Woodward Inc (WWD) 2013 Q3 法說會逐字稿

Thank you for standing by. Welcome to the Woodward third quarter fiscal 2013 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you will be invited to participate in a question-and-answer session.

Joining us today from the Company are Mr. Tom Gendron, Chairman and Chief Executive Officer; and Mr. Bob Weber, Vice Chairman, Chief Financial Officer and Treasurer. I would now like to turn the call over to Mr. Weber. Please begin.

Thank you, Operator. We would like to welcome all of you to Woodward's third quarter fiscal year 2013 earnings call. In a minute, I'll cover the financial highlights of our third quarter, and Tom will comment on our strategies and markets. I will then comment on today's earnings release, and at end of our presentation we will take questions.

For those who have not seen today's earnings release, you can find it on our website, at Woodward.com. As noted in today's earnings release, we have included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available through July 30, 2013. The phone number for the audio replay is on the press release announcing this call and will be repeated by the operator at the end of the call. In addition, a replay of this call will be accessible on our website for 14 days.

Before we begin, I would like to summarize our cautionary statement, as shown on slide 3. In the course of this call when we present information and answer questions, any statements we make other than actual results or business facts may contain forward-looking statements. Such statements involve risks and uncertainties, and actual results may differ materially from those we currently anticipate. Factors that might cause a material difference include, but are not limited to, future sales, earnings, business performance and economic conditions that would impact demand in the aerospace and energy markets. We caution investors not to place undue reliance on these forward-looking statements as predictive of future results. In addition, the Company disclaims any obligation to update the forward-looking statements made herein. For more information on risks and uncertainties facing Woodward, we encourage you to consult the earnings release and our public filings with the Securities and Exchange Commission, including our 10-K for fiscal 2012 and 10-Q for the quarter ended June 30, 2013, which we expect to file shortly.

Segment earnings, EBIT, EBITDA and free cash flow are non-US GAAP operating measures that we use in the earnings release and during this call. Additionally, adjusted earnings per share, adjusted EBIT, adjusted segment net sales and adjusted segment earnings are also financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America, or US GAAP. A description of these measures and a reconciliation of each to the most comparable US GAAP measure is included in the appendix to our slide presentation and in our earnings release and related schedules, all of which are posted on our website. Management uses this information in monitoring and evaluating the ongoing performance of Woodward and each business segment.

Turning to the quarter, net sales for the third quarter of 2013 were $484 million, including the Duarte business acquisition, compared to $460 million in the third quarter of last year, an increase of 5%. Earnings per share were $0.34 in the third quarter of 2013, including specific charges totaling $0.17 related to alignment of the renewable power business. Excluding these charges, adjusted earnings per share were $0.51 in this quarter, compared to $0.40 as reported in the third quarter of last year. Total EBIT for the quarter was $42 million, including the specific charges totaling $16 million related to the renewable power business. Excluding these charges, adjusted EBIT was $58 million, compared to $44 million in the third quarter of the prior year, an increase of 31%. Free cash flow year-to-date increased substantially, to $55 million, from $19 million last year. Now I will turn the call over to Tom to comment on our results, strategies and markets.

Thank you, Bob, and welcome to those joining us today.

Let me first address our renewable power business. The on-again, off-again production tax credit in the US, slowness in the offshore wind market, and a tough solar market have destabilized the renewables industry. This instability has put substantial financial stress on those in the industry, including some of our customers. We now estimate that our renewable power business will see a decline from 2012 of approximately $100 million in revenue, or about 50% across all market segments. The speed and size of this sales decline was too fast and too much to absorb through our normal operating activities. As a result, we have made a decision to align our wind business with this current environment which, among other things, means that we will no longer pursue expanding our wind business in China.

Additionally, our acquisition of IBS, although focused on obtaining technology for our wind turbine converters, also included a small solar inverter business. Solar market activity has been also been subjected to significant uncertainty and downward pressure. We've made the decision to cease all further investment in our solar business. We believe 2013 to be the bottom of the trough for the wind industry and that these decisions, although difficult, will position our wind turbine converter business for future profitable growth. With that said, I would like to keep this in perspective. Although our renewable power business sales this year are expected to be about 5% of total Woodward sales, we are the largest independent wind converter provider in the world. We will continue to support our existing customers and strategically pursue future opportunities with wind turbine manufacturers.

Turning to the operating performance of the other 95% of the Company, both our Aerospace and Energy segments are performing well, despite a challenging global economy. Financial results and operating performance improved this quarter. Our investments in manufacturing capabilities and lean process improvements have begun to improve segment margins. Initiatives such as enhanced process automation, design for manufacturability, improved partnering with our customers and supply chain, and many other lean activities aimed at eliminating waste and improving profitability are yielding positive results.

Turning to Aerospace, commercial Aerospace demand continues to be strong, as evidenced by production rates and order backlogs at Boeing and Airbus, reflecting the need for more fuel-efficient aircraft. Although passenger miles continue to increase at healthy rates, which should result in growing after market business, commercial after market sales have been relatively flat this year, but were up in the quarter compared to a week comparable in the same quarter of 2012. The market for large business jets continues to show signs of growth, while smaller business jets remain depressed. Regional jets remain soft, but order books have started to fill in.

Rotorcraft remains a solid growth driver within our Aerospace business. Commercial Rotorcraft experienced strong build rates on new and existing platforms, while military Rotorcraft sales were also strong this quarter. Despite government budget uncertainty, including sequestration, military after market remains solid sequentially and compared to the prior year, while military OEM is showing signs of softness. The integration of our Duarte business is on track, both operationally and financially. Performance metrics are improving, and technology and integration has already begun. The acquisition continues to enhance our relationships with major OEMs.

Now turning to our Energy markets. The demand for clean, low-cost natural gas continues to drive growth of compressed natural gas systems. Growth in oil and gas infrastructure projects are positively impacting the aero derivative gas turbine market. Other markets within our Energy segment are feeling the effects of a sluggish global economy. Growth in shipbuilding, petrochemical plants and heavy frame turbines, where long lead times and significant investments are required, has not materialized as anticipated, due to continuing economic uncertainty.

In summary, while our performance this quarter was impacted by the difficulties in the renewable power industry, we believe our renewable power business will be aligned to current and expected future conditions. Without exception, for the other 95% of the Company, we have delivered improved profitability through market share gains and lean initiatives in a challenging economy. We're confident in our growth strategies and we'll continue investing prudently to meet the future customer commitments and opportunities. Now let me turn it back to Bob to cover the financials.

Thank you, Tom. This quarter was marked by improved profitability in the majority of our businesses offset by the specific charges and an operating loss related to our renewable power business. Improved profitability and challenging economic times is a key focal point of our overall strategy. Our Aerospace segment sales for the third quarter of 2013 were favorably impacted by strong military after market sales. Organic sales increased 11% in the third quarter of 2013 compared to the prior year. Total Aerospace earnings as a percent of segment sales were 14% this quarter, compared to 10% in the same quarter a year ago.

Segment earnings this quarter reflected the improved operating performance in our motion control business, as well as a rebound from the system issues incurred in last year's third quarter. Earnings were positively impacted by the higher sales volumes and lower investments in research and development in the quarter. We continue to anticipate ongoing variability in research and development as programs continue. Aerospace organic segment earnings as a percent of organic sales were approximately 16% this quarter and year-to-date. The Duarte business was slightly accretive to earnings this quarter.

In our Energy segment, we saw a sales decrease in renewable power systems of approximately $35 million in the quarter and approximately $80 million year-to-date compared to the same periods in the prior year. Energy earnings as a percent of segment sales were 6% this quarter, after the specific charges related to the renewable power business. As Tom mentioned earlier, the renewable power industry is extremely challenging. As a result of the rapidly declining sales and resulting deterioration in operating performance, we have recorded specific charges totaling $15.7 million to appropriately align the business through the revaluation of its assets and liabilities, including workforce management actions. Our renewable power business is included in our Energy segment, and as such, all charges are reflected in those results. In addition to the specific charges, the sales decline has resulted in lost margins and negative leverage in that business.

To better understand the performance of our Energy segment, the presentation materials include a schedule showing comparative results for both the quarter and year-to-date for both 2013 and 2012, excluding the effect of the specific charges and operating results related to the renewable power business. Excluding the specific charges in this quarter and the operating results of our renewable power business from this quarter and the same quarter the prior year, Energy adjusted segment earnings as a percent of adjusted segment sales would have been 17% this quarter, compared to 14% for the prior-year quarter. Segment earnings, excluding the renewable power business, were favorably impacted by product mix and operational improvements.

Now I would like to focus on certain specific elements of our consolidated financial statements. Gross margin, defined as net sales less cost of goods sold, was 27.8% of sales in the third quarter of 2013, compared to 28.4% for the third quarter of 2012. Gross margin decreased primarily due to lower wind turbine converter sales and approximately $8 million of the specific charges recorded in cost of goods sold, partially offset by increased Aerospace sales, favorable product mix and improved operational performance. Research and development costs decreased primarily due to the completion of certain programs and lower related material purchases. Selling, general and administrative expenses were $47 million, or 9.7% of net sales this quarter, compared to $40 million, or 8.6% of net sales in the same period of 2012, primarily due to the specific charges related to the renewable power business.

Excluding the specific charges, selling, general and administrative expenses would have been consistent with the same quarter of the prior year. Our effective tax rate for the third quarter pf 2013 was 33.3%, compared to 24.9% for the same quarter last year. The increase in income tax rate was primarily due to the unfavorable impact of foreign tax rates in this quarter and favorable adjustments recorded in the third quarter of 2012 related to prior years. We expect the full-year tax rate to be approximately 27%.

Looking at the balance sheet and cash flows, free cash flow for the first nine months of 2013 was $55 million, an increase from the prior year's free cash flow of $19 million for the same period. We generated $133 million of cash flow from operations for the first nine months of 2013, compared to $64 million for the prior year, primarily the result of reduced receivables and lower inventory requirements. Capital expenditures increased to $79 million for the first nine months of 2013, compared to $44 million for the prior year. We continue to believe capital expenditures for the full year will be about $150 million. We still expect full-year 2013 free cash flow to be approximately $75 million. We issued a press release earlier in the month announcing a new $600 million revolving credit agreement, increasing available credit from $400 million in the previous revolver.

Lastly, let me turn to our outlook. We now believe fiscal 2013 sales will be between $1.9 billion and $1.95 billion, and reported earnings per share will be between $2.05 and $2.10 for fiscal 2013, after reflecting the $0.17 per share impact of the specific charges related to the renewable power business.

This concludes our comments on the business and results for the third quarter of fiscal 2013 and our full-year 2013 outlook. Operator, we are now ready to open the call to questions.

Thank you. The question-and-answer session will begin at this time.

(Operator Instructions)

Julie Stewart, Credit Suisse.

Good evening.

Good evening, Julie.

Hello, Julie.

On the guidance, I believe in the past you've generally tightened to a single point instead of a range, with the third quarter. So with only one quarter left, what's the variability in the range?

We've kind of done all of the above. We've had point solutions and we've had ranges and so on. So nothing intended by our choice this time. The variability will largely be related to sales, so the revenue projection. So there's still been an incredible amount of uncertainty. We've talked about seeing some things that have shown positive signs, and some of them materialized and some of them haven't. So it's a really a revenue focus.

Okay. And then just a second question on the underlying margins in Energy were clearly very good on mix. What should we expect in the fourth quarter, and then how do we think about where margins will trend next year after the realignment?

Yes. They did improve substantially for the business, excluding the renewable power business. We believe renewable power will continue to be tough next year, so at this point very difficult to -- and we'll talk more in November. But the markets that we see, some have been showing some nice increases, some have been showing no increase from their very depressed levels. So at this point, too early to talk much about 2014, but renewables will continue to be tough.

Okay. Thank you very much.

Pete Skibitski, Drexel Hamilton.

Hello, guys. Just a broad thought on renewables margin to follow-up. We shouldn't factor in necessarily a zero margin rate for renewables as part of Energy, but safe to say it should be below the balance of the Energy segment going forward for a while until volumes maybe meaningfully improve?

I think that's correct. We have volumes. We have to complete the restructuring activities that we are undertaking. We believe the Energy business without renewables, you could see, is we think the average rate for this year will continue through this year and improve. But we have headwind as we roll into '14 from renewables, though we will be trying to move quickly to improve upon that. But it does take time for some of these businesses to get restructured.

Okay. And you're basically -- I guess we've seen weakness in the rest of Energy as well, from a volume standpoint, except for natural gas infrastructure. Is that fair?

Yes. What we would look -- and I'm sure you've seen some of our customers' announcements over the last 10 days. The natural -- compressed natural gas has been strong. Some of the pipeline work, if you want to say in the oil and gas side, has been strong. Some of the power generation's down. You see mining is really taking a huge hit. Ships are down. So we have some things up, some down. Overall, as we said, the sales were basically flat, excluding renewables. It was flat year-over-year. We see some signs of order improvement, but we think going into '14 it will still be challenging. We're continuing to work on margin enhancements, to next year.

Great. I'll get back in queue. Thanks, guys.

Tyler Hojo, Sidoti & Company.

Hello. Good evening, guys.

Hello, Tyler.

Hello, Tyler.

I'm just kind of curious, in regards to the restructuring initiatives that are being implemented within the renewables business, what's the right way to think about where this business is currently sized to be breakeven from a revenue standpoint? I guess we're looking at about a $100 million business today.

Yes. I would say, on a sales basis we'd want to see more in the above $120 million in sales. We're going to work on that breakeven point, but I think it would need to be there. You could see, as we were anticipating the sales -- we knew there was a bubble in 2012, and we were calling that out at $40 million, $50 million bubble. Obviously, at $100 million reduction, that was not in our forecast or plans that we would see that much headwind. So it went below breakeven. You can see we're losing money. We've probably tried to provide some highlights, if you look at some of the pro forma charts that we put out on the presentation. So once we get to that point, we start moving towards breakeven and profitability, then we're going to continue to work on improving those numbers.

Okay. And I think you mentioned in the prepared remarks, Tom, that you expected to see the wind inverter business recover next year. I'm assuming that you would expect to be north of $120 million. Is that fair?

Right now, we're not putting up -- what we're seeing is we truly believe the trough, bottom of the trough, was in this third quarter. But we do see some of the orders filling in. It's not skyrocketing back, but we do see and believe we've hit the bottom of the trough. And so we start to see orders picking up ever so slightly in the fourth quarter, moving into next year. But we'll provide more updates on that in the next conversation we have with you, or the next earnings call, when we provide details of the forecast. But right now, looks like some orders are filling in, but not at a rapid rate.

Got it. Okay. And just one more for me, if I may, just to follow on Julie's question in regards to your guidance. It looks like you've taken down the high end of your guidance by about $50 million. And if my notes are correct, at least, it looks like you're about $20 million more pessimistic in regards to your wind inverter outlook. So where's the other $30 million coming from, just from a market standpoint?

More on the remainder of the Energy business. We still see the heavy frame turbines -- we were expecting some improvement there. Mining is really just tanked. And we were thinking we'd start seeing some improvement in shipbuilding. We are hoping to start seeing that late '14 into '15. But some things are a little slower than our original forecast, and with the renewable uncertainty, we did take the numbers down, as you highlighted.

Okay. That makes sense. And I take it, at some point you're going to update your long-term sales and operating margin goals? Is it safe to assume those are in flux right now?

Well, what you have -- and we will update -- so if you come to our investor day in December, we will provide updates on all of that. There's an interesting dynamic happening. When we start looking at the aircraft market and the market share gains that we're right now in product development on, we can look out in that 2016, '17, '18 timeframe and start to see with some confidence sales growth, and so we'll highlight that. The next 18 months or so is a lot more uncertain. But we'll highlighting that too. So we have these wins coming in. We've get these market share gains. So we know when they kick in, and so we think those are still solid. It's more this '13 and '14 that have been softer than our original outlook.

Also, some of the Energy projects, we've won a lot of market share, some of the new advanced diesel, some of the LNG applications, on a whole lot of the turbines, but a little bit like the aircraft side, those are in development. We know those are coming, and so we have some confidence in that. So it's this near-term versus long-term. But to make a long story short, we'll update you in December.

Perfect. Okay. I'll hop back in the queue. Thanks a lot.

Thanks, Tyler.

Peter Lisnic, Robert W. Baird.

Good afternoon, gentlemen.

Hello, Pete.

Just to continue on the Energy path, maybe a different way of asking this would be that $17 million charge, I guess part of it is actual taking costs out. What are the savings that you plan on realizing from those actions? And then should we expect any more costs as we look to the fourth quarter or early fiscal '14 on that front?

With respect to the charge itself and the impacts, obviously, we mentioned some workforce management. So that has a continuing impact as we go forward. Some of our sites will be affected in terms of the size of the workforce that is there, and in some cases, restructuring some of our sites. In some cases, for example, no further investment in solar, that's a big part of that. And so the investments that have currently been going on related to the solar business will cease. Our decision to focus on our European, North American customer base for wind will allow us to experience some savings with respect to the focus on China, where the market just is, the type of dynamics in the market in China really don't play to our strong suit. And so we've made the decision that that's just not a market for us.

So at this point, too early to call out the specific impacts. It will, as Tom, I think, mentioned, gain speed throughout the year. Not everything happens immediately. And as you know in Europe, some of these things have some longer tails on them. So as we progress into the second half, you'll start to see and we'll be talking more about what the specific impacts can be on profitability.

Okay. All right. Fair on that one. And then is it safe to say that you would also be avoiding some perhaps material capital expenditure costs as you tighten the reins on solar and the wind business a bit?

There would be a little bit with respect to that. Those aren't real capital-intensives. But there is capital tied to it, so it would bring down capital, it would bring down some of the SG&A costs, some of the R&D cost. So it is kind of spread across things.

Okay. All right. And then I want to switch gears to Aero. If I look at the operating margin in that business for the third quarter, it was actually down sequentially. The incremental, I guess, was stronger, but the absolute operating margin down versus the second quarter, even though revenue was up a bit. Was there something in the mix there? I'm a little bit surprised it would be down, especially when you had pretty strong aftermarket, both on the military and on the commercial side, with that margin being compressed a bit from the second quarter.

Not substantially. The aftermarket, we mentioned, was not as strong as anticipated in the quarter and we had -- it's been kind of sluggish throughout the year. So other than that, it's really just normal quarterly variability. There's nothing specific going on that is worthy of pointing out. So last year, we mentioned the various issues in terms of the overall comp there. But this year, it's just normal quarterly variability, and we will continue to have that. We've called out that given the size of the programs, the variability in research and development will be larger than we've had in past periods. So depending upon prototype shipments, et cetera, in any given quarter, that number can vary more than it has in the past.

Okay. All right. And then you gave some good color commentary on end markets. I'm just wondering if, Tom, you could share any sort of anecdotes or color on the order book or inquiry book on the heavy frame, on the IGT side. Obviously, we've been waiting for that cycle, I think, to pick up. But just a current market status and what you're hearing from your customers would be helpful, as always.

Yes. Basically what we're looking at is the order book has been a little soft. We're really looking at going into '14 with probably flat from '13 to '14, and then picking up in '15 is kind of the way we're looking at it. So we don't expect much change in volume in '14.

Okay. And that's on new, and I would assume, aftermarket is a plus, or --

After market, they're still operating the machines and aftermarket should continue to, I would say, pick up slightly. The more used, the better.

Okay. All right. That is very helpful. I appreciate the time and the information.

Thanks, Pete.

Sheila Kahyaoglu, Jefferies.

Thank you. Good afternoon. Thanks for taking my question.

Hello, Sheila.

Just another quick follow-up on Energy margins. If you exclude the wind business, it appears that organic sales were flattish, yet margins reached -- were above 17%, and I think they peaked back in Q4 of ' 10 at 15.6%. So could you elaborate on the underlying strength there?

Yes. I think what you're starting to see, if we went back, we've talked quite a bit about Energy margins, our target range we said we were going to get to is 14% to 16%. You can see we're in that range, if you exclude the renewables. We expect to be in that range with renewables in the future. So we've got a combination of positive mix, a lot of work being done on productivity, some of our newer applications are carrying better margins. We're also working to enhance our services. So it's a combination of the like, and we believe we can hold these stronger margins. And you've heard us talk about that before, and I think this gives you the picture that we're entering that range. We still see opportunity to improve. We just have to get the renewables back into that range, as well, and then we're closer to where we think the, if you want to call it, the entitlement level is for those types of businesses.

Okay. Thank you. That's helpful. And in terms of the Aerospace aftermarket, you mentioned commercial was up modestly. Can you quantify that, and if you're seeing an inflection point in that business? And secondly, on the military aftermarket, what's your visibility there and what's driving the strength over the last few quarters? Is it [op, temp] or training? Thanks.

The commercial -- start with commercial -- the commercial after market was up about 5%. And so, not bad. But we're still seeing some interesting dynamics in the commercial aftermarket. But we continue to believe that with the amount of aircraft being introduced, the revenue passenger miles numbers going up and the like, that commercial aftermarket will be healthy. We've had seen some softness earlier in the year, and some of that we think is just some timing by operators of maintenance cycles and the like, and maybe some of the cannibalization of a parked fleet. But we think it should be on track to remain healthy going forward.

The military side, we had a strong aftermarket, Rotorcraft in particular. What we believe is you're seeing still the influx of maintaining a lot of the equipment that's coming out of the theater. We do believe that's going to start slowing down, as we move forward. And we talked about strong, we do think that will come down. We are going to start, as we move into '14 and beyond, we are going to start feeling some of the effects of the cutbacks in defense. So we do believe we'll start to feel some of that. So the good thing is we are very diversified in military, so we have a lot of applications and we get a lot of various revenue streams, and so we get offsets. But for this year, very strong, will be slowing down, as the rest of the industry is, going into the next couple years.

Okay. Thank you.

William Bremer, Maxim Group.

Good evening, Tom, Bob.

Hello, Bill.

Hello, Bill.

All right. So let's first go into Aerospace. Correct me if I'm wrong. Second quarter, last quarter, excluding Duarte, we had operating margins approximately 17%, okay? This quarter, we're down to 14.3%. Why such a dramatic pullback here?

I really think, Bill, that that's predominantly this variability we're talking about. There's nothing significant going on in the business. I can't think of anything in the second quarter. The first quarter saw some impacts related to purchase accounting, which we've had in the past. But second quarter, nothing there, so --

Okay. So we could expect --

Bill, I'm not sure. We'd have to go back. I'm not sure on your math. I think we're more like 16% organic.

Because I thought in my comments I said 16% year-to-date and quarter.

I think you have to look at your math. We're talking about like one point, and that fits into the variability with R&D and some other variabilities. But we feel real good about our Aerospace business. It's strong, improving --

So we could have a snapback in this upcoming quarter, in the fourth quarter, given the fact that your guidance -- and correct me if I'm wrong -- guidance, you're $2.05 to $2.10. Those are GAAP figures, just want to confirm that.

Yes, that's true.

And that includes the charges. So that's GAAP, so adjusted would then be -- okay. All right. So then we could expect a sizable sequential increase in EPS from third quarter to fourth quarter here to coincide into those figures?

Correct. The fourth quarter is forecasted to be a strong quarter.

Right. And the comments that we had last quarter regarding sizable, looking at a lot of these larger ticketed items coming forward into the mix, do you feel as though those are just delayed at this point again? Or what occurred that all of a sudden you're starting to see additional push-outs?

When you say large individual ticket items, you're just referring to some of the markets that we've been talking about that we were seeing signs of recovery in?

Yes.

I would say this, that's continuing uncertainty, It's like every quarter there's something there that has been, I would say, causing everyone to withhold investment in large projects. And you know how much that affects us, large infrastructure of almost any type. And so when you have this kind of uncertainty, you hold back. And you've seen that in the comments made by some of our customers, as well. So it seems to be a general economic condition right now that a lot of what we would expect, even though some of the underlying indicators are fairly positive, is not materializing.

Okay. You called out flattish volume in order book, like a little bit soft going into '14. Is it safe to conclude that the pricing, say in the last quarter or two, is better than it was a year ago?

I don't know if I'd go there, Bill. I think pricing is holding, is maybe a better way, I would say.

What about if we broke that down into more of the say, the Energy side, excluding renewables? Is pricing getting better there?

Margins are getting better.

Okay.

Okay? Pricing, that's how we -- you've heard us talk a lot. We put a lot of emphasis on productivity, a lot on our lean manufacturing initiatives. We have always, as we introduce new platforms and new products, we're working hard to ensure they come out with better margins. So there's a mix of things that go on. But we are subject to pressures in the industry, but we're not losing price, but it's not really a market where you're gaining price, either.

And then my last question regarding the restructuring on the renewable side, $15.7 million charge here. I'm assuming this is the bulk, but there was a former question -- what should we be looking forward in terms of the next few quarters in terms of charges to this right sizing of this business?

Well, I'd say right now, to the best of our vision, we don't anticipate any more charges.

Okay.

And that's based on our belief that third quarter was the bottom of trough. And --

Got it.

Something changes and we have to change our outlook. But right now, we believe we're at the bottom of the trough and that we've taken appropriate actions, so we don't anticipate any other special charges.

Can you give us an idea of when this decision was made?

Over the last three weeks.

Okay.

It didn't come immediately in the last three weeks. We've been analyzing and doing a lot, but we took -- in the prepared remarks, we commented on it. But we really studied and looked at the opportunities in solar for where we stood and decided was not a good use of our capital to further invest. So that was a decision that was fairly recent. We really took a hard look at the sales outlook and really, we're seeing though future opportunity for offshore wind looks positive, that the near-term numbers aren't materializing for many reasons, from cost, environmental, and electrical infrastructure and transmission lines. We factored that down, and that's a healthy market for us. We play in this higher value, higher power, higher reliability area. We've decided that the China wind market's not conducive to making profits and that we're not going to do that. So it was kind of a comprehensive look at everything in the renewables business, and maybe a more rigorous look at sales opportunities over the next few years. And a combination of all that, that was how we came up with the decision.

Okay. Okay, gentlemen. Thank you.

Thanks, Bill.

Michael Ciarmoli, KeyBanc Capital.

Good afternoon. Good evening, guys. Thanks for taking my questions.

Good evening.

Maybe to follow-up a little bit on the margins in Aerospace, the military aftermarket, with the strength, are those revenues and margins currently accretive to the segment?

Yes, they're positive, I would say, on the after market side.

So with the potential headwinds that you guys are seeing coming up, how should we think about the segment's margins trending forward into '14? Is it realistic to think that maybe softer military aftermarket, unsettled commercial aftermarket and just the ramping OE, can you get some decent margins expansion in that segment next year just on productivity and continued efficiency measures?

Well, we do believe the margins will continue to improve. We do have quite a bit on productivity and continuous improvement initiatives. But you're also seeing, and what we are beginning to see is, we are making headway on the businesses that we acquired over the last few years, the three businesses. And each of them we highlighted that we were going to expand their aftermarket. That is starting to happen. We're making progress. One of the early hurdles we highlighted was we had to improve operating performance and we needed to improve our logistics handling of spare parts and servicing. Those are now, the operating turnaround times have improved to be competitive, the logistics are in place and we're starting to gain in the aftermarket in those. So in addition, we also believe that with all the new introductions, the likes of 787, is taking a long time, but we're going to start seeing more initial provisioning-type sales, improvement on our motion control service business. And that combination, we think, is going to help us continue to grow margins.

Okay. Fair enough. And then maybe just a little bit, your business with Caterpillar, given their thought process of, I think it's $1 billion of inventory they want to destock. What are you guys seeing specifically there, and your expectations or visibility in the short term regarding that big customer of yours?

Well, Caterpillar is a great customer of ours and they've been hit with some tough issues, particularly in the mining and other parts of their business. Our sales reflect that. And when we talk about having really organically flat sales in some of the tough markets, I'd say some of it's related to the same issues they have and our sales into their network. But it's not just Cat, it's other customers that have the same issues. So we have some things up, some down. So as we're giving you this information, that's all reflected in our numbers that we're telling you.

Okay. And maybe just the last one for me, piecing together some of the comments from this call. The order book for energy being flat, looking into '14 military becoming a headwind, if I were going to generalize the revenue growth for next year, two-thirds of the business flattish? And you've got the commercial OE and after market being your growth engines. Is that the right way, or --

It's in the right direction.

Okay.

And with our belief that things start turning in '15, I think you're in the right direction.

Okay. Perfect. Thanks a lot, guys.

Thank you.

(Operator Instructions)

Pete Skibitski, Drexel Hamilton.

Tom, on the military OE softness you mentioned, is that across-the-board or is there one or two programs there that you're seeing a fall-off?

I would say it's more across-the-board. Right now, it was a little soft. We're anticipating being softer in '14. So we also, it seemed like military vehicles, that's a little further down. But Rotorcraft has been positive, and then the smart weapons programs that we do, those have been solid, as well. So it's kind of a little bit on the vehicles, a little bit on fixed wing type, so --

Okay. Got it. Got it. And I guess last one for Bob. Bob, it looks like you used revolver a little bit this quarter. Do you guys have any sense of a pay down schedule on the revolver, or is that going to remain flattish as you're spending on CapEx over the next couple of years or so. I'm just wondering how I should think about that.

We've called out significantly higher capital expenditures over the next couple of years, so there will probably be a little more use on the revolver than we've had in the past. But we've also generated an awful lot of cash that we've used to pay down, in some cases early, some of our term loans and so forth. So we will continue to do that as we repatriate cash from other parts of the world, as well, pay down US debt and things like that. But there will be more use, as we go through the year, related to the capital expenditures, no doubt about it.

Okay. So you'd pay down your notes before you pay down the revolver is what you're saying?

Well, no, most of what's remaining is fixed rate and is not really pre-payable. So we've pretty much paid off everything that is pre-payable without penalty, and now it's only the revolver that's pre-payable without.

Okay. Got it. Thank you.

Sure.

Thank you. Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you.

Thanks for joining us today and thanks for your questions. We'll look forward to following up at the end of our fiscal year, and then I really do hope to see all of you in December where we roll out a lot more comprehensive outlook on the business. So, thanks again. Good night.

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