Moog Inc (MOG.B) 2014 Q4 法說會逐字稿

Good day and welcome to the Moog Q4 and year-end earnings conference call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Ann Luhr, Investor Relations Manager. Please go ahead, ma'am.

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 descriptions of these risks, uncertainties, and other factors is contained in our news release of October 31, 2014; our most recent Form 8-K, filed October 31, 2014; and in certain of our other public filings with the SEC.

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

Good morning. Thanks for joining us. This morning, we report on the fourth quarter of FY14 and reflect on our performance for the full year. We'll also reaffirm our guidance for FY15.

FY14 was a very respectable year for the Company, given the challenging market conditions we faced. Earnings were up and cash flow was very strong.

Folks around our Company put in a tremendous effort to deliver on our commitments to both our customers and our investors. And at the outset of this call, I thank them for their hard work and dedication.

Now to the headlines. First, earnings per share in the quarter, excluding restructuring, came in very close to plan. Second, during the quarter, the outlook for some of our markets weakened. We responded swiftly with restructuring actions to right-size the Business to meet our FY15 projections.

Third, it was another quarter of very strong cash flow, to close at the year our record cash flow. Fourth, we completed the first phase of our share buyback program in the quarter, ahead of our plan. And finally, we are reaffirming our guidance for FY15 at $4.25 per share.

Now let me move to the details, starting with the fourth-quarter results. Sales in the quarter of $671 million were down 1% from last year. Sales in the Aircraft and Components segments were up, as sales in our other three segments were down from last year.

Taking a look at the P&L, our gross margin is up on a slightly better mix and continued focus on cost reductions. R&D is up in the quarter on higher aircraft activity. Our total G&A expenses are also up marginally.

We incurred $13 million of restructuring expense in the quarter, mostly in our Aircraft and Space and Defense segments. Our effective tax rate was relatively low at 25.2%, helped by the fact that the majority of the restructuring cost is in high tax jurisdictions. The overall result was net earnings of $40 million and earnings per share of $0.93, and excluding the effects of restructuring, earnings per share was $1.12.

FY14. For the full year, sales were up 1%, or about $40 million. Aircraft sales were up 5%, while sales in Space and Defense, Industrial, and Components were more or less flat. Sales in our Medical Device segment were down 18% from last year.

Net earnings and earnings per share were up over 30% from last year; however, FY13 included a couple of unusual non-cast charges in our Medical segment. Exclusive of these charges, earnings per share in FY13 were $3.26, which compares with earnings per share of $3.52 in FY14, an 8% increase.

The performance of our underlying operations was very comparable between FY13 and FY14, but low-interest costs in our share buyback program in FY14 resulted in higher earnings per share. Free cash flow for the year of $208 million was up 32% from last year.

Before moving to FY15, let me provide a little color on the restructuring charges we took in our fourth quarter. On our July earnings call, we told the market we were anticipating restructuring charges of $5 million, or about $0.07 per share, in our Q4 numbers. At that time, our planned restructuring was confined to our Aircraft segment.

As the fourth quarter unfolded, the outlook for our Space business started to weaken, and in response, we broadened our restructuring actions to include the Space and Defense segment. In total, we incurred $13 million, or $0.19 per share in restructure charges in the quarter. $11 million of this $13 million relates to severance, while $2 million relates to decisions to exit a couple of product guides. I'll provided a bit more detail on those decisions when I discuss the Industrial Systems and Medical Devices results.

Turning to FY15, we are affirming our earnings forecast for FY15 at $4.25 per share. Sales will be up about 1% over FY14, with sales in each segment pretty much in line with this year. In FY15, we're anticipating operating margins of 11.5%; improvements in our Space and Defense and Industrial segments are driving the increase.

Margins in Aircraft and Medical will be about flat with FY14, while margins in our Component segment will be marginally lower. We anticipate another year of healthy free cash flow.

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

Beginning with aircraft, Q4. Sales in the quarter, $283 million, were up 3% from last year. As in past quarters, commercial sales drove the increase, with military sales about flat with last year.

Sales to Airbus were up on the A350 ramp versus sales to Boeing were flat with last year, a combination of higher 787 sales and lower legacy sales. Business jet sales had an usual spike this quarter, as we closed out an old program. Commercial aftermarket sales were up nicely, on continued strong 787 initial provision.

On the military side, sales to foreign militaries were up nicely in the quarter, compensating for lower at F-35 development sales and lower sales on various helicopter programs. Despite the continued pressures on US Defense spending, our military aftermarket was relatively strong, down only slightly from last year.

Aircraft FY14. FY14 was another record sales year for our Aircraft business. Sales topped $1.1 billion, almost evenly split between military and commercial. This compares with almost two-thirds military and only one-third commercial just four years ago.

Over that four-year period, military sales have grown 18%, while commercial sales have more than doubled. Sales growth in FY14 was all on the commercial side, with sales to Boeing and Airbus up over 20%, and commercial aftermarket sales up 16% on 787 initial provisioning. Military sales were down 4% in FY14, most driven by lower F-35 development revenues and reduced work on the B22.

Aircraft FY15, we're keeping our sales forecast for FY15 unchanged from 90 days ago. Total sales of $1.1 billion will be marginally largely lower than FY14. Continued growth in commercial OEM will compensate for slower military sales.

We are anticipating a weaker commercial aftermarket, as the 787 initial provisioning slows down from a banner year in FY14. We believe FY14 was outlier for IP and that FY15, be much slower as our customers adjust their inventory holdings based on their fleet goals.

Aircraft margins. Margins in the quarter were 9.8%. These margins included $5 million in restructuring charges. Margins exclusive of restructuring were 11.7%. Margins for the full year were 10.8% excluding restructuring. These margins are down from 12% in FY13.

Last quarter, we explained the shift in out of our aircraft margins. Let me remind you of the three elements which have impacted the margins in FY14 and which we continue next year.

First, our R&D costs are running ahead of what we had planned 12 months ago, driven by the A350 certification process and the accelerated ramp-up on the Embraer E2 program. Second, margins in our military business are coming under increased pressure domestically, and were seeing a less favorable mix, with slower sales on foreign military platforms. Finally, the production ramp-up on new commercial programs is proving more expensive than we had into expected.

We are in the early stages of building our commercial portfolio was significant OEM sales on new platforms and the aftermarket less than one-quarter of our sales. As this book of business matures, the margins will also improve. Looking to FY15, the margin headwinds will continue to weigh on our performance; therefore, we are moderating our margin forecast for FY15 to 10.5%, more or less in line with our FY14 performance.

Turning now to Space and Defense, Q4. Sales in the quarter were down 6% from last year. The weakness was all in the satellite market, where we saw a slowdown in activity across our components, engines, and avionics businesses. Our satellite business is going through a cyclical downturn at the moment, which we believe will extend into 2015.

Sales in our space business are subject to two cyclical effects: first, the sales mix between development and production contracts, and second, the success of our customers in winning new programs. We've seen these cycles in the past and we are now adjusting our cost structure going forward in light of the lower sales outlook. On a positive note, sales in the defense market were up nicely in the quarter, driven by higher volumes on our missile programs.

Space and Defense FY14. Total sales in FY14 or $395 million were flat with last year. Sales were flat in both the space and defense markets.

In the space market, higher sales from NASA compensated for lower satellite sales. And in the defense market, higher missile and security sales compensated for lower sales in military vehicles.

FY15. Given the sales weakness we have seen in the space market over the last few quarters, we're moderating our forecast for FY15 by $15 million. The reduction is about one-half in the satellite market and the other one-half in the launch vehicle and NASA market.

We are keeping our defense forecast unchanged from 90 days ago. The result is total sales for FY15 of $403 million, up very slightly from this year. Space sales will be lower, but we're anticipating higher defense sales on strength in the missiles markets, as well as improving sales on foreign military vehicle programs.

Space and Defense margins. Margins in the quarter were a very disappointing 60 basis points. Exclusive of restructuring, margins were 6.2%. We had been anticipating higher sales in the quarter and significantly better margins.

The sales shortfall relative to our forecast from 90 days ago was across all our markets. Anticipated bookings on various programs did not materialize. The lower sales drove the lower margins.

We had been forecasting an improving sales picture for several quarters, but we've now concluded that we need to adjust our cost structure downward to reflect the actual sales level we're seeing each quarter. As a result, we took a restructuring charge of $5 million in the quarter. We believe this lower cost structure will enable us to meet the operating profit charge that we set 90 days ago for FY15 of $43 million to yield an operating margin of 10.7%.

Turning now to Industrial Systems, sales in the fourth quarter of $148 million were down 3% from last year. Wind energy sales were up nicely in the quarter, with stronger sales in both China and Brazil. Sales to our flight simulation customers were 22% lower in the quarter, as these customers continue to adjust their inventory levels. We believe we are nearing the end of this inventory adjustments phase and have new orders in-house to support our forecast of higher sales to these customers in FY15.

Industrial automation sales were flat from last year. For the full year, sales of $591 million were flat with FY13, although there was a slight change in the mix.

The story for the year is similar to the story of the quarter. Wind energy sales were up, with stronger sales in China and Brazil. Industrial Automation sales were up, as our European business improved. And on the downside, sales in the flight simulation market were lower as our customers worked down the inventory they built up in FY13.

Industrial Systems, FY15. We're adjusting our FY15 sales outlook as the result of the recent strengthening of the US dollar. Much of our industrial sales are in Europe, and the recent run up in the dollar relative to the euro has a negative translation effect of approximately $15 million on our sales outlook for next year.

On a positive note, over the last 90 days, we believe the demand for our products has firmed somewhat. Combining these effects results in an $8 million reduction in our sales outlook for next year. The reduction is all in our industrial automation market. The result is totally Industrial System sales in FY15 of $600 million, up about 2% over this year.

Industrial Systems margins. Margins in the quarter were 9.5%. There were two unusual items, which negatively affected margins.

First, as part of our ongoing portfolio review, we decided to stop our sales activity in the semiconductor market. As a result, we took a non-cash charge in the quarter equivalent to 75 basis points of margin. We entered the semiconductor market back in FY09, but over the last five years the market has not developed as we had anticipated, and with minimum sales, we've decided to focus our attention on more promising areas going forward.

Second, in the quarter, we took a reserve for a quality issue. The issue was associated with one particular application and is limited to a specific customer. This reserve equates to 175 basis points of operating margin.

Exclusive of these unusual items, margins in the quarter were 12%. Margins for the year were 9.8%. These margins also include several one-time charges we made over the course of the year, as we continue to clean up the portfolio product lines.

These charges equated to about 150 basis points of margin headwind. For FY15 we're projecting margins of 12.1%. The improvement over FY14 will be driven by the absence of special charges, and our continuing containment activities.

Turning now to our Components group, sales in the fourth quarter were up 6% from last year. Non-A&D sales were up 8% in the quarter, as shipments into the energy markets continued strong. Sales on the A&D side of the house were also up this quarter.

In the aircraft market, we had some nice international aftermarket orders. On the other hand, component sales for military vehicles were lower in the quarter, a trend we've seen for several years now.

For the full year, Component sales were up 2%. The increase was driven by higher sales in the industrial market as a results of our acquisition of Aspen Motion Technologies halfway through FY13. Higher industrial sales compensated for lower sales across our A&D market, with particular weakness, again, in the military vehicle market.

Over the last four years, our Components group has managed through a significant shift in their sales mix. In FY14, total sales were $425 million, of which only 42% went to the Aerospace and Defense markets. Back in FY10, total sales were $360 million, 63% of which went into the Aerospace and Defense market. So over this four-year period, our A&D sales have declined 21%, while our sales into non-A&D markets have increased 87%.

Looking to FY15, our forecast for FY15 is unchanged from 90 days ago. We are projecting total sales of $440 million next year, a 3% increase over FY14.

In the A&D markets, we believe we see slightly stronger defense sales, as some of our missile programs ramp up, and international sales on military vehicles increase. In the non-A&D market, we anticipate further growth in our general industrial the category, as the US economy continues to improve.

Components margins in the quarter were 16.7%, resulting in full-year margins of 15.3%. For FY15, we're projecting margins of 14.8%, unchanged from 90 days ago.

Now to Medical. Medical Q4. Our Medical segment continues to perform well, despite some significant sales headwinds. Sales in the quarter of $32 million were down $7 million from last year.

Sales of pumps and in our other category were flat with last year, but set sales were up $7 million in the quarter. Last year's fourth quarter included a significant stocking order for [entrance] sets from one of our major distribution partners and that did not repeat this year.

For the year, Medical Devices segment sales were down 18%. One-third of the decline is due to the divesture of the Buffalo Ethos operation, which we completed in the third quarter of FY13. The other two-thirds is primarily due to lower set sales. As mentioned already, FY13 set sales benefited from an unusual stocking order in the fourth quarter, while FY14 sales were lower, as our partner works down its inventory.

Medical FY15. Full-year sales in FY15 are projected to be $120 million, in line with our FY14 sales. We anticipate higher set sales will compensate for lower sales in our other category.

Medical margins. Margins in the quarter were 10.1%, to yield full-year margins of 8.8%. In the quarter, we incurred a $1 million charge related to exiting an old product line. Absent this charge, margins in the quarter were 14.1%.

Given the challenges this business faced during the year, this is an impressive results. For the first half of FY14, the Management team was focused on supporting the divesture process, which distracted from the day-to-day operations. When the divesture did not complete in March 2014 as planned, the second half of the year involved significant reorganizing.

On top of these challenges, sales in the year were down 18% from the FY13, and despite these headwinds, operational performance was over $2 million better in FY14 than FY13. For FY15, we are projecting full-year margins of 8.8%, in line with the FY14 results. We anticipate it will take us another couple of quarters to stabilize this business, in preparation for a return to the market in the second half of FY15.

Summary. With FY14 behind us, we are looking forward to a stronger FY15. We're forecasting full-year sales next year of $2.66 billion, up 1% from FY14.

Commercial aircraft OEM sales will continue to grow nicely next year, up 9% from FY14. However, Aircraft sales in total will be 2% lower on weaker military and commercial aftermarket sales.

We're forecasting 2% to 3% increases in sales in our Space and Defense, Industrial, and Components segments. We think Medical sales will be flat with FY14.

We are projecting net earnings of $180 million and net margins of 6.8%. Earnings of per share of $4.25 will be up 21% over FY14.

We're also forecasting another strong year free cash flow, with conversion rates [yield] over 100%. As usual, we think the year will start out slowly, with earnings in the [first] quarter of $0.85.

As always, our forecast does not include any projection for future acquisitions. FY14 was a quiet year for acquisitions, but we continue to look for adjacent opportunities which meet our strategic and financial goals.

With patience, we believe the right opportunities will come along and our strong financial position will allow us to move quickly. In the meantime, as we continue generate excess cash, we continue our share repurchase program.

Note that our $4.25 outlook for FY15 does not include any impact from additional share repurchases that we might undertake during the coming fiscal year, nor does it include any impact from financing decisions we might make in support of additional repurchases. We will report on these items at the end of our first quarter.

As we look to FY15, our focus remains unchanged. Our goals are growth, margin improvements, and strong cash generation. We continue to invest in R&D to drive long-term organic growth, and will continue to seek adjacent acquisitions.

We continuously review our portfolio of product lines to ensure we are following a strategy, which maximizes long-term value creation and enhances margin performance. We'll promote lean techniques to increase our cash flow and improve our returns and capital. Finally, we'll consider all capital allocation decisions in the light of long-term shareholder returns.

As always, there are both opportunities and risks associate with our FY15 outlook. On the opportunity side, we could see a pick-up in our global industrial markets and the commercial aircraft aftermarket may be stronger than we are forecasting. On the risk side, defense spending remains a concern and meeting our production cost targets on our new commercial aircraft programs will continue to be a major area of focus.

The recent drop in the price of oil could also negatively impact our offshore energy business. The forecast we provided balances these pluses and minuses.

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

Thank you, John and, good morning, everyone. As John has already described, we had an impressive year for cash flow. Our strong fourth quarter resulted in free cash flow for the year of $208 million, or a conversion ratio of 132%. Coming into FY14, we had projected free cash flow of $165 million, assuming about $51 million of pension contributions.

We actually contributed $80 million to our global defined benefit pension plans, as we made discretionary incremental contributions during the year. Despite the higher pension contributions, we ended with free cash flow that was significantly stronger than our original projection. The $200 million of 2014 free cash flow compares with an increase in our net debt in FY14 of $91 million and the difference relates primarily to $266 million of cash used to repurchase Company stock during the year.

In addition to our capital expenditures being lower this year than in recent years, we've also had success managing down our working capital. Working capital, and that's excluding debt and cash, declined as a percentage of sales by 260 basis points in the last 12 months. This equates to more than $60 million of capital that we freed up from our balance sheet.

The improvement is shared between receivables and inventories. For 2015, we are reaffirming our free cash flow forecast at this time of $190 million, which reflects a conversion ratio of 106%.

Our 4 million share repurchase program that we announced in January of this year was completed as of the end of September. During FY14, we repurchased all 4 million shares, representing about 9% of our shares outstanding, at an average per-share price of about $68.

In addition, you remember our Board authorized an additional 5 million share buyback in August of this year. We will report on the progress of that buyback at the end of our first quarter of FY15, and also to reiterate John's previous comment, our projections for 2015 do not include the impact of any further share buyback activity or related financing strategies. We will report them as they occur.

Capital expenditures in the quarter were $21 million, and depreciation and amortization totaled $28 million. For all of 2014, CapEx was $79 million, our lowest level since 2010, while D&A was $109 million. For 2015, we are leaving our CapEx forecast at $100 million, up from 2014 due to increased spending, on the Airbus A350 and Embraer E-Jet programs, to support their production ramp-ups. D&A in 2015 will about $114 million.

Cash contributions to our global defined benefit pension plans totaled $35 million in the quarter, resulting, as I said, in $80 million of contributions for the full year. This compares with $43 million for all of FY13.

In the latter part of 2014, we decided to make discretionary incremental contributions to the US plan because of our strong cash position. And in addition, we made some additional or initial contributions to our trust associated with a German pension obligation, in order to utilize some of our idle offshore cash.

In 2015, we're planning to make contributions into our global defined benefit plans totaling $62 million. Despite these increased contributions to our DB plans over the last couple of years, we've been able to report strong free cash flow results. Global pension expense for our DB plans in 2014 was $36 million compared to $51 million in 2013 and our 2015 global DB plan expense is projected to be about $42 million.

Our effective tax rate in the quarter in the fourth quarter was 25.2% compared with last year's 14.8%. Before the tax effects of last year's goodwill impairment charge, the Q4 FY13 effective tax rate was a more normal 30.2%. So the comparatively low rate in 2014's fourth quarter resulted from the mix of taxable earnings, particularly affected by the larger than previously estimated Q4 restructuring charge, associated with higher tax jurisdictions.

For all 2014, the effective tax rate was 27.7% versus 27% for all of 2013. For 2015, we're forecasting an effective rate of 30%, down slightly from our forecast of 90 days ago.

The increase in our rate from 2014 to 2015 results primarily from a less favorable mix of taxable earnings around the globe. More precisely, we're forecasting our US-based taxable income to be substantially higher in 2015 compared to 2014.

Our financial ratios at the end of the fourth quarter are solid. Even after spending $266 million of cash in 2014 in the share buyback program, our leverage ratio was 1.85 times compared with 1.56 times a year ago. Net debt as a percent of total capitalization was 32.3%, up from 26.4% last year.

With respect to M&A, we've not had anything to report on in the last six quarters; however, as John has noted, we continue to look for strategic opportunities. We consider M&A an important complement to our organic growth objectives and we remain actively looking. Prices are high in some of our markets and deal flow is, on balance, moderate.

In the meantime, our shareholders are benefiting from our strategy to return value by buying back some of our shares. At quarter-end, we had $321 million of unused borrowing capacity on our $1.1 billion revolver that terms out in 2019. We also have an additional $200 million untapped accordion feature with our bank group, that is available for us to exercise at any time.

In summary, we've got 2014 in the record books: sales were $2.65 billion, net earnings were $158 million, margins were 6%, earnings per share were $3.52 after $0.19 per share of restructuring costs, and our free cash flow conversion ratio was 132%. As we look ahead to 2015, we're projecting an increase in revenues of 1%.

Despite this top-line growth challenge, we believe that, with the benefits of the restructuring actions we've just taken, we will see 2015 operating margins increase by 110 basis points, or an improvement of 60 basis points, ignoring restructuring costs. Earnings per share will be $4.25. This will reflect an EPS increase over 2014 of 21%.

Although many of our markets we're in are showing tepid growth or even declining in some cases, such as in defense, we believe the diversity of our portfolio of products, markets, geography, customers, and technical capabilities, positions us well for any recovery that we will see in the markets that we serve. So with that, I'd like to turn you back to John for any questions and, Joshua, if you can help us out, that would be great.

(Operator Instructions)

Cai von Rumohr.

Thank you very much and congratulations on terrific cash flow performance.

Thank you.

As I look at your guide for this year, I see CapEx spiking to $100 million. I see payables that look like you were very generous to your suppliers. Can you comment?

Is there further opportunity? What are you doing on inventory and receivables and where could that cash flow number maybe go if things work out a little bit better?

Cai, This is Don, and of course, we're hopeful that, that is conservative estimate. We decided that based on what we are seeing right out, there wasn't enough indication for us to change what we had already put out in The Street three months ago. So the $190 million of free cash flow for 2015, seems like it's a reasonable place to start and we are coming off of a real solid year.

You've picked on a couple of things that, yes, maybe our CapEx may be conservative; however, we do have those programs that I referenced in the remarks, A350 and Embraer E-Jets that do require some support with respect to capital spending. We're trying to be, like I said, conservative. We are also continuing to work hard to perpetuate the benefits that we just realized in 2014 into 2015 as it relates to the rest of working capital.

Inventories and receivables, inventories in particular, there are continuing to be a lot of areas that we work on and we're hopeful that we'll see some continued improvement there. But we're thinking right now, setting expectations at $190 million, just a little bit over 100% conversion, is the responsible thing to do.

Okay. Terrific. And then maybe if we could go to Aircraft and R&D. Maybe give us some color in terms of where was the Aircraft R&D in 2014? Where is it likely to go in 2015 and total R&D in 2015?

The total Company, Cai, the R&D in 2014 was just shy of $140 million and we think that will drop to about $135 million next year, so call it [up], $5 million, 3% to 4%. And for the Aircraft R&D, that ended up the year, FY14, at about $90 million and we're thinking that will be down a little bit, about $85 million next year. But that's essentially the difference. The rest of the operations will be more or less in line with what happened in FY14.

And maybe update us where you are on the 777X decision and how you are doing on A350 and E-2?

We're doing very well on the A350. As you know, that airplane is flying and we're looking forward to the initial deliveries on that. So that's all going very well.

E-Jet is still early in the program. We're working very closely with our customer Embraer on that and that's going pretty well. And then on the 777X, the competitions our type of products have not yet been announced, so it's a little bit premature for me to say how that will play out, so it's still, I would say, that's not yet been decided.

Okay. And then the last one, maybe update us on your progress in terms of getting your suppliers on stream in Asia? Thanks.

I'd say, that's -- as we described in the past, Cai, that's a long-term, multi-year process to build an Asian supply chain that we started I would say four, five, six years ago, and it's a continuing process. I'd say, quarter-to-quarter, there is incremental development, but it's not something that I would say there's a large step-change. It's something that we're going to continue as we get into the 350 production ramp and the [E2] ramp.

That's -- of course, we've been manufacturing ourselves in the Philippines since 1984. In terms of the actual manufacturing side, we have a very well-established facility there. All of the 87 product works is essentially coming out there, and we're in the process of transferring the 350 products into that facility.

So what we do is we do the initial units here in the US in order to make sure that it's close to the engineers and any bugs are worked out, and then when it's stable, we move it over to the Philippines. So that ramp between -- from [western] to the Asian supply chain are what I call it, the lower-cost supply chain continues, but I would say, it's a gradual process over a multi-year span of time, rather than a specific quarter-to-quarter that we would see major changes.

Thank you very much.

Thank you.

Michael Ciarmoli.

Good morning, Michael.

Good morning, guys. Thanks for taking the questions. Maybe, Don or John, if you could maybe characterize what some of the real-time trends are looking like in your European Industrial automation businesses. How confident are you in -- you talked about the risk in offshore with oil, but we keep hearing Europe starting to weaken a little bit. Maybe if you could just talk about some of the real-time order trends, what you're seeing from your European-related revenues?

If I look at that Industrial automation piece of business, quarter-over-quarter, it's flat $75 million Q4 for 2012, 2013 to 2014. If I look for the year, it's up from $293 million in 2013 to $307 million, call that a 4%, 5% increase, but next year we're forecasting it back to $300 million.

So it's a business I would describe as going sideways. Now of course, when you dig into a $300 million, there's lots of different product lines and some are doing a little bit better and some are doing a little bit worse, but it's essentially been a fairly stable business.

It's also a business that, typically, it's on a lead time of six, eight weeks. So you don't have a very large backlog like you do in some of the Aerospace businesses, where you can say, we've got the next 6 or 12 months worth of backlog and we are seeing how that is fluctuating. It's really based on orders we take today, shipping them in the next month or two.

Therefore, you can assume that the order trends lines up very closely with the sales trends, just time-shifted by, as I say, six to eight weeks. So there is, I would, say the order trend is supporting that flat business outlook as we go forward. There is no significant change in it one way or the other from what we saw in 2013, 2014, and now what we're projecting into 2015, Michael.

Okay. And maybe just your updated thoughts on Medical. It's now looking like just from a organic improvement expectation and performance, Medical has probably got the best margin potential in the portfolio. Is there any updated dialogue or internal discussion about how you're thinking about the Medical segment going forward?

Of course, there's ongoing dialogue about all of these things. Right now, our plan remains the same as what we said 12 months ago, which was we don't think that the medical pump business is a real long-term strategic fit for the Company.

It really has to do with, it's an FDA type of products; it's a sale directly to an end user, so it's almost B-to-C, although you go through medical providers. It is a consumer-based product and that's different from the rest of our Business and that's one of the areas that we struggled with as we went through it.

Within the Medical segment, part of what we said when the deal didn't go through in March, is that we learned that there are, perhaps, four different pieces to that business. When we were looking for buyers, any one particular buyer was more interested than one piece than the other, but we had started out with a view to let's just well it all and let the buyer decide how he wants to split up. When the deal fell through, we concluded, maybe we need to be able to separate it out, so we could market the individual pieces differently.

Within the portfolio, for instance, there are some pieces, component-type businesses that we -- might be a business that we would say, well maybe that fits a little bit more with our traditional businesses, but the pump business, which is the vast majority it, at the moment our thinking remains the same. It's an FDA type business.

It's a business that goes into -- the sales are driven by medical reimbursement rates and stuff. It's not something we have a lot of expertise in and our intention right now is still clean up the organizational structure and make sure we can carve it up in a way that is sensible for the market. We think that's probably going to take us another two to three quarters, and then go back out into the market and look.

If we go and look and you do an analysis that says, boy, if we keep it, we can make -- it's a lot more value than if we sell it for whatever reason, the market demand is not there, we would retain the prerogative to say, well, maybe it's a little bit different than we thought, and geez, we've learned a lot, and maybe it's going well. But right now were still on that same path. Just because it's doing well, to suddenly assume that we're strategically -- we've learned an awful lot and now we're really good in the medical pump business, is probably a dangerous thing to do, because who knows, then it starts to go badly.

Sounds good.

The other thing is, the statistics say that if you sell businesses on the up, most people sell businesses when they're down, when it's real tough to sell, if you can sell a business on the up, perhaps you capture more value.

Got it. Then maybe just a last one. I'm just trying to get understanding of, you guys have been doing restructuring. It seems to be more reactionary in nature when the markets start to go back.

Maybe if you can just talk about broader process improvements you've got, irregardless or irrespective of what's happening in the end markets. I know you've got the ERP system. Is there anything else you looking at Enterprise-wide to boost margins outside of the markets change and we need to right-size the Business?

That is, Michael, across every piece of business that we have, there is a focus on looking for opportunities to improve the margins. It's a broad strategy in terms of lean implementation, where we're working across all of the operations to look at how we can accelerate our lean activities because we've been doing lean in various forms for the last 20 years, but really start to accelerate that and start to see some improvements there.

But it's also -- it's not just in the operational side of the Business. It's also very much on the administrative side of the business and let me give you a simple example. We look at the administrative functions, the HR function, the finance function, the IT functions across all of the Business and say, where are the opportunities for our process improvements there?

And again, let me just give you a very simple anecdotal one. About a year or two ago, we just looked at life insurance. We have various life insurance policies for folks around the Company and we discovered that we had seven different life insurance providers.

Most people don't know who the heck their life insurance provider is, so we consolidated those into one life insurance provider, and that saved $1 million. Exactly the same insurance coverage and totally independent from what any particular person that is covered would care about.

So that's one of the areas that we've -- again, just a simple anecdotal one that I would describe. But there's across all of the administrative functions, as well as in the operational side, there are ongoing efforts to improve the underlying operating performance of the Business.

Okay. And then maybe just one last one, more maybe housekeeping. You guys have content on Orbital Sciences' Antares rocket. I'm assuming it's not, given your broad portfolio, but is that going to create a bit of a headwind next year if we see delays in future launches of that rocket?

We do have content on the Antares, but if our forecast for all of next year, it's only in the $2 million to $3 million range, is the total amount that we've forecast, as where we are in the program. So could that get delayed, or -- possibly, but it's not a big number.

Yes, I knew it was small. Okay. Thanks. That's perfect, guys. Thank you.

Thank you.

Tyler Hojo.

Good morning. Maybe to further the dialogue on the restructuring front. Can you maybe give us an update in regards to what the expectations are, as it pertains to guidance for 2015?

Is there anything anticipated in the guidance? And also maybe you could just touch on ERP system implementation and an update there?

So let me see if I can understand. When you say is there anything anticipated in the guidance. I'm not sure I understand that question.

Is there any restructuring expense assumed in your guidance at this point for FY15?

There is no further restructuring expense of any significance in our FY15 guidance. So no.

Okay. And just what about the ERP implementation. How is that tracking?

We started -- we engaged in that about a year ago and I would say we're still in that early planning phase. We're working through that.

Our objective in the whole ERP implementation is to make it totally transparent to the market. In other words, there's no time driver that says we've got a system that's going to stop working in two or three or four years time.

Therefore, our approach is to move at a pace that allows us to implement this without having any major hiccup in any one particular quarter or any one particular year where we describe that to market. So it's moving forward, but it's moving forward, I would say, at a pace that, it's not a break-neck pace, it's not going to be all implemented in the next two to three years, it's probably a six-, seven-year project in total across the Company and various parts of the Company will do it at different time periods.

So it continues. It will be long-term, a significant advantage for us. But it is something, it's a little bit like changing your car. You get to the point where you've got an old car and it keeps going, but at some stage you say, I got to do it. We're in that stage.

But as I say, it's not something that's going to have a dramatic impact, positive or negative, we hope and that's the approach that we're taking.

Okay. Thanks for that. Maybe just a follow-up to the 777X question that you were asked. I totally get that the decision hasn't been made. When you last spoke with us, about three months ago, you had indicated that your R&D guidance for 2015 had a placeholder in there for 777X spending. Is that still in there?

I don't remember that we said that specifically. Our R&D guidance for next year includes various -- includes the major programs, of course, the A350 and the E-Jet, those of the vast majority of it on the Aircraft side. And that there is funding available for other programs.

Should we win any position on the 777X, the spending in the first year, given that there hasn't yet been any announcements, it'll be a process that will probably take another while. So now you're only talking about maybe two to three quarters worth of spending.

Typically in the initial phases, it's a very slow ramp. So I don't anticipate that, even if we were to win positions on the 777X, that it would have any significant impact on the R&D spend next year.

Okay. Got it. Thanks for that. And then maybe just lastly, as it pertains to your extended repurchase authorization in terms of your common stock. I understand nothing incremental is assumed in the guidance, but since that announcement has been made, in regards to the additional 4 million buyback, have you been active in the market, buying back your stock?

This is Don, Tyler, thanks for the question. We are doing our program on a discretionary, opportunistic way -- or in a discretionary, opportunistic way. We have communicated that through September, we've completed the 4 million share buyback.

For us to comment on our activities in the market are not in the market, isn't seemingly appropriate at this time, so we prefer to punt that to the end of next quarter. We'll report on what we've done.

Part of the reason also that we've decided not to provide any projections on what might happen with respect to buyback, there's also, as John and I both commented, the aspect of -- so are there any financing aspects that might need to be taken into consideration, as well. So for us to try to walk you through all these [machinations] of what might happen in terms of a pace or a magnitude and how might it be financed, seems like it would be very difficult to provide some guidance, so we're thinking the best thing to do is to say it does not include either aspect of that, either the continued purchase activity or any financing related to that. Does that help?

Okay, that's fair. Yes. Helps enough. Maybe just lastly, if this was in the supplemental and I missed it, I apologize, but typically, you give a guidance by quarter, in terms of how you think the year is going to stack out. Would you be willing to provide that?

What we said in the text is that we think the first quarter will be a slow start. We typically see a slower start and then acceleration through the year. And we are putting out $0.85 is what we think that first quarter will be. We're not providing guidance on the subsequent quarters yet. We'll do that as the year unfolds.

Okay, great. That's all I had. I appreciate it.

Thank you.

J.B. Groh.

Hey, guys.

Good morning, J.B.

Hey, how are you doing? Thanks for taking my call. Just looking at your forecast, the detail in the supplemental there. You talk about commercial aftermarket being down about 15% in 2015. When I look at that, I remember that we had a lot of initial positioning in 2014, but it's also lower than 2013, so is there something going in on the market there or is this just a lack of initial provisioning on new programs?

It is all initial provisioning. If you strip out initial provisioning from 2012, 2013, 2014, and 2015, the rest of the aftermarket is flat. The difference is essentially all in the initial provisioning. This year, we closed out with 87 initial provisioning of $30 million and we're forecasting it to be closer to $10 million and that is the difference.

Okay. So ex-provisioning, you said flat forecast.

Ex-provisioning is $100 million run rate, and then provisioning is essentially layered on top of that. That's essentially the way the numbers play out.

And then a conceptual question. Obviously, with 787 suppliers, got a lot more responsibility and risk potential. In the way that you are working with the big OEMs now, have you seen a shift there at all, in terms of what your scope of work is? And does that have any implications for your R&D spend?

I would say that is a story that has played out, really over the last decade, where the 87, we won that program back in 2004 and that was a dramatic shift for Boeing, as you know, from parceling out, particularly for our stuff, individual actuators, and saying that we want one guy to build the flight control system and that model, then, carried over to the A350 and the Embraer air program. So we have seen over the last decade, a significant increase in content on each of those major platforms, and of course, the associated contractual elements that go with it.

So there is nothing new in that. We've been in that situation, as I say, for last decade. If anything, looking to the future, and you can read this as well, Boeing in particular, perhaps felt that they overextended, in terms of providing responsibility to the suppliers on the 87 and that, that was one of the challenges managing the supply chain and that perhaps, in future airplanes, the pendulum may swing back somewhere closer to the middle.

I don't know, but -- so there may be a little bit of a shift in the other direction, as we look to future generation of airplanes, as Boeing and Airbus do the analysis of what worked and what didn't work so well on the last airplane. So I don't -- there is not any significant change. If you look at 777X, it's not a significant change, I would say, in the overall outlook for the kind of the business we do.

Okay. So it seems like they are wanting to take a little bit less risk, but that doesn't necessarily mean that -- like you said, the pendulum hasn't shifted that much. Okay. That's helpful. Thank you.

You're welcome.

Steven Cahall.

Good morning. Maybe the first one, just on Aircraft controls. The development in there, as you talked about last quarter, ended up coming in a bit higher for the year, and we took margins down as result.

As you look into FY15 and the development, if we compared that to 2014, is there more equal or less risk as we work through the year that we may have to rebase our expectations, in terms of development cost as you look out 12 months?

That's a really good question, Steven. You're right. When we went into 2014, we were anticipating that the development costs would be lower, and as we went through the year, they increased. They were two reason for that. One was the reason that we -- one was the 350. There was more effort on getting certification on that than we had anticipated.

The other one was that the Embraer E-Jet program accelerated quicker than we had anticipated. So that one we might -- the E-Jet acceleration would have been tough to forecast.

The experience on the 350, perhaps we could have known better, but the 350, like every major airplanes is a different architecture and a different technology. It's an EBHA technology versus a 5,000 psi, for instance, on an 87.

You learn every time. The first on you go through it, somebody once said, that a Fed governor said, when you've seen one recession, you've seen one recession. To some extent with the types of technologies that we have, clearly there is a learning curve, but each one is different, and therefore, there is always some elements of uncertainty associated with it.

It did -- it ticked up significantly in 2014. We hope that we've learned from that experience and therefore, as we move into 2015, that we've got a -- we've baked in that kind of uncertainty. I would offer two things. The A350 is getting much, much closer to the end, so hopefully we would see that, that would close out and that our estimate for that is good.

Having said that, again, if there's ever a hiccup or something, you end up having to spend a little bit more. The E-Jet, the technology on the E-Jet is not as difficult as the technology on the 87 or the 350.

It's a little bit more of a traditional system, so I would say the risks associated with that is lower than what those two other major programs. So we've done the very best estimate that we can. We hope that the number is what the number is.

However, we will spend what it takes to make sure we satisfy our customer requirements and we meet these programs. So if there's an issue and we have to spend more, we will spend more, and we will report to the market that margins were lower, but that's the absolute necessary thing to do with these types of programs, to be in this business in the long-term. So we won't compromise what needs to be done in order to meet our customer's schedule and the technology and make sure it's all done properly.

That's helpful. Then just a last one. If I just look at some of your sales guidance in the supplemental data for next year, the F-35 is on a lower run rate of both 2014 and 2013. Is that just that you've been shipping ahead a bit of the OEM? And then also on wind energy, which seems like it's been improving a little bit over the last couple of quarters, you've got that down next year, is that conservatism and just short-cycle visibility or anything else we should read into that? Thanks.

Okay. Let me do the F-35. The F-35 is all essentially a function of the development contract. If you go back to 2013, the development contract was over $20 million, this year it was closer to $10 million, the next year it's under $5 million. That is -- the production has gone up a little bit [68, 75 to 73] next year.

The production has been fairly flat 2013, 2014, and 2015. They are not really ramping yet, the quantities, but it's the development contract has come down, so that's the effect there.

Now the other question, the wind energy stuff. Wind got better this year. We spent a long time explaining why wind kept getting worse, so I'm happy that it got better this year. The improvement was in -- a little bit in China, and in particular, in Brazil where we won some nice positions and we talked a little bit about that over the last couple of quarters.

And as we look out to next year, we're forecasting wind pretty much flat with this year. We think there will be probably a little bit of pick-up in the Brazilian business that we are in and then Europe, down a little bit. Now keep in mind, there is a little bit of currency effect there.

And the Pacific, China, down a little bit. We're cautious in China. The behavior of the customers there is less predictable than, I would say, in the US or the European markets and therefore, maybe that's conservative, but, as I say, we spent a lot of time apologizing that wind came in lower than we thought so hopefully now we can meet the number, maybe do a little bit better.

Great. Thank you.

You're welcome.

There are no further questions at this time, sir.

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

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