings in fiscal 2013.

Q4 was another good quarter. Sales were up 2% to $633 million. Net earnings of $42 million were up 10%, and earnings per share of $0.91 were also up 10% from last year. Taking a look at the P&L our gross margin was up slightly on better mix. R&D is also up driven by the A350 program. SG&A is up as a result of a shift of activity from direct product support to support, and interest expense is about flat. Our income tax rate came in at a low 20.8%, as we benefited from some unusual items and the overall result was a 6.6% net margin and as I mentioned earnings per share of $0.91.

Overall fiscal 2012 was a very good year for our Company. It was our third year of growth in sales and earnings following the great recession of 2009. For the full year sales were up 6%, net earnings up 12%, and earnings per share were up 13%. Over the last three years sales have increased 34%, and earnings per share are up 68%. We have delivered this improvement despite the reduction in military spending and the tepid industrial recovery. We believe our diversity across markets and geographies as well as our excellent position in the most important military and commercial programs has been the key to this strong performance, and we think these factors will continue to benefit us in 2013.

Looking to 2013 our forecast for next year shows further growth in sales and earnings over our 2012 results. 90 days ago we described a forecast for fiscal 2014 which included a $50 million sales range and an associated earnings per share sales range between $3.50 and $3.70. We are affirming that outlook today. As before this forecast does not take account of sequestration.

There have been statements from the DOD that if sequestration happens, they will not change or cancel contracts for which funding has already been obligated. We believe that the majority of our fiscal 2013 defense sales are in that category. That being the case, if the DOD sticks with that plan sequestration, may not have much impact on fiscal 2013. Comparing our thinking now on fiscal 2013 with 90 days ago with some positives as wells as some new headwinds. On the positive side we think our aircraft, space and defense, components businesses will be a little stronger and we will also see higher sales because of our recent acquisition of AMPAC In-Space Propulsion business and Tritech. Two headwinds of note are a lower discount raise in our pension expense calculation and softening outlook for our industrial business. Putting it all together we are forecasting sales in the range of $2.62 billion to $2.67 billionwith earnings per share of $3.50 to $3.70 a 5% increase over 2012 on the low end and 11% increase on the high end. Our core businesses remain strong and we believe diversity across aerospace, defense and industrial markets will help us ride out the ups and downs of the various markets we serve.

Before I jump into the segments, let me offer some general thoughts on fiscal 2012 and reiterate our broad strategy for the business. In addition I would like to address two specific areas of interest; the outlook for aircraft margins and our wind energy business. Starting with fiscal 2012, from an outsiders perspective fiscal 2012 was another great year for the Company. Sales and earnings grew nicely , and we continue to add on bolt-on acquisitions to augment our position in our target markets. From an insiders perspective however it was perhaps the most eventful year in a generation. In December 2011 after 23 years as CEO Bob Brady passed the reigns to the next generation. For me the objective in 2012 was simple, steady as she goes, continue with the proven strategy of the past and deliver on the forecast we had provided (Inaudible). As we close out fiscal 2012, I am happy to report that is what we have achieved.

As we now look to next year we continue to focus our attention on growing sales, margins and earnings per share. Our broad strategy remains unchanged ; to be a world's leader in high performance controlled systems. We will maintain our excellence in components and continue to broaden our portfolio to offer higher level systems to our customer. We continue to look for bolt-on acquisitions which support this strategy. We share our technology across a diverse range of markets. And with this strategy we believe we will continue our right guard of strong and consistent growth in sales and earnings.

Now to a couple of specific topics of interest starting with the outlook for Aircraft margins. Ten years ago we embarked on a strategy to shift our Aircraft business from a Tier 2 supplier of components to a Tier 1 supplier of fully integrated flight controlled systems. Along the way we made significant investments in new programs and saw our margins compress. The low point was in fiscal 2009 with operating margins of just under 8%. Over the last few years we have explained that our margins will gradually increase as our R&D load moderates and new programs transition into production. We are now in the middle of that margin recovery cycle with margins in 2013 projected at 11.5%, some 360 basis points improvements over a four year period.

We are sometimes asked why our Aircraft margins are not expanded faster, and there are several reasons for this. First, delays in all our major development programs have resulted in longer development cycles and higher level of R&D spending than planed. Second, these delayed programs are only now coming into production and early deliveries are never very profitable. Third , in 2009 we completed the acquisition of the Wolverhampton business from GE. A critical step in consolidating our sector, but a short-term drag in margins as we restructured the business, moved commercial production off shore and invested in a new facility in the UK . Finally, the continuing decline in interest rates has resulted in a pension headwinds which we had not anticipated a few years back. To put this in context, comparing fiscal 2012 to 2013 higher pension cost shave over 50 basis points from our projected 2013 operating margins, were it not for this our Aircraft margins in 2013 would be 12.1%.

To some up, our Aircraft segment strategy is firmly establish, and we believe we are now the premier supplier of flight controlled actuation in the world. Our journey of margin expansion is well under way albeit moving a little slower that we would like. Over the last decades we have won the only major military competition , the two commercial widebody competitions, gained shares in the business jet world and won a position on the new Chinese airplane. We have also acquired a significant competitor and consolidated their operations into ours. We believe we are on the best programs on both the military and commercial side of the house , and our confidant that our margins will expand to mid teens over the coming years.

Now let me provide some context on our wind energy initiative. Our foray into the wind business has been an interesting ride. Back in the summer of 2008 we bought a 40% stack in LTi, a German manufacturer of electric pitch controlled systems for wind turbines. At the time LTi was one of the few suppliers of this technology in the world, and wind OEMs were clamoring for products. LTi had a strong business in Europe and an exploding business in China. It was a suppliers market with strong growth and nice profitability. In 2009 we completed the purchase of LTi at a price which had been agreed some two years earlier. We paid 3.6 times forward EBITDA. As the industrial automation business suffered in the recession of 2009 our wind business boomed. Sales in China grew to over $90 million with attractive margins. Then the music stop, and since 2010 the wind story has been a tale of two regions. First China, in 2010 the market in China started to turn. Wind OEMs had over built capacity , the end market for turbines was slowing, and local competition for our product had emerged, demand wanes, prices dropped and some OEMs developed in-house pitch control systems. This trend in China has continued, and as a result we are forecasting wind sales in China for fiscal 2013 of only $25 million.

On the other hand, our wind sales in Europe have been steady since 2009, and we are forecasting that 2013 will be another year of sales close to $70 million. As the industry has retrenched margins in Europe have moderated from the high point in 2009, but the business there remains healthy. So in 2009 and through much of 2010 our wind business boosted our overall margins in the industrial segment. Since that time they have been a drag in our overall industrial margins. Over the last two years we have taken repeated actions to resize our wind business in line with demand an action we have taken again in the past quarter. Looking to the future, we believe success in this market will come from new products designed to be fundamentally more compact and cost effective than the present solutions. We have the portfolio of products required to deliver a complete solution and the engineering capability to take out cost, so that is our plan; ride out the present turmoil while sizing our operations for the market needs in parallel develop a range of new products which create superior value for our customers and address the future needs of the wind energy market. We think it could take another couple of year to see this business really turn around, but we believe it will be well worth it.

Now (Inaudible) the quarter. I would remind our listeners that we have provided a two page supplemental data package posted on our website which provides all the detail numbers for your models. We suggest you follow this in parallel with the text. Starting with Aircraft. Q4 was another good quarter. Total aircraft sales were up 11% to $254 million. The commercial market drove the increase with higher sales across all our major customers. Sales in the 787 program contributed over 60% with 787 sales to Boeing more than double the level of a year ago strong initial provisioning at the airlines.

Military sales were up marginally in the quarter with a strong after market more than compensating for lower B-22 OEM sales. Fiscal 2012 was a very strong year with sales up 13% to $963 million. We saw our military Aircraft business increase 9% in fiscal 2012 despite the general market concerns about slower military spending. The major drivers were the F-35 production ramp up, higher foreign military sales, strong after markets and the new KC-46 Tanker program. Helicopter sales moderated from 2011 highs in both the B-22 and the Black Hawk. Commercial had a very strong year across the board with sales up 21% for the year, buthalf of this growth was on our legacy platforms and the other half on new platforms including the 787 and the new Gulfstream business jets.

Fiscal 2013. Fiscal 2013 should be another year of growth driven principally by the continuing ramp up in our commercial business. We are projecting a sales increase of 7% for the Aircraft segment to $1.03 billion. Commercial sales will be up 13%, with two-thirds of the growth coming from the 787 and A350 OEM programs. We are forecasting a modest decrease in commercial the after market next year as the rate of 787 initial provisioning for spare slows. Military sales will be up 3%, with higher sales in the KC-46 tanker program and in the military after market more than compensating for lower OEM sales in helicopters. F-35 sales will be up slightly on higher production rates .

Margins. Margins in the quarter were 11.5%, and for the full year fiscal 2012 were 10.9%. Margins expanded 100 basis points from fiscal 2011. For fiscal 2013 we are forecasting further margin expansion to 11.5%, and were it not for the impact of the pension discount rate margins next year would have been 12.1%.

Turning now to Space and Defense. Sales for Space and Defense in the quarter were up marginally from last year with additional sales from recent acquisition compensating for lower security sales. In total sales were up 1% to $93 million. The satellite market was up strongly with the growth coming from our acquisitions of Bradford Engineering last December, and the AMPAC rocket engine business we completed in July. Our NASA business was lower as work on the space launch vehicle and the Orion crew vehicle slowed. In the defense market sales remain solid as our (Inaudible) replenishment work continues. The security sector was sharply lower from a combination of no DVE sales and continuing malaise in the general and security market.

For fiscal 2012 the story for the year mirrors the story for the fourth quarter. For the full year sales increased 1% to $359 million. The space business was up on acquisition sales for satellite combined with increase activity on various launch vehicle programs in particular TVC for the Delta IV and Atlas V programs. The defense business was down slightly for the year. You may remember that in 2011 we enjoyed a one up contract for a stores management system which did not repeat in 2012. Excluding this program defense sales in 2012 would have actually been up slightly from 2011. Finally our security business was way down in 2012 as we were expecting. The DVE was the major factor, down from $30 million in 2011 to just over $4 million in 2012.

Looking to fiscal 2013 for space and defense we anticipate sales growth from our recent acquisitions with our legacy business about flash. We are projecting a 15% increase in sales to $415 million. This is similar to our forecast from 90 days ago adjusted for our rocket engine acquisition which will add over $40 million of incremental sales in fiscal 2013. We see increases in our defense business as sales from our defense program increase and some of the foreign military opportunities we have been chasing some to fruition. We should also see a modest increase in our security sales at the market for general security installations recovers.

Space and defense margins. Margins in the quarter were 11%, for the year margins of 11.9% were down from 13.8% in 2011. Two programs in 2011 contributed to the strong the margin performance ; the DVE program and the stores management system. As we look to fiscal 2013 we are forecasting margins of 11.2%. Our recent acquisition from AMPAC will provide an up tick in sales next year, but given first year accounting adjustments will dilute margins in the segment overall.

Turning now to industrial systems. The industrial system business saw 14% drop in sales this quarter to $150 million, two-thirds of the drop was the result of lower sales and local currency with the other one-third the result of the stronger U.S. dollar. Wind energy in China continues to be a challenge with sales down to $9 million in the quarter, less than half the level from a year ago. Industrial automation in both Asia and Europe was also softener with sales off in each of the core markets we serve. On the brighter side energy sales and exploration and generation were up almost 20% and our simulation and test business continued strong.

Fiscal 2012 industrial systems. Despite the weak fourth quarter sales for the full year were 1% higher than last year, and that is a combination of 4% real growth negated by 3% adverse currency effects. It was a similar story to the quarter, weakness in wind in China and slowing industrial automation business compensated by higher energy exploration and generation sales and a robust simulation and test business.

For fiscal 2013 we continue to worry about the outlook for the global industrial economies and as result are projecting sales within a $50 million range. We have reported for several quarters that our industrial business was strong in the Americas steady in Europe and slowing in Asia particularly China. Three months ago we reported the first signs of slowing orders in Europe. At that time we were not sure if this was just a seasonal affect or the start of a more sustained slow down. Over the last three months we have continued to see some weakness in Europe. We also not seen a pick up in Asia and our wind business in China remains very challenging. On the positive side our simulation and test business remains the bright spot on our portfolio. In total we are now forecasting industrial sales for fiscal 2013 around the mid point of $649 million. Compared with fiscal 2012 this forecast assumes lower China wind sales balanced by slightly higher industrial automation and simulation and tests sales. Industrial margins in the quarter were a disappointing 8%. In response we have resized our wind operations during Q4. We continue to adjust our expenses around the world in line with business conditions. Fiscal 2012 margins came in at 10%, the same as fiscal 2011, and for fiscal 2013 we are projecting margins in the range of 9.6% to 10.9% in line with the sales range.

Now to our Components Group. Sales in the quarter in the Components Group were up 13%, to $100 million with growth in both aerospace and defense and non aerospace and defense market. We saw recovery in aerospace and defense sales from a low point 12 months ago while our Marine and medical businesses picked up nicely. Marine is driven by off shore oil exploration and our medical sales (Inaudible). were up in the quarter. The general industrial business was slightly lower reflecting the softness we have also seen in our industrial systems business. For the year sales increased 6%, to $374 million with acquisitions supporting the growth. Our aerospace and defense markets were flash with fiscal 2011 with some slight shifts in the mix. On the other hand, our Marine market was way up as offshore oil exploration boomed and we saw some sales pick up in the fourth quarter from our Tritech acquisition. Our industrial business was also way up driven by Animatic's acquisition.

Looking to fiscal 2013 we are anticipating further group in our non A&D markets. We are projecting a 10% in sales for the components segments next year to $413 million. Our 2012 acquisitions contributed most of the increase. We are also anticipating some growth in our defense business driven by work on Missile Defense Applications. Marine should also be (Inaudible). offshore oil exploration continues. We anticipate that our general and industrial business will be up as result of some particular projects we have in the mark.

Taking a look at the sales trend for fiscal 2011 to fiscal 2013 we see the A&D markets are essentially flat over this three year flat over this three year period while the non A&D markets are growing nicely the result of good organic growth combined with acquisition. Components margins were strong in the quarter at 16.1% and for the year at 15.3%. In fiscal 2013 we are projecting margins of 15.5%.

Medical, sales in the quarter were $36 million down 3% from last year. We saw marginally low pump sales flat set sales and slightly lower sales in our other category. For the year sales came in $140 million in line with fiscal 2011. Both pump and set sales were flash. In pumps slightly higher sales in Europe compensated for slightly lower sales in the U.S. Sales of sensors and hand pieces were down from a very strong fiscal 2011. In 2011 you may remember a key customer for our sensors had a very strong year. This customer benefited from a competitor product recall and shift more product than normal as they captured market share. Moving to fiscal 2013, we are keeping our forecast unchanged from 90 days ago. 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 U.S. Our set sales will be down slightly as we change our supply arrangement with an international customer from part sales to a royalty structure.

Medical margins. This quarter we had an operating profit of the $1 million or 2.8% of sales. This was a little lighter than our recent quarters the result of slightly adverse sales mix. For the year margins came in just under 4%. And looking out to fiscal 2013 we are projecting margins of 6%. Higher sales will deliver the margin improvement next year. Margins next year would be higher were it not for the new medical devices tax to be introduced in January 13 under the Affordable Health Care Act. This will be a headwind of about 100 basis points of operating margin for the business next year. Our medical business in fiscal 2012 performed as planed. It was the year of consolidating the gains we made in the second half of fiscal 2011. We had steady sales and modest profitability each quarter. Total sales for the year were flat with fiscal 2011, but our operating profit improved from break even to almost 4%. We are anticipating further gains fiscal 2013, and we are still targeting double-digit margins in the next couple of years. Before I leave our medical segment let me provide one other perspective on the financial performance of this unit. We built this business through a series of acquisitions and intern investments over the last six years, and as result it carries a very high level of depreciation and amortization. In fiscal 2012 we had operating margins of just under 4%. If we add back both depreciation and amortization, our medical business margins are actually relatively close to equivalent metric for our other business segments.

Let me summarize. We are very pleased with the way fiscal 2012 turned out. We had projected earnings per share of $3.31 back in July of 2011and 15 months later finished the year at $3.33 a 13% increase over fiscal 2011. For fiscal 2013 we are projecting further growth in both sales and earnings. Just to remind you again in this projection we are not assuming that sequestration will happen.

With the benefit of our Q4 acquisitions we are now projecting sales next year of approximately $2.65 billion with a range of plus or minus $25 million. We are maintaining our EPS range of $3.50 to $3.70 reflecting the uncertainty in the global industrial markets. At the midpoint of this range earnings per share would be up 8% from fiscal 2012. As in most years our quarterly earnings will start out a little slower and then accelerate through the year. Assuming we hit the midpoint of the our range we anticipate quarterly earnings of $0.80, $0.85, $0.93, and $1.02.

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

Thanks, John. Good morning, everyone. I would like to first echo's John's comments about the recent storm damage, and our thoughts and prayers are with you all on the East Coast as you deal with the devastation and disruption. Hopefully all of your friends and family are safe.

Our free cash flow in the fourth quarter came in strong at $43 million just ahead of our net earnings of $42 million. Our net debt however increased over the last 90 days by $34 million to a net total of $616 million . That $77 million difference is principally related to two acquisitions we closed on during the quarter. You remember the Tritech deal we announced back on August 22. We paid about $33 million for Tritech International. They are a leading designer and manufacturer of high performance products for remotely operated vehicle used for undersea oil exploration. Tritech is located in the UK , and FY 2013 we expect they will contribute about $20 million of sales to our components segment.

We also announced on July 31st, the acquisition of the In-Space Propulsion business, or ISP, from American Pacific Corporation for $46 million. ISP develops and manufactures liquid propulsion systems and small rocket engines for satellites and missile defense systems. They have operation in the U.S., UK and Ireland, and they will generate about $40 million of incremental sales in FY 2013 as part of our Space and Defense segment. So it was a busy M&A quarter for us.

For the full year our free cash flow was $107 million compared to our net earnings of $152 million or conversion ratio of 70%. That is in line with our forecast , and averaging the last three years our free cash flow conversion ratio has been a respectable 90% over that time. Receivables and inventories in total were flat over the last three months after removing the effects of acquisitions and currency movements. At year end customer advances were $112 million and loss reserves were $48 million both essentially flat from three months ago after removing the effects of acquisition. Capital expenditures were $28 million in the quarter and $107 for the year. Depreciation and amortization totaled $27 million in the quarter and $101 million for the year . For fiscal 2013 we are forecasting $105 million of CapEx and depreciation and amortization of $114 million.

I would like to turn to pensions for a moment to add a little more color to John's brief comments on pensions. We have defined benefit pension plan in the U.S. that has been frozen to new participants since 2008. Our contributions to this plan have average about $30 million annual over the past few years , and in FY 2012 our expense for this plan was about $23 million. Threemonths ago with the help of our actuaries in the ordinary course we were forecasting this expense to increase modestly in to FY 2013. Unfortunately we are now looking at a FY 2013 expense for this domestic plan of around $33 million a substantial $10 million increase over FY 2012. This increase is all the result of a very low 3.75% discount that was rate determined on the last day of our fiscal year. As we recently updated our outlook for FY 2013 we are now expecting that much of this FY 2013 headwind will be offset by incremental operating efficiencies, so we are not adjusted our EPS for projections we have previously provide. Regarding cash funding of the plan we expect to contribute about $39 million to all of our global DB plans in FY 2013, and over the past few weeks we have spent some time looking at the funded status of our domestic plan and we have concluded that continuing to make annual contributions to the plan in the range of $30 million to $40 million annually should result in the plan returning to a fully funded status towards the end of the decade. Putting all of these pieces together we are forecasting our FY 2013 free cash flow to be $135 million or cash conversion ratio of about 80%. This is unchanged from our forecast of 90 days ago.

Our outstanding debt at the end of the quarter was $765 million and our cash balances were $149 million. Our total book equity was $1.3 billion. Our quarter end net debt as a percentage of total cap was 32.1%, which is down from last year's 33.9%. Our leverage ratio was 1.74 times, and at quarter end the unused available capacity under our $900 million revolving credit facility which turns out quite a few years out in 2016 was $594 million, so we are in very solid financial shape.

Let me turn for a second to the effective tax rate which may be of interest to some. Our effective tax rate in the fourth quarter was a low 20.8% as John described down slightly from last year's 22.2%. A low tax rate in our FY 2012 fourth quarter is due to a statutory tax increase and reduction in the evaluation allowance for European deferred tax assets. The decrease in the statutory tax rate happened in the UK as legislation was passed during the quarter affecting the measurement of some of our deferred tax liabilities. For all of FY 2012 our effective tax rate was 27.0% compared to 26.0% last year, so not much of a change. In FY 2013 we are forecasting an increase in our effective rate to 30.6%, and FY 2013 effective rate will be up from 2012 as the fourth quarter adjustments that I just mentioned will not repeat and we expect to have a slightly less favorable mix of global taxable earnings.

So to reiterate John's summary FY 2012 was a really good year for us. Same-store sales were up 6%, and that is after removing the affects of acquisitions and currency fluctuations, and earnings per share were up 13%. Looking ahead to FY 2013 we are forecasting further top line and bottom line growth, so we are looking ahead with optimism. We are now ready to answer any questions you may have, and thanks for listening.

Hand it back to the operator, and perhaps you can ask us some questions.

Thank you. (Operator Instructions). We will go to Tyler.

Yes. Hello. Good morning.

Good morning, Tyler.

First thanks for providing all the color with regards to the regional breakdown of your wind business. What I am wondering in regards to your prepared remarks how do we think about China? Is that ultimately a business that goes away here?

That is a good question, Tyler, and if you go back to 2009 in to 2010, we did $90 million sales in China, and now we are forecasting for fiscal $25 million. That is a significant drop obviously , and we have done a lot of restructuring as we have gone through that it has been step by step by step. I describe it before that the business in China is a transitional business, where the business in Europe is a relationship business. What I mean by that is China the OEMs want to have standard products that they can take from two separate suppliers and perhaps even a third supplier which is an in-house supplier and they want to play each one of those suppliers off every time they make a purchase.

And therefore it is a standard product price game. In Europe it is a relationship business, where you work with an OEM, develop their next generation of products. You are the guy on that particularly turbine, and as long as you continue to work closely with them you will continue to have that business. So it is fundamental different approach to business. I believe that overtime China will shift more to that relationship type structure just as the industry matures there. T

hey are going through a dramatic shake out in terms of the available capacity, and hopefully when that happens we will have the opportunity to work with the OEMs and say not a standard product, but let us develop a product tailored to your turbine that gives you an enhanced value proposition. Whether or how that will happen I don't know. Our strategy right now is to try and maintain a foothold in the Chinese market, it is not to give away products, and that is why you see our sales coming down. But it is to try and maintain as many customer relationships we can over there. We will have to see how it develops. Does that help?

Okay. Great. It sure helps a lot. I know in these conference call you have discussed the U.S. market. Just wondering if there is any update there. Do you have any opportunities to perhaps break into that market even if you want to given the bleak outlook there?

We supply to the OEMs and the OEMs supply to the end market, so I think it is difficult. The only OEM in the U.S. is GE, and I do not anticipate that we will find a way to do business with GE in the near future, so I put that to one side. The effect of the production tax credit in the U.S. will be that the overall wind energy market contracts globally because there will probably be fewer turbines erected in the U.S.,and therefore U.S. companies will probably buy fewer turbines from primarily European suppliers, I do not know that they are buying too many yet from Chinese suppliers.

So we have products in the U.S. I think that has come in through OEMs that we supplied in Europe. And if those OEMs lose some business, then I think the decline in the U.S. market will have that effect but it will be a second order effect. We actually have some business in the U.S. this year. We have $4 million or $5 million that we had in fiscal 2012 which we did not have before, but that was actually business to Alstom which is Europe selling turbines to Brazil. The way it is structure it runs through our U.S. books, because Brazil is part of our American activities. It is an indirect effect.

We do not have direct sells to an OEM manufacture in the U.S. The major player is GE and Vestas. We do not supply product to either of them. So hopefully we are somewhat installed from the dramatic downturn that may happen in the U.S. Nevertheless if the overall market shrinks by the U.S. turbine count then that probably is not a positive.

Okay. Got it. Just to switch gears here. One more question on R&D for fiscal 2012. Thanks again for the details you provided. But just in Q4 it looks like you overshot your full year R&D guidance by a bit. I was wondering if you could perhaps specifically talk about why that happened?

Well, I am not sure I have the number -- when you say we over shot, I am not sure I have that number exactly at hand. The total for the year was $116 million, and the major driver of our R&D is the A350 program and Aircraft, and that was a large part of the fourth quarter. It was a very large part of the year. It is almost $50 million for the full year. That is the major driver I would say in our R&D overall. And typically program R&D expense varies somewhat quarter-to-quarter depending on how much work gets completed, what activities are going on, et cetera. I would say any change in the R&D is probably attributable to the A350 program and Aircraft.

Got it. I will hop back in to queue . Thanks a lot.

Thanks, Tyler.

Thank you. We will go next to JB Groh.

Good morning, guys.

Morning, JB.

Don, I had a question. I am looking at the growth in space and defense for 2013 and I have aerospace in there for a run rate of 40, but where is the rest it? Am I missing a transaction?What else is going on there?

You are talking about end of 2013?

Right.

We got some help from ISP that is incremental about $40 million.

Right. Got that.

And I think that is all about out change.

There is a little bit from Bradford , which we bought earlier this year. That is about $4 million or $5 million incremental next year. So of the 50 space and defense went up it is really acquisition driven.

Okay. Good. Okay. And then on sequestration it sounds like you have some comfort around your contractual builds. What about after market? Is there anything that is going on there that would protect you from any cuts in 2013? Are those contractual or do those just come in as they come in?

I am not sure we have comfort maybe we are just kind of fooling ourselves. I think nobody knows. The military after market has been a real power engine for us over the last couple of years. If I go back to 2010 we has 160 million, 2011 206 million, this year 214, and our after market folks are forecasting a slight up tick next year in the military after market to about 220 . It is a long, long list of programs. Some of the big ones are the C-5, the F-18 we have been on, the V-22, the Blackhawk, Seahawk, but it goes on and on and on. There is a very long list of programs, so that is one piece of it. It is very diversified, and it is very hard to know how the funding to the depots gets effected in the case of sequestration. It may well be that it is an easy area to cut, you slow the depots down and they do not do as much repair work, and that could have a negative impact on the military side.

On the other hand, there is two things we have been doing on the military side to grow our business over the past couple of years. One is that we have looked at getting in with the depots and taking control of more of the contract for our products that are being done at the depot, so we have been working very closely with the depot. So that in some cases in some of these platforms even though the depot is doing the work because legally the depot has to do a certain percentage of the work in order to maintain capability it can actually be organized and run by ourselves, so that has helped to grow the business for us. The other thing is we started develop capability in repairing, this is an initially quarry into this so it is not a huge part of our business.

But looking at repair opportunities for our products that is very similar to the types of product we do but on old platforms where the original supplier or manufacturer is no longer interested in doing the work or perhaps is even no longer viable. The process there is older platforms you look to do repair work and as you do that you actually insert some intellectual property in terms of improving the product and sending it back into the field. So the next time around it actually is your product. Again (Inaudible) we are starting in that. It is a way to broaden the after market, but I would say those two initiatives have helped us to grow the military after market beyond just market growth , and as I say sequestration how that will play out in the military after market I'm not sure.

Our folks that work the after market have been very accurate in the past in forecasting. The gentlemen that runs it says he keeps talking to all of the depot, all of his contacts about sequestration they all do not know where it is going, but they have no indication as of yet. As soon as we know, we will tell you folks. Right now the best we can say is we think the after market is strong, and it looks as if it should be good next year.

It sounds like you have developed some value added services there that have helped you grow that military after market business. It is not inventory build or anything like that is what you are saying?

Yes, it is not. How the government controls inventory or manages inventory is not something we have a clear understanding of, but that is not what it is.

Got it. Good. Thank you very much for your feedback.

Your welcome.

Thank you. We will go next to Cai von Rumohr.

Thank you very much. Can you give us a little more color where was Aircraft R&D for the year and where do you expect it to be in 2013 and overall R&D in 2013?

Aircraft R&D for the year, Cai, was about $65 million, and for next year we are anticipating about $59 million, so a little bit of a reduction. Drop of about 10%. And in total R&D for the year was $116 million, and we are anticipating next year to be about the same.

Okay. You mentioned A350 was as high as $50 million what are the drivers in the R&D coming down next year?

The big one is the A350 will come down from shy of $50 million to just over $30 million.

There is other offsets in Aircraft that are a handful of programs that we have going on, Cai, as well as some of the other businesses outside of Aircraft there is some increases some of which is driven by the acquisitions.

What are you assuming about the Brazilian position on their new plane or their update?

In terms of what we are assuming in our R&D for next year, Cai?

Yes.

There has not been a decision from Embraer yet as to who their supplier will be for their next generation E-Jet. I think for ourselves we are part of that competition with the rest of the industry. Even if we were to win that, that would probably be another quarter or maybe even longer, typically in the first year to two years of a program it is a relatively speaking low level of R&D. There is probably a couple of million dollars backed in here and there in the Aircraft forecast for next year for various miscellaneous programs that might come along, but it is not a significant number for that program whether we would win or loose.

Okay. And then you had the two acquisitions in the fourth quarter. Were there any noticeable transaction expenses in the fourth quarter as result of those two?

I would say there was the normal transaction expenses but nothing unusual.

What is the normal would be what roughly, and where was it booked? Was it booked in corporate expense or in the divisional numbers?

Are you talking about legal costs?

Yes.

It is buried in SG&A and it is not significant at all, Cai.

But it is not in corporate, Cai. It is in the actual operating groups, and it is a small number because typically we did not in those ones we do not engage a banker, so we do not have any. The seller has transaction costs. We have the usual legal and some other advisory costs, but they are relatively small.

Okay. You mentioned the pension I think you had been looking for 26, 27 and now it is 33 and you made that up with other cost cuts. Could you give us a little color in terms of is that essentially a difference of some $6 million to $7 million versus the first time you provided guidance, and what are the things you did to make up the $6 million or $7 million?

It is about $0.10, so $6 million or $7 million is probably a reasonable number of difference between what we were anticipating when we talk to you in July and now. And as I mentioned we have gone back through all of the numbers. We said we are looking to try to get keep our range of $3.50 to $3.70. We found some improvements in the Aircraft business. Essentially what they did was absorbed the initial cost in Aircraft and kept the number the same in terms of the forecast we provided , and then the space and defense folks and the components folks we saw a little bit of an up tick in the performance there. So we went back and we said we have additional pension costs let us look for additional opportunities to try and absorb that cost without changing our forecast and that is what we did.

Terrific. Thank you, very good.

Thank you.

Thank you. We will go next to Michael Ciarmoli.

Good morning guys. Thanks for taking my questions.

Good morning, Michael.

Maybe just to follow-up on the Aircraft controls. I think we covered the R&D. How do we think about as these margins expand on a go forward basis obviously there will be some variation to R&D given the programs, but how should we think about the margin increase on new production Aircraft? Let us take the 787. Are there certain rate breaks where you start to dial up your margins, or how does that play into the margin expansion story there? When can we expect to see some more positive contribution and maybe not as much of a margin drag from those new platforms being delivered?

Let me phrase it a little bit differently. We have had 90 basis points of margins expansion sequentially from 2009 to 2013, annually 90 basis points per year since (Inaudible). Next year we are looking at growing margins to 11.5%, so that is 60 basis points up from what we are doing this year. As I mentioned the pension headwind that we just ran into that is another 50 basis points to 60 basis points there again you would have another 90 basis points to 100 basis points of expansion. So I think your question would suggest that somehow we have not seen the margin expansion.

By the way, we have been carrying a fairly heavy R&D load throughout that time, it is up and down a little bit year-to-year. I think what you will see a continuation. It is not as if I think you will see suddenly a breaking free and then margins will expand by 200 basis points to 300 basis points in a particular year and you will be on a whole new level. The ramp in production will be a gradually ramp. We will see the 87 ramp and then a couple of years after that the 350 would start to ramp. 87 maturing into production, but on the hand you have 350 moving into production C-919 probably a little bit behind that. We anticipate it is kind of a steady year-on-year improvement up in to the mid teens area, and we would have liked that to happen faster. Our anticipation was that it probably would happen faster.

But as I mentioned on the call all the programs stretched out in terms of the time line. And what happens unfortunately in these programs is you just continue to spend R&D money. So that is a drag. Production is (Inaudible) so you get initial production which is not typically profitable or very profitable early on. Then we have the Wolverhampton thing that was a big thing and then the pension. So I would phrase if differently I do not think you are going to suddenly see it all taking off. Each of those commercial programs will come on stream spaced out a year two years apart so you will see this continuance gradual improvement we believe.

Good lecture. That is helpful. When do you think the 787 program, is that generating margin I am assuming that is below the segment level, and does that get to -- when do you foresee that program becoming in line or even above current segment margins? And a follow-up, how should we think about a normalized R&D spend? There is obviously a lot of the platforms , you mentioned the C-919, what is going on with Embraer? Is this $50 million to $60 million is that the right range to be thinking about R&D?

So let me answer your first question first. We are not going to go into margins by program that takes us down a path of margin by every program. Unfortunately we are not going to do that. We talked about margins in the overall segment and I think you understand the dynamics between military and commercial pretty clearly. The overall R&D spend we are anticipating that will continue to moderate over the next few years. I think long term R&D probable in the 2% to 4% range in the Aircraft business is probably a reasonable number, 2% if everything is quiet maybe you get to 4% to 5% if you have another big Embraer or Triple 7 or something you see a peak on.

Th&D load in Aircraft has been very significant over the last seven or eight years since we got on to the 787 program . Typically running $50 million to $60 million a year on a business that grew from $400 or $500 million up to what is going to be a $1 billion next year. So we had to grow into the R&D level we now have. At $1 billion next year R&D Aircraft just under $60 million you are starting to get in to that 4% to 5% range, and from a dollar perspective I think it will come down slightly over the coming years from a percentage basis I think it will come down fairly strongly as sales continue to grow.

That is the helpful. Last one and I will jump off here. Commercial after market you are modeling down 6% next year coming off of a pretty strong year. Is that a function of global economic conditions, traffic, capacity cuts or is there anything rolling off onetime items that gave you a boost this year?

Yes. It is one thing it is the 787 initial provisioning. So the 787 initial provisioning this year was about $12 million to $13 million next year we are anticipating it will about half of that. If you strip that out it turns out the after market is about flat, and the reason that it is coming down next year is because we are working closely with the airlines to try to sign them up for long term kind of fly by our type of contracts that changes the modeling a little bit on the after market, but it is a very steady stream over a much, much longer period of time. So initial provisioning coming down, butwe anticipate that we will try to get in some long term contract that will better overall in the long term for both us and our customers.

Perfect. Great. Thank you very much guys.

Your welcome.

(Operator Instructions). It appears there are no further questions at this time.

Thank you very much indeed everybody. We will talk to you again in 90 days time.

Thank you.

That does concludes today's conference. Thank you for your participation.