MOG.A (MOG.A) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Moog Second Quarter Fiscal 2012 Earnings Conference Call. As a reminder, today's call is being recorded. We will have a question-and-answer session at the conclusion of today's presentation. [Operator Instructions] At this time, I would like to turn the conference over to your host, Ms. Ann Luhr. You may begin.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of April 27, 2012, our most recent Form 8-K filed on April 27, 2012 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 homepage and webcast page at www.moog.com. John?

Good morning. Thanks for joining us. This morning, we'll report on the second quarter of fiscal '12, and we'll update our guidance for the year. Q2 was another strong quarter. Sales were up 9% to $625 million, a record for the company. Net earnings of $35 million were up 16%, and earnings per share of $0.77 were up 17% from last year. Sales were up in every segment, and operating profit was up in 4 of the 5 segments. Our story is one of balanced growth and good operational performance. Taking a walk down the P&L, our gross margin is slightly better than last year on the higher sales, R&D is down both in dollar terms and as the percentage of sales due to the timing of reimbursements negotiated on certain commercial programs. SG&A is up slightly as a percent of sales as a result of some moving costs in Wolverhampton, which I'll describe later. Interest expense is down marginally on lower rates, and in the Other category, we have the effects of some foreign currency movements in the quarter. Income taxes came in at 28.9%, slightly down from last year's 29.3%. Overall result was a 5.7% net margin, and as I mentioned, earnings per share of $0.77. Fiscal '12 outlook. There's minimal change to our forecast for the year to report this quarter. We're adjusting the mix slightly in our sales forecast to reflect the performance in the first half, but the net result is a very modest reduction of $4 million of sales for the year. We're maintaining our forecast for net earnings of $152 million and earnings per share of $3.31. When we started out the year, we expected a somewhat slow start in Q1 and Q2, and that the second half of the year would be considerably stronger. Our original forecast for the first half was to earn $1.53 per share and at the halfway mark, we're $0.04 ahead of that plan. For the year, we're keeping our forecast unchanged at $3.31 or earnings per share of $1.74 for the second half. We believe this is a realistic view of the next 6 months balancing the expected acceleration in earnings in the second half with the macro uncertainties associated with defense spending and the industrial economies around the globe. Before I jump into the segments, I'd like to provide some perspective on the broader story at play for our company. We describe ourselves as a company that provides customized high-performance control systems and components in applications where performance really matters. We apply our capabilities to a diverse range of markets and applications. Over the years, this diversity had helped us navigate through the ups and downs of the different markets we serve. We enjoy diversity across markets, technologies and geographies, and we also enjoy diversity within markets. Let me offer some illustrative examples of that diversity by providing some color on what we are seeing in our major markets. Starting with defense, a topic of considerable debate at present. So far we've seen a clear slowdown in those defense programs which were associated with vehicle upgrades and the U.S. war efforts overseas. A good example is our Driver Vision Enhancer program. On the other hand, our major aircraft production programs have held up well, and our foreign military sales are strong. The defense market is not the growth engine for the company that it was a few years ago, but it remains a strong contributor to our overall performance. Counterbalancing the slowdown in defense spending is the pickup in the commercial aircraft market. In addition to the general growth in this market, we have a very strong position on tomorrow's widebody fleet, and should enjoy many years of good growth as new airplanes come into service. Moving over to our industrial businesses, we've seen a nice recovery since the low point of 2009. Within our industrial portfolio, we also have the diversity element playing out, with a nice mix of industrial automation, with strong roots in the European machine builders sector; energy, a mix between renewable and non-renewable; and test and simulation, a real growth driver at present. When we add it all together, we believe that our business will continue to perform well over the long-term, despite the ups and downs in any particular market. And this is indeed what we are seeing in 2012. Now to the quarter, starting with the aircraft business. We had a strong sales quarter in aircraft, with good increases in both our military and commercial product lines. Based on the solid first half in our military business, we're increasing our sales forecast for the full year by $15 million. In the second quarter, total aircraft sales were up 15% to $236 million, military OEM sales were up 17%, with gains across multiple platforms. Our F-35 program was up over 20% from last year, as was the V-22 program. In addition, we are ramping up our efforts on the KC-46 tanker development program. Foreign military sales were also stronger than last year with gains on the F-15 for Japan, Light Combat Aircraft for India and T-50 for Korea. The growth story on the commercial side of the business continues. Commercial OEM sales were up 24, 7 -- 27%, with growth across all our major platforms. Of particular note is our business jet product line where sales were up significantly over last year. We're enjoying the general recovery in these markets, and we're seeing nice orders for the Gulfstream G650 aircraft. On a less positive note, we had minimal sales on the Hawker 4000 in the quarter. We've been very diligent in managing our relationship with Hawker over the last year as they worked their way through some difficult circumstances. As a result, we are not exposed from an inventory or receivables perspective, and to be conservative, we've assumed minimal sales on this program for the remainder of fiscal '12. The commercial aftermarket was up 16% in the quarter, with general strength across the board. In addition to increased fleet activity, we're also enjoying the benefit of some initial provisioning of spares on the 787 program. Looking out to fit the rest of fiscal '12, we've increased our sales forecast by $15 million, with all of the increase on the military side. There are minor puts and takes across multiple platforms, but nothing of particular note. The run rate in the first half has been stronger than we had anticipated, and we don't envisage a slowdown in the second half, and therefore, have provided the second half up to take account of the first half result. There's no change to the forecast for the commercial book. Aircraft margins. Margins in the quarter were 9.6%, up from 9.3% a year ago, but down from the first quarter and our expected run rate for the year. There are 2 stories of note in the quarter. On the one hand, R&D was down in the quarter as a result of reimbursement agreed on some commercial jobs. On the other hand, we're in the process of moving our facilities in the U.K. out of the antiquated GE Wolverhampton building into a new purpose-built facility. When we purchased the Wolverhampton building for our business in 2009, we had agreed to vacate the building within 3 years. This quarter, we incurred considerable moving expense, which depressed margins. The move also contributed to production inefficiencies, which resulted in somewhat higher product costs. Q3 should see some residual moving costs, but the bulk of them are now behind us. And for the year, we're maintaining our margin forecast at 11%. Turning to the Space and Defense segment. Sales in the quarter were up marginally from last year. The Driver Vision Enhancer program is winding down, and excluding the effect of that program, sales in the quarter were actually up almost 10% from last year. For the full year, we're still anticipating an increase from last year, but today, we're moderating our sales forecast to reflect weaker defense and security spending. Sales in the second quarter were $19 million. It is a similar story to the first quarter, with strength in the space markets compensating for weakness in the defense and security markets. Starting with the space markets, sales were up almost 40% from last year, with growth in each of our main product lines: satellites, launch vehicles and NASA. The commercial satellite market remains buoyant, and this year, we have the benefit of some additional sales from our Bradford acquisition in Europe, which we completed in the first quarter. Our launch vehicle business is also up as we performed work for United Launch Alliance on the common TVC system for the Delta IV and Atlas 5 next-generation rockets. Finally, our sales to NASA were down from the first quarter as budgets were reset in 2012, but they were up from the same quarter a year ago. We view this year-over-year increase as a positive sign, and we believe that the NASA budgets are settling down, and there's opportunity for some upside relative to our last forecast. Defense sales were 9% lower in the quarter. Our defense sales are into 2 primary markets, missiles and military vehicles. On the missiles side, a year ago we were working on a large contract for a stores management system, and that contract is now closed out. The remainder of the missile business, however, is strong. Our military vehicle business was a little lighter this quarter, although we believe this business is stabilizing with about 90% of the sales now coming from outside of the U.S. The security business was down in the quarter, driven by $6 million lower DVE sales. We have been anticipating an uptick in the general security business, but I'm not yet seeing this. That market is partially dependent on municipal government spending, as well as a recovery in the U.S. commercial construction markets, and both of these drivers remain muted. Based on Defense' fiscal '12, we're reducing our sales forecast for the year by $19 million to $365 million. The reduction is in the defense and security markets. In defense, we have been forecasting sales in the second half on some new programs, and those programs have pushed to the right outside of fiscal '12. The result is that our second half sales will be lower by about $10 million from our last plan. We've also reduced our security forecast by $9 million, as the pick-up in spending on new security installations has not yet materialized. We're leaving our space forecast unchanged from 90 days ago. Margins. Margins in the quarter of 11% were down from 14.9% last year. Lower sales on the DVE program and the Stores Management application accounted for most of the difference. Compared to our forecast of 90 days ago, we're forecasting lower sales for the remainder of the year, but we've taken some steps to mitigate the last contribution on those sales and, as a result, we are keeping our full year margins forecast unchanged at 12.2%. Industrial systems. Sales in the second quarter were up 8% from last year. We saw some mix shifts within our markets, but in general, we are on plan, and we're keeping our sales forecast for the year unchanged. Sales in the quarter were $168 million, up $12 million from last year. All of the increase was in the simulation and test market. In this market, we provide 6-Degree of Freedom motion bases for flight training simulators and product test systems, as well as a range of high performance mechanical systems used in both aerospace and automotive test applications. Sales in this quarter on that market were up almost 50% over last year. The flight training simulator market remains strong, as the commercial aerospace sector gains momentum, and new aircraft are introduced to the global fleet. Our test business was also very strong, almost double last year's sales. We're several years into our initiative to take our components and systems capability into the test market, and that initiative is now paying off. Sales in the energy market were flat with last year, although we saw a shift within this market with higher sales in oil and gas exploration, compensating for lower sales in wind energy. Finally, our industrial automation sales were flat with last year, and in line with the average sales in this market over the last 6 quarters. This market saw 10 quarters of sequential growth as we came out of the recession, but over the last year has leveled out. Most of our industrial automation sales are in Europe, and our business there remains solid despite the ongoing fiscal challenges in various countries. Industrial systems for fiscal '12. We're keeping our sales forecast for the year unchanged at $650 million. However, we're shifting the mix somewhat between energy and simulation tests. We're decreasing our energy forecast by $10 million to reflect the ongoing challenges in wind [ph] in the China market. Balancing this out is an increase of $10 million in our test and simulation markets, which continue to outperform. Margins. Margins in the quarter were 11.5%, and for the first half were 10.8%. For the year, we're keeping our margin forecast at 10.5%. Turning to the Components group. Q2 was a record sales quarter for our Components group with sales up 6% from last year. Our Components group sells in all the same markets as the rest of the company, and are a great diversity play within their own 15% slice of our overall business. The headline story within this business continues unchanged. Non-defense markets improving and defense, slightly weaker. For the year, we do not see any changes from our last forecast. Sales in the second quarter at $96 million were up $5 million from last year. We saw increases in each of the non-aerospace and defense markets. Marine sales, which are driven by offshore oil exploration, were way up. With oil prices high and uncertainties surrounding future supplies from Iran, the push to find new fields offshore continues. Our medical business was also up nicely this quarter, with particular strength in CAT scan equipment. Finally, our general industrial business was stronger, the result of the additional sales from our recent Animatics acquisition. Turning to the aerospace and defense markets. Total sales in this quarter were $47 million, down marginally from $49 million a year ago. Military and commercial aircraft sales were flat with last year while our space business was up. On the other hand, our defense controls business, which consists of products which go on military vehicles, was down from 12 months ago. In the Component segment, our military vehicle sales are predominantly in the U.S., and they are suffering from the shift in U.S. defense priorities, as the overseas operations wind down. For the fiscal year, fiscal '12, we are keeping our sales forecast unchanged at $372 million. Within the markets, we believe our Marine business will be slightly stronger, but our general industrial business will be slightly weaker. Looking back over the last few years, the continued strength in our Components business is a direct result of our diversity strategy. In fiscal '12, we're expecting a sales breakdown between aerospace and defense and non-A&D of about 50-50. Going back just 2 years to fiscal '10, that ratio was 65-35 in favor of A&D. Our strategy of balanced investment across all our markets has provided for steady, consistent performance through this dramatic shift in the business cycles, and allows us to tell a story this quarter of record sales and healthy profits. Components margins. Margins in the quarter were 14.1% compared to 14.7% last year. This quarter, we took a modest restructuring charge to align our future resources with our forecasted military sales. For the year, we're leaving our margin forecast unchanged at 15.5%. Medical. Our medical business had another good quarter. I'm happy to report that there's nothing much to report on this business this quarter. Sales and profits were in line with plan, and for the year, we're actually increasing our profit forecast modestly. Sales in the quarter were $35 million, up marginally from last year, and in line with the first quarter. There was some shift in the mix with higher pump sales more than compensating for lower set and sensor sales but overall, nothing of significance. Last year, during Q2, we restructured this business and changed strategy to focus on a combination of profitability and modest sales growth in the short-term. That strategy is now firmly in place. Q2 was the fourth consecutive quarter of profitability and, over the last year, we've introduced a new pump to the international market, which is providing modest sales growth. Comparing the first half of fiscal '12 with the first half of fiscal '11, we see that our total sales are up about $3 million, but the real story is in the profitability. In the first half of fiscal '11, we were struggling with high development costs, recall issues and the loss of our exclusive IV distributor in the U.S., B. Braun. Since that time, we focused on improving our internal operational and quality systems, trimmed and refocused our development efforts and built a non-exclusive distribution channel in the U.S. In the first month of fiscal '11, we lost $3 million on sales of $67 million. In the same period in fiscal '12, we earned $3 million on sales of $70 million, almost 900 basis points of margin improvement. Our margins are not yet where we would like them to be, but we've made significant progress, and we believe our results will continue to improve. For fiscal '12, we are forecasting sales of $145 million, unchanged from 90 days ago. We're changing the mix slightly with pump sales a little lower than our last forecast, and set sales a little higher. Margins. This quarter, we had an operating profit of $1.5 million or 4.2% of sales. This was similar to our first quarter. And we're increasing our margin forecast for the year to 4.2% from the 3.4% we reported 90 days ago. So putting it all together, after all the various adjustments, our sales forecast for the year is now $4 million lower than our forecast from 90 days ago. Total sales for the year should be $2.47 billion, up 6% from fiscal '11. Sales in the Aircraft Group will be $15 million higher than our last forecast, as a result of strength in the military market. On the other hand, sales in our defense, space and defense group will be $19 million lower than our last forecast, a combination of lower defense and security sales. Forecast of sales in the industrial, components and medical groups are unchanged. We're maintaining our operating margin forecast at 11.3%. We earned $1.57 per share in the first half, a little ahead of our original plan. For the second half, we're forecasting $1.74 per share and slightly higher sales and improving margins in the aircraft business. And for the year, we're maintaining our EPS forecast of $3.31, a 12% increase over fiscal '11. We're forecasting now quarterly earnings of $0.84 in Q3 and $0.90 in Q4. Now let me pass you to Don who will provide some color on our cash flow and balance sheet.

Thanks, John, and good morning. Our net debt decreased by $3 million during our second fiscal quarter of '12 to $622 million. Our free cash flow was a positive $13 million. The $10 million difference relates to our March 13 Components group acquisition of a company named Protocraft located in Kingsport, Tennessee. Protocraft designs, manufactures and markets fiber optic connectors and switches for environmentally challenging environments. Protocraft sales for the last 6 months of fiscal '12 are forecasted to be about $4 million, while the impact on EPS is expected to be neutral. So free cash flow for the first 6 months of this year was $21 million compared to our year-to-date net earnings of $72 million, so we're obviously off to a slow start relative to our last quarter's projection of $110 million for the whole of fiscal 2012. Our second half should be considerably better, driving -- or driven by improving working capital results, specifically better timing on collections and better inventory turns. Our collections will improve largely related to 2 issues. In our second quarter, we had an unusually high amount of shipments in invoicing that went out late in the quarter in our Industrial segment. Those receivables will be collected during the second half. More importantly, we have a number of open contract negotiations, predominantly in our Aircraft segment, that are nearing completion, and we expect that the majority of these will be finalized during the second half, resulting in a noticeable infusion of cash and a corresponding decrease in either unbilled receivables or an increase in customer advances. These types of negotiations are always ongoing for us, but timing is apparently a bigger issue for us this year. Inventory turnover should improve during the latter half of this year. You recall that John mentioned the significant activity in Wolverhampton, moving into a new building. The direct costs and inefficiencies associated with this move are significant enough, but we've also been building inventory to support timely deliveries to our customers in anticipation of this physical move. Over the next 6 months, we expect that this will normalize, and we'll see the effects of this reverse. It looks like we've set ourselves up for a rather steep hill to climb in the second half of the year in order to hit our previous free cash flow forecast of $110 million. Although we are still targeting to achieve this for the year, it's fair to say that it will likely be the high end of the range. If one or 2 of the negotiations going on don't settle timely to the point of collection by the end of our fiscal year, free cash flow for all of '12 might end up coming in somewhere between $95 million to $110 million. So that's our range. That's the macro picture on cash flow, but occasionally, some of you are interested in some more specific balance sheet items, so I'll trip through them rather quickly. Customer advances declined during the quarter by $8 million to $107 million, as we worked off some of the previous advances we received, particularly in our space and defense business. Loss reserves declined from the prior quarter by $2 million to $40 million. Capital expenditures were $27 million in the quarter and $54 million for the first 6 months, on pace with our forecast of $105 million for all of 2012. And finally, depreciation and amortization totaled $24 million in Q2 and $49 million to date. Depreciation and amortization for all of fiscal '12 is forecasted to be $102 million. Our pension story is the same as last quarter. We previously described how we accelerated contributions into our U.S. defined benefit pension plan in fiscal '11 making our forecasted contributions in fiscal '12 on a lighter side. In our first 6 months, our global DB plan contributions were only $5 million, while our expense was $18 million. We're estimating our full year 2012 global DB plan contributions and expense to be $19 million -- or sorry, $9 million and $35 million, respectively. From a financing perspective, we're in very good shape. Our quarter end net debt as a percentage of total capitalization was 32.7% compared with last year's 33.9%. Our leverage ratio was down to 1.84x. In terms of unused borrowing capacity, during the quarter, we began drawing down on a new $100 million, 364-day securitized facility secured by our domestic receivables, and we do plan on rolling that facility over annually. Our treasury team has been working diligently with our 13 banks and our bank group over the past few quarters to get all this lined up, allowing us to effectively increase the borrowing capacity on our revolver by the same amount. The unused capacity on our $900 million revolving credit facility jumped up $74 million during the quarter to $616 million as a result of us implementing this new securitized facility. In addition, we've already began saving at current interest rates about $500,000 annually in borrowing costs. Longer-term, our refinancing needs are secure. Our revolver terms out in 2016, and our 2 high-yield debt issues, each at about $190 million, term out in 2015 and 2018, respectively. So one might ask, what are you planning on doing with all this capacity in this strengthening financial picture? Using it to grow through targeted acquisitions is our primary focus at this time. Over the past 4 quarters, we've spent over $80 million on 4 acquisitions, including Animatics, which is a SmartMotor business in our Components segment; Crossbow, a MEMS-based Gyro's business in our Aircraft segment; Bradford Engineering, a European-based space controls business in our Space and Defense segment, and most recently, Protocraft, that I mentioned earlier. So we are active, and we continue to actively look for strategic properties that will be a good fit with our core businesses. Our effective tax rate in our first quarter was 28.9%, about the same as last year's 29.3%. For the first 6 months, the effective tax rate was up to 30.1% compared to 28.1% last year, that primarily is related to R&D tax credits. This year, as you know, the tax credit has, at least for now, expired as of the end of our first quarter, December of 2011. So we've recognized only that first quarter's estimated benefit. Last year's first half tax rate included the R&D tax credit benefit for both 2011 and 2010 because of the timing of when the related legislation was passed. For all of 2012, we're forecasting our effective tax rate to be 29.9%, down just slightly from our last forecast. To reiterate John's summary, we've got a very solid first half behind us. Our forecast of 2012 sales will be up over 2011 by 6% to $2.47 billion, and EPS will be up 12% to $3.31 a share. Lastly, cash may be off to a slow start, yet we're confident we'll see substantial improvement in the second half. So now let's hand this back to John, and ask our moderator, Andrea, to facilitate any Q&A.

Thanks, Don. Andrea, can you give the explanation for asking questions, please?

[Operator Instructions] Our first question will come from Julie Yates.

John, I think last quarter you reduced the aftermarket guidance from 9% to 6%, and you've seen a nice uptick in the growth rate in the second quarter, but your outlook remains unchanged. How should we think about aftermarket as the year progresses and the timing on some of that spares provisioning that you thought was flipping to the right last quarter?

I'm thinking, Julie, you're talking about the commercial aftermarket.

Yes, correct.

Yes, the spares provisioning, through the first half, was a couple of million dollars, and we think that will strengthen in the second half. So that is starting to come into line. Generally, when we're forecasting our aftermarket quarter-to-quarter, Julie, we get to see some fairly significant moves up and down. So if I look at the commercial aftermarket this quarter, it's about $29 million, but over the last 4 to 5 quarters, been running an average of $24 million, $25 million. So we've seen a particularly nice quarter this quarter, but our aftermarket is not easily correlated one-to-one with either fleet usage. Over the long-term it is. So we're feeling like we had a good quarter, but we don't want to bump it up for the year at this stage. We think the year's forecast that we did last quarter was probably about right, and we're sticking with that for the quarter.

Okay, great. And then just one follow-up on industrial margin. It looks like there was a nice uptick in the quarter, but your guidance implies it will revert back down in H2. What's going on there?

Yes. Well, if you look at the first quarter, the margins were 10%, second quarter, they were 11.5%. So through the first half, we're at 10.8%. The kind of the first quarter to the second quarter gives you a sense of the shift in the mix in this business can kind of shift fairly significantly quarter-to-quarter. We're seeing -- we're not changing the forecast in total for the year in that business in terms of sales, so we just think it's prudent to keep the number in line with what we had last quarter. Our European business, the industrial business, the machine business, that's holding up well. Our Asian business in China is kind of softening a little bit like we've said before. U.S. business, the test and simulation is doing well. But we think it's prudent not to get ahead of ourselves in terms of the performance in 1 quarter, and we think again, for the year, we're sticking with what we've got with softer first quarter, better second quarter. We think for the full year, the 10.5%, we think that's probably a reasonable number.

Our next question will come from Tyler Hojo.

I was wondering if you could expand a little bit on kind of the sales weakness within the wind market. Just with the production tax credit expiring here in the United States, I was thinking maybe it would be a little bit stronger.

Well, so our wind business is really a 2-market business. It's an Asian business and it's a European business. It's really a China business and a European business. And we have almost no business in the U.S. And we supply pitch control systems to OEM manufacturers of turbines, and the only real OEM manufacturer in the U.S. is GE and GE has an in-house solution. So for that reason, we don't supply in the U.S. Now that's not to say that turbines we supply on are not installed in the U.S. So that some of our European customers install turbines in the U.S., Alstom for instance, then we have U.S. content, but we see that as European sales. So the effect in the U.S., actually we had a little bit of sales this quarter in the Americas, but that was actually for some wind farms that were being installed in Brazil. So we haven't ever had any sales of any significance in the U.S. and therefore, the shift in the tax regime doesn't make any difference to us.

Okay. And could you maybe just talk about what your outlook is for the wind market a little bit longer-term? I mean there was some data out, I think the global market was up something like 20% plus year-to-date, and I mean, obviously, you guys aren't seeing that, so that's really what I'm getting at.

Yes. So our wind business is really a story of 2 different markets, it's the European market and the Chinese market. And what we have seen -- let me start with the good news story. The European business has actually strengthened very significantly over the last couple of years. So if I go back a couple of years, our European business was in the kind of the $60 million range, and this year, we're forecasting it will probably be closer to $80 million. That's a business that's characterized by long-term relationships, bringing value to the OEM, and where the OEMs don't feel threatened by having strong suppliers. In China, it's quite a different story and our business there has gone down from the $90 million to about half of that, we're forecasting this year. And what's happened in China is that the -- first of all, the market has shifted. There were far too many OEMs, a lot of small startups that consolidated into a couple of very large players. And the large players at this stage of their evolution, and they're only a few years old, I mean they're probably in the 5 to 10 year old companies, have decided that they want to in-source most of the key technologies. So our competition and our sales in China, those companies that are third-party suppliers, are all seeing these effects where the major guys are looking at sourcing, in-sourcing, and you're competing with an in-house supply. So that has changed the dynamic of the business in China. Our belief is that, in time, the Chinese markets will consolidate, and then the suppliers will develop into the more mature type of customer-supplier relationship that we see in other markets, like for instance in Europe, and then our value proposition of providing superior controls in difficult applications will actually win through. But at the moment, it's turned out to be a very volatile market, and we've seen some significant shifts. So as I say, it's stronger business in Europe, weaker business in Asia and, overall, I think the growth in the wind market at the OEM level, were not seeing reflected down into our level because of this in-sourcing effect, particularly in China.

Okay, great. I really appreciate that color. Just one last one for me. You mentioned some moving expense impacting your results this quarter. Could you maybe quantify what exactly that was?

Well, I can describe what it was. I don't want to go into the details of exactly what the numbers were, but when we bought, back at the end of 2009, we bought the Wolverhampton business, the GE Wolverhampton business in our Aircraft business which was a flight control business. At that time, that facility that those folks were in was built, I think in the '20s or the '30s, very old facility made lots of fighter aircraft during World War II, has had a lot of history, let me put it that way. And as part of the purchase, we decided that we didn't -- the building was too big, it didn't meet our needs, and there was a little bit of a concern that perhaps there might be some environmental issues. I'm not saying there were. Just from our perspective, we didn't necessarily want to take that on. So the agreement was that we would have a 3-year lease in the building, and then we would move into a new facility. So over the last couple of years, we've been building a new facility a couple miles up the road. This quarter, we had some of that -- we had a major move expense where you're moving large machines and moving equipment into that new facility. And those expenses played through in the operating margin on our Aircraft business in the quarter. You also get the kind of the indirect effect where you get production inefficiencies when you do that type of thing, start-up, wind down cost with the machine, start up on the next machine and that would also have depressed the margins a little bit in our Aircraft business. So our Aircraft margins are lower than we would have -- you might have expected. We think for the rest of the year, we'd see a pickup in them, and that really was those move expenses were what were pushing them down this quarter.

And the move will be behind us by the end of Q3, is that a fair statement?

There will be some residual costs in Q3 and we'll be -- I mean, we're in and up and running in the production, but yes, essentially, it will be gone in Q3, and Q4 we'll be fully up and running in our own facility.

Next, we'll go to Eric Hugel.

I just wanted to follow-up on the prior question on your answer to the -- to your wind turbine exposure, that just because it's a European OEM, you don't have any exposure to the U.S. wind market if the production tax credit, sort of goes away. I think that your answer wasn't quite what I would expect. I mean, you basically, you're telling me that because it's a European OEM that if U.S. sales drop off, you're not going to have exposure? That doesn't make much sense to me. I mean, can you -- maybe another way to ask it is in looking at the end-to-end market, sort of where the sales that your OEMs are coming from, can you sort of talk about what your U.S. exposure is?

Okay. That's a fair answer. I think I answered a different question then perhaps, which was our sales in the Americas and would our sales in the Americas be affected by tax credit. We don't have good visibility through to where the end farms are that our actual products go into, but I can tell you that the focus in the European business is more moving towards offshore wind farms. And offshore right now is more of the European business, it's also more of a -- it's also an Asian business. I think in the U.S., the offshore is not yet a particularly strong contributor. So unfortunately, the shift in the U.S. market, I can't quantify in any great detail. I can tell you that our forecast for this year for our wind business in Europe, and this is based on direct feedback from our winds customers, is up about 12% from what we saw last year. So that business is doing well, and we've got some large contracts with some of the major suppliers there. How they then -- which products they put into, which end markets, whether the end market is the U.S, Europe or perhaps somewhere in South America, is not immediately obvious to us. The one exception that I can identify in that is, as I mentioned, we have sales this year of a couple -- of this quarter of a couple of million dollars for Alstom, so this is where we do know the customer is a European customer, but those sales are going to a Brazilian wind farm, and because of the way that's structured, we deliver actually that through the U.S. organization. So we do take those sales in the U.S. where we can directly see what the end market is. But generally speaking, that visibility through to the end market is not clear to us. So I don't -- based on what we've seen so far in our business in Europe, that hasn't been a factor that's been raised.

Okay. Just to follow-up also on your Chinese industrial demand. I mean, you talked about last quarter, that is slowing down, and you said that has, but has that slowed down pretty much in line with your expectations, better or worse?

I think what I said last quarter was that the growth in China was slowing, and I think it is in line with our expectations in that if I put that -- that's in our industrial automation category, we're not changing our forecast for industrial automation. We're at about $299 million, $300 million for the year. That's where we were at last year, last quarter. Through the first half, we're kind of a little bit ahead of that run rate, but it's pretty much lining up with what we thought. So there's no shift in our expectations, I think, in the general industrial business in China versus what have we been thinking for the last several quarters.

Okay. And lastly, can you maybe sort of think about maybe a little longer-term, when we think about the aircraft market, when we look out past the development cost in terms of 787, A350 and sort of that hump, sort of where you think ultimately you can get those sort of margins? In the past we've talked sort of in the maybe the low- to mid-teens, is that still sort of something that you can target and maybe sort of a timeframe on when you could get there?

I'd say that the story is the same that we've been telling for quite a while. You're right, as we get past the major R&D, we'd see margins expand, but also with the ramp up in production, we should start to see some benefits from that. So we're still anticipating getting to mid-teens by middle of the decade. That's kind of our broad plan. By next quarter, we'll give you a little bit more insight obviously into 2013. But I don't want to be too specific, but I would say our overall strategy hasn't changed, the overall plan hasn't changed, and we're targeting mid-teens by mid-decade.

Our next question will come from Michael Ciarmoli.

Just to follow-up on maybe the aircraft margins, I know you didn't want to get into the exact cost, but x the charges, you've kind of been running at this 10.5%, I think even fourth quarter was 11.2% x the charges. Would you guys have been in that mid-10.5% range if it wasn't for the closing costs and the associated maybe productivity disruptions?

I think that's the same question in a different way, but I would say, yes, our business is well into plan.

Okay. Okay, fair enough. And then can you just elaborate maybe on the charges that hit the Components segment?

Well, what we said -- we took what I call a modest restructuring charge in the quarter. It was essentially a voluntary package that we offered to some folks in one of our facilities that's primarily focused in the defense business, so that's because we're seeing the defense business slowing as we had anticipated. So it's in the range of 50 basis points, kind of a 50, 60 basis points. So the margins would have been kind of more in line with what you had expected from the first quarter or the average of the year, if you were to exclude that charge.

Okay, that's helpful. And then just on the F-35 program, you're obviously forecasting a pretty big increase this year. How should we think about that program going forward if production rates kind of hold x current levels? Is there an ability just for you guys to still drive growth from that platform? Or do we start to see revenues sort of level out over the next 18 to 20 months or so?

Well, our business is going to go out with what the forecasted sales are. I think the U.S. forecast, give or take a couple of airplanes per year, is in that kind of around the flat 30 over the next few years. As we get out into '13, '14 and particularly, when you get to '15, you start to see some significant uptick from the foreign military sales. Now of course, that assumes that, that picture doesn't change, and I think of course, the picture keeps changing on a regular basis. But right now we're assuming -- our assumption is lined up completely with what the DoD and Lockheed are projecting, which is flat around the 30 units per year in the U.S. and then starting to see some pickup from FMS sales out a year or 2. With flat sales, there's not going to be any significant growth in terms of the revenue line for the F-35. It does depend a little bit on the mix because; we have on the a, we have the flight controls; when you get to the b, the STOVL, we have the lift fan at the back; and on the c, we have some wingfold. So the mix affects how much content we have to some extent. And the other effect, of course, is once the fleet starts to fly, you actually do start to get some aftermarket activity, whether it's upgrades, whether it's retrofits, whether it's some spares. So you actually, as the fleet grows, you do start to see some incremental revenue from that. But we're anticipating and we will -- as we give guidance next quarter for '13 and when I talk about mid-teens by mid-decade, we are working with the assumptions that the F-35 is not going to ramp significantly. It will ramp in line with what folks have been -- what the DoD is projecting at the moment.

Okay, that's perfect. That's helpful. And then just a last one for me, can you give us any color on the 787 program and how that's feeding into your full year growth forecast, and maybe even what the margin trajectory on that program is looking like as Boeing starts to ramp towards, I guess, 5 at the end of the year?

Well, for the year, we're anticipating full year sales on the 87 of about $50 million. That's up from $40 million last year, $25 million the previous year. So it's picking up. It's at 20% increase from last year, but of course, it's not like the number of deliveries. It's not connected to Boeing deliveries directly, because deliveries only really started in the last quarter or 2. So we're seeing that business grow. We're at the same production rate that Boeing is, about 3.5 per month. We will accelerate our production rate in line with their requirements, and we'll continue to see that grow. We've gone on record of saying we have roughly $1 million of content per airplane, so you can start to extrapolate as you move to the future as to how those sales will grow. We don't get into margins on individual programs, that -- we don't get into that level of detail.

[Operator Instructions] Next we'll go to J. B. Groh.

You mentioned you had some good growth in aftermarket until that was driven by -- some of that was driven by the spares provisioning and this is spares provisioning for 787. Can you maybe help us out as to what sort of impact that was, and how aftermarket would have looked without it?

Like so many things in our business, there's a lot of small moving parts. So the aftermarket, commercial aftermarket in the quarter was about $29 million. $1 million or $2 million of that is spares business. So it's not the huge bulk of it, the vast majority of the aftermarket business is just the reflection of the increased usage of the fleet, and that's starting to push -- roll through to our business. So it's not that, that's -- all of the increase is not being driven by the initial provisioning in the 787.

Okay, good, good. And sort of what's your feel of customer inventory levels at this point?

Well, that's a real tough one to put any kind of a number around. I think we saw through the downturn that customers clearly worked down their inventory, and I think what our sense would be is that they are working -- they've minimized their inventories, and we don't think this is a restocking effect. I think they are continuing to work very hard given the financial pressures thereon to keep their stocking levels at a minimum. So I don't think we're seeing any kind of a restocking effect. I think we're seeing them this is the real demands that they've got is to actually keep their airplanes in the air. It's important though to mention again that in our aftermarket business, it's not scheduled maintenance. It's maintenance that comes as a result primarily with the flight controls up. Leaking typically is on the hydraulic side and that seals need to be replaced and stuff, but it's based on some kind of issue coming up with the hardware and then there's a repair or a spare that's inserted. And therefore, it's very difficult to time it and it's very difficult to connect it directly to flight hours. Over the long haul, the more airplanes are used the more the seals wear out, the more stuff we get coming back. But quarter-to-quarter, it bounces around by 10%, 15%, up and down around the medium -- the median, and then gradually, you start to see that increase. And I think this quarter was strong. For the year, we're up forecasting about a 6% increase over last year, and we think that's probably still a reasonable number.

So over a long period of time, there should be pretty tight correlation, but quarter-to-quarter, it's not something you're going to ever have a ton of visibility on it's just going to happen the way it happens?

Absolutely, yes. I mean quarter-to-quarter, it's driven by particular orders from spares orders or repair units from particular airlines, and it bounces around a bit.

Okay. And then one for Don, on the corporate and equity-based compensation, that looks like the sum of that has been running at $8.5 million, is that a good run rate for the second half of the year? Or will it go a little lower?

The equity-based comp and what else did you say?

Well, I actually add up the corporate...

Well, on our end, so it's corporate and other, we had, John mentioned, that we had some foreign exchange in the first half, second quarter, that was a little bit heavier than the norm, and so I would say that right now, we're forecasting the equity-based comp and other miscellaneous stuff to run about $8 million for the full year.

Our next question comes from Cai Von Rumohr.

Your aircraft, well, how big was your aircraft R&D in this quarter? And what is your expectation for aircraft R&D and total R&D for the year?

Well, aircraft R&D for the quarter was about $14 million, and for the year, aircraft will run in the low 60s. And for the year, we're anticipating about $113 million in total R&D.

Got it, okay. And then usually, you have contract loss adjustments in the Aircraft Group, or some kind of adjustments. Were there any kind of any additions to the contract loss reserve in the Aircraft Group in the quarter or any sort of other adjustments, either positive or negative?

There wasn't anything of significance, Cai, that we felt was worthy of singling out. I think I mentioned that the loss reserves came down by a couple of million dollars in the quarter, so it was kind of a normal runoff rate, nothing unusual.

Got it. And then if we kind of go back to your guidance, it looks like your military aircraft in non-helicopter, OE, is up, how come?

It's a reflection, Cai, of what we've seen in the first half. The first half has been a little bit stronger than we anticipated, and we don't anticipate that it's going to get softer in the second half. Second, the run rates through the first half would be, if you annualize it, it's kind of it's pretty close to what we are seeing. So we felt that we should take the guidance up in line with essentially what we've seen in the first half. And it's a myriad of small puts and takes across all of the programs, and when you add them all up, it ends up with about a $15 million increase in that total business, including the aftermarket for the whole year.

Terrific. And if I take your guidance for biz jets, which didn't change, and in that appears to look like you're looking for the biz jets business to slow in the second half, is that correct?

Yes, it will be down a little bit in the second half, and we -- primarily what shifted there is Hawker is down from what we had been anticipating. We had been anticipating $6 million or $7 million in sales in that program. And we think we'd essentially, we got a couple of millions through the first half, and we've decided that to be prudent. And this is not a reflection on their plans or any suggestion about what their future business is. But just for our internal uses, we've taken that forecast down for the rest of the year, essentially reduce that to a negligible amount.

Also on the G650, we had a little bit heavier activity in the first half, and that will moderate in the second half.

Got it. And then if I go to kind of the Components group, if I look at your run rate on both Medical and your run rate for Marine, it looks like you didn't change the numbers, so that we're looking at a fair deceleration there. I would think that the Marine business would not be decelerating but, if anything, would be accelerating. Are those numbers conservative?

So I think some of the Marine business, all of the businesses kind of have ups and downs. I think we've got a very strong first half behind us in the Components business, and we're kind of the numbers it's in nice, Cai, I'd say the Marine business, if you annualize, the first half were in the kind of $45 million, $46 million range. Our forecast for the year is just about $1 million below that. Some of the Marine business is based on some very large shipments of big pieces of equipment called the floating FPSOs, floating platform storage and offloading, swivels there, and they can be in the millions, a couple of million dollars a unit. So that really depends on when those actually ship, because those -- it's a short term accounting that some bigger ones in the second half of the year, some of them maybe in or maybe out. So I think we're being a little conservative there, or at least, hopefully, realistic. We're trying to be as realistic as we possibly can. And on the medical side, we had a good first half, I think we're just not expecting that it's going to get any better in the second half, maybe it's a little bit conservative. On the other hand, I'd say in that in the Defense world and the Components business, we've seen Defense over the last several quarters slow more quickly than we anticipated, and I think if you take it all on balance, keeping the forecast flat is probably a prudent thing to do.

Got it. And then if I look at your Medical division, the sales are off a little bit but an interesting mix shift with administrative sets up and pumps down so essentially more of the good stuff. Maybe explain that and does that give you a little bit more margin opportunity because the sales of the admin sets really look quite good in the second half?

In the second half of the year, Cai? Sorry, I'm wondering what...

Right, am I correct that admin sets are a little under 55 for the year, so it looks like they would trend up a bit in the second half, and that comps are at 41, so they will be a little better but compared with your last guide, there was a little bit more pumps and somewhat less in admin sets?

So you're right. Admin sets, the run rate on that, we think we got a little bit better on the second half. We're saying that maybe the pumps won't be quite as strong. I don't think that it's -- I wouldn't assume that there's a dramatic difference in the margins. The pump business actually has some nice margins at the OEM level, but we have also increased the forecast, our profitability forecast, in the Medical business. We ticked it up a bit from 3.4% to 4.2%. I mean it's immaterial in the total scheme of things, but it's about $1 million of extra profitability coming in the second half. So I think we are reflecting the fact that it looks like things might be getting a little bit better.

Okay. And then the last one, you mentioned that you don't have exposure to Hawker. How big are your receivable now to Hawker? Because I think the expectation is that they could be going into bankruptcy, so what is your -- what do they owe you?

It's not much, and we've got ourselves very well-protected, Cai.

This is something that we, I would say, Cai, over the last year or so, our folks here have been working very closely with the customers to make sure that we don't have an exposure that we would be reporting. So if something were to happen, it wouldn't, it just wouldn't show up on any of the line items in terms of the size. It would be immaterial.

And ladies and gentlemen, our last question will come from Eric Hugel.

Just a follow-up on from the medical business. John, I know and I agree with your short-term strategy of stabilizing the business and sort of getting everything sort of in place, but when you look at the long-term strategy, do you believe that you have sort of the critical mass in that business with sort of the pieces that you have right now to really effectively compete in that market?

Well, that's an interesting question. So let me turn the question around, can a small player establish a position in the medical devices market and be successful? And I think if you look at the history of successful companies over, at least, over the last several years, there have been a variety of companies, and I'm going to quote one that's actually runs [indiscernible], a company called SIGMA that was just bought out by Baxter, which is a company that started up within the last decade very small startup, developed a superior product, got that to market, got it through the FDA, and have done extremely well, and were bought out by Baxter for a very large sum of money. So I think if you ask what are the characteristics of the market, and do you need a certain size, pick a number, $0.5 billion, $1 billion, just to be able to compete, I would say, "No, you don't." And I think the fact that we bought 5 companies, they were small pump companies, that individually had also found opportunities, found niches in the market to be successful with their pumps. So I think with $150 million, $145 million, $150 million business, it's a business that's profitable. I think if we can focus our strategy in the right areas, develop the right products, I think we can be successful in this.

Do you envision further M&A down the road? Are there other sort of capabilities or products that would sort of mesh well together with that, that would sort of improve the overall business, or is your plan to really grow it organically?

I'm assuming that the question is still pertaining to the Medical Devices business. In the next -- no, I don't envisage that we will do any significant acquisitions in that business. I think we are -- we've acquired a series of companies, we've integrated them. I think we stabilized our business. Perhaps there's a little piece of technology here or there along the way that we might decide we want to add, although sitting here right now, I don't know exactly what that would be. I think we need to prove to ourselves that we are -- we understand the market and can make a good business out of what we already have acquired and not try to acquire our way to profitability. I think we need to consolidate what we've got, so right now acquisitions in the Medical Devices sector are not on the horizon for the moment.

Maybe in a broader standpoint from the M&A, when you look at the M&A pipeline, can you sort of talk to us about what you're seeing there for the whole company sort of in terms of numbers of opportunities and sort of the size and sort of where your -- are there any particular areas of focus for you?

I'd say there's an active pipeline of opportunities. It's not particularly better or particularly worse than it has been historically. As Don mentioned, we've actually purchased 4 small companies over the last year, but to some extent, it's gone a little bit unnoticed because they've all been relatively small. But we spent $80 million, and we've acquired what I would call 4 niche technology companies that fit nicely within our segments in terms of broadening their product portfolio, giving them additional opportunities of scope growth at existing customers and perhaps opening up some new adjacent markets. And that continues. I think we continue to find -- there's always a pipeline and there's always some things going on at any one particular time. I don't envisage -- there's larger opportunities when you start to get into the multi-$100 million opportunities, those opportunities we don't see on the horizon at the moment. Of course, that can change any moment, but right now I'd say our focus in our activities are more in the smaller end, the sub-$100 million opportunities where their tuck on acquisitions for products that we are familiar in markets that we know our way around. And I think we'll continue to do that over the next few years.

And then just 2 quickies for Don. Don, did you say, I think it was J.B.'s question, that the combined corporate overhead in option expense number should be around $8 million per quarter?

Well, let's make sure we got it right. I said there's a couple of numbers, but I'll throw them all out. The corporate expense number, our forecast for the year is $21 million, and then we've got equity-based comp and other that will be closer to $8 million. So combined you've got about $29 million in total.

And just in terms of, again, you've done a number of acquisitions over the past year, can you sort of break out what was the organic growth versus the total growth?

In the quarter and in the year, it's, I'd say, about 80% of the growth in the quarter was organic. So we experienced in the quarter 9%, so it's about 7% organic.

And with that, I'd like to turn it back over to our presenters for any final and closing remarks.

Thank you very much indeed for your attention. We look forward to speaking to you again in about 90 days. Thank you.

Once again, ladies and gentlemen that does conclude today's call. Thank you for your participation, and have a great day.