MOG.A (MOG.A) Q3 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Moog Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I turn the conference over to Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of July 27, 2012, our most recent Form 8-K filed on July 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, Ann. Thank you for joining us. This morning, we report on the third quarter of fiscal '12, we update our guidance for the remainder of this year and we provide our initial projections for fiscal '13. Our story today is one of strong performance in the quarter and a solid finish to the year. We're also projecting growth into fiscal '13 but with a cautionary note given the uncertainty in global markets. Q3. Q3 was another good quarter. Sales were up 5% to $611 million, net earnings of $39 million were up 15%, and earnings per share of $0.85 were up 16% from last year. Sales and operating profit were up in 4 of our 5 segments. Taking a look at the P&L, our gross margin was up slightly on the higher sales. R&D is also up, driven by the A350 program. SG&A is in line as a percentage of sales, and interest expense is down marginally. Our income tax rate came in at 27.2%, up from last year due to lower tax credits. The overall result was a 6.4% net margin and as I mentioned, earnings per share of $0.85. For fiscal '12, we're 9 months into our fiscal year. Sales are up 7%, net earnings are up 13%, and the year is on track for a 12% increase in earnings per share. Today, we're refining our sales forecast for the full year slightly with a net reduction of $21 million. Our earnings per share forecast is unchanged at $331 million, with fourth quarter EPS of $0.89. Looking out to next year, we're seeing some real positives in our businesses, as well as some real concerns in the macroeconomic picture. Our underlying businesses are strong, and our ongoing investment in new technologies and products is yielding growth opportunities at customers around the globe. If global economies hold up, fiscal '13 will be another strong year for the company, with double-digit earnings growth. However, there are 2 storm clouds on the horizon which we need to consider. First, on the defense side, we have the issue of sequestration. The forecast we will provide today assumes that sequestration will not happen as it is presently written. Our forecast for fiscal '13 is based on military spending in line with the present budget plans. No one knows whether sequestration will happen or if it does happen, how it will be implemented. There is the possibility that the Office of Management and Budget will empower the Department of Defense to use judgments in making program cuts. If this is the approach, our book of business may be largely unaffected. In any event, we've been through budget cuts before. We'll be ready to react when we know what is going to happen. And in the meantime, we're working hard to meet our present commitments to our customers. Second, on the industrial side, we have the financial crisis in Europe and the slowing economies in Asia. For the last year, we've told you that the U.S. was strong, Europe steady and China soft. The key question for us was whether our industrial business in Europe, driven by German machine builders feeding the export markets, would be affected by the European turmoil. Late in the third quarter, we saw some slowing of incoming orders at a couple of our European customers. At this stage, it's too early to tell if this was just some customer-specific issues or the start of a more structural slowdown. Our forecasting model is based on a rigorous process of building up our sales projection customer by customer and market by market. Our outlook is based on what our customers are telling us and what they believe will happen. We learned, however, in 2009 that our customers' forecasts don't always materialize. So in the present environment, we think it is prudent to plan for a range of possible outcomes in 2013 and manage accordingly. Note that even in the event of an industrial slowdown, we're still projecting sales and earnings growth for the corporation in fiscal '13. Though we have a strong underlying business, but there are macro effects which we will have to ride out. The industrial uncertainty is captured in our fiscal '13 projections, which we will present shortly. Now to the quarter, starting with our aircraft business. Q3 was another strong sales quarter in aircraft, with growth in both our military and commercial product lines. We're forecasting continued strength in Q4 and consequently are revising our full year sales forecast up $11 million. For fiscal '13, we're projecting further sales increases, a combination of double-digit growth on the commercial side and a modest increase on the military side. Q3. In the third quarter, total aircraft sales were up 10% to $242 million, another record sales quarter for this segment. Military sales were up 6%, with a handful of mix shifts from a year ago. Foreign military sales on fighter aircraft were up nicely, and our Navigation Aids business almost doubled as work on some major contracts for the U.S. Navy and the U.S. Air Force ramp up. On the other hand, our military aftermarket was off 10%, mostly the result lower of V-22 aftermarket activity related to the timing of shipments. Production activity on our F-35 program continued to increase, up 10% from last year. Turning to commercial, the growth story continues. Inert [ph] commercial OEM sales were up 13%, with strength in most platforms. Two items of note are slightly lower 787 sales in the quarter and no sales in the Hawker. Last year in the third quarter, we settled open scope change negotiations with Boeing on the 787, which resulted in a significant catch-up adjustment to sales in that quarter. On the Hawker, we had sales a year ago of $2.5 million and no sales this year. As we described last quarter, we have no lingering financial exposure to the Hawker program and to be conservative, are assuming no further sales on this airplane. The commercial aftermarket had a very strong quarter, up 25% from last year. 3/4 of this gain was the result of higher initial provisioning sales for the 787. Aircraft fiscal '12. With 3 quarters behind us, we're increasing our sales forecast for the full year by $11 million to $952 million, with the increase coming predominantly on the commercial side. Looking out to fiscal '13, we're projecting a sales increase of 8% for the aircraft segment to just over $1 billion. The military business will be up marginally with 3 items of note. Sales in the new KC-46 tanker program and in the aftermarket, will each be up by about $10 million, while OEM helicopter sales on the V-22 will be down by about $10 million. Commercial sales will be up 17%, driven by strength at Boeing and Airbus. We're assuming flat sales for businesses jets and a slightly lower aftermarket as 787 initial provisioning slows. Aircraft margins in the quarter were 11.5%, up from 10.4% a year ago. For the year, we're maintaining our margin forecast of 11%, up from 9.9% in fiscal '11. Margins in our aircraft segment vary quarter-to-quarter, but the general trend of increasing margins continues. For fiscal '13, we're forecasting further margin expansion to 11.5%. Now to Space and Defense. Sales in the quarter were up nicely, with strength in the space markets and defense markets offsetting lower security sales. Despite the strong quarter, we're moderating our forecast for the year slightly as some programs push out. In fiscal '13, we're projecting a 5% increase in sales. Q3. Sales in the quarter were up 9% to $87 million. In the space market, sales were up almost 20% from last year, with commercial programs up strongly and $2 million of additional sales from our Bradford acquisition. On the other hand, NASA was down in the quarter as the space launch program continues to refine their technical concepts for the next generation vehicle. Defense was up 15% over last year as our major missile production programs continue strong and work on the light armor vehicle ramps up. Finally, security was down in the quarter as DVE sales of over $3 million last year drops to 0 this quarter. We believe the DVE party is over and are anticipating very modest sales in this program as we look to the future. Fiscal '12. We're reducing our sales forecast for fiscal '12 by $10 million to $355 million. The reduction is in missiles and in security. Our tactical missile team had been anticipating some new wins for foreign military programs this year, and it now appears that the gestation period for this work is longer than we had anticipated. In the security markets, the uptick we have been anticipating in commercial programs has not yet materialized. For fiscal '13, we're projecting a 5% increase in sales to $373 million. The increase will come in our missile business as sales from missile defense programs increase and some of the foreign military opportunities we've been chasing come to fruition. We recently announced the signing of a deal with AMPAC to buy their In-Space Propulsion business. We have not closed on that deal, and thus [ph] the forecast we're presenting today does not include any sales or contributions from this potential acquisition. We anticipate that the acquisition will close by the end of our fourth quarter. Space and Defense margins. Margins in the quarter of 11.4% were up from 11% a year ago. For the year, we're anticipating margins of 12.1%. As we look to fiscal '13, we believe that the mix of business will be similar to fiscal '12 and are forecasting margins of 12%. Industrial Systems. Dollar sales in the quarter were essentially flat with last year. The stronger dollar this quarter resulted in a negative translation effect, and exclusive of foreign currency effects, real sales growth was 7% [ph] in the quarter. As a result of the weaker euro and some slowing of incoming orders in Europe, we're moderating our forecast for the remainder of the year. For fiscal '13, we believe we'll see some real growth. But given the uncertainty in the global economies, we'll provide a sales range for your consideration. Q3. Sales in the quarter were up 1% to $158 million. Real growth of $10 million was lost in the transition from euro to a stronger dollar. Starting with the energy market, sales were up 5% as strength in the gas and steam markets more than compensated for slightly lower wind energy sales. The wind energy story remains unchanged, with strength in Europe but weakness in China. In the industrial automation market, sales were down 7%, primarily the results of translation effects. We're seeing some slowing of our incoming orders in Europe. But on the other hand, we're seeing strength in general automation applications in the U.S. Finally, simulation and test remains a real bright spot, with sales in the quarter up 16% as the demand for simulators continues to grow. Fiscal '12. We think Q4 will be slightly weaker than Q3 and are reducing our sales forecast for the year by $15 million to $635 million. The reduction is in 2 main areas: wind energy sales in Europe and test sales in Asia. The lower test sales in Asia are on our large contract in India for automotive test facilities and are due to the delayed completion of government facilities. Fiscal '13. We've been reporting for several quarters that our industrial business was strong in the Americas, steady in Europe and slowing in Asia, particularly China. Late in this quarter, we started to see a shift in Europe, with incoming orders starting to show signs of weakness. The weakness was confined to some specific customers and it is too early to tell if this is just a blip or the start of a more prolonged slowdown. This may be an early warning sign, and given the general economic malaise in Europe, we think it is prudent at this point to be cautious in our outlook. We do not believe we are heading into a situation similar to 2009. We are looking to the future as a range of possibilities rather than a specific sales projection and planning accordingly. For fiscal '13, we're projecting sales between $624 million and $674 million, a $50-million gap. It is important to note that our high-end projection is based on our detailed roll-up of information from our customer base around the world. This is what they think will happen. Under this high-end scenario, we would see modest growth in energy sales, with flat wind energy sales and slightly higher nonrenewable sales. We would have 7% growth in industrial automation sales, with strength in the U.S. and modest increases in Europe. Finally, we would see 9% growth in simulation and test, fueled by investments in new automotive test facilities in Asia. On the lower end of the projection, sales of $624 million would be down $11 million from fiscal '12 and in line with the run rate of the second half of this year. This scenario still assumes growth in simulation and test, but sharply lower sales in wind energy and industrial automation. The folks who run our Industrial Systems group describe the present challenge as driving with one foot on the brake and one foot on the accelerator. We have customers demanding products and we are racing to keep up, but at the same time trying to plan for a possible slowdown. This is the management team that worked through the 2009 crisis, and they will be watching carefully as events unfold, ready to take the necessary steps to optimize our overall performance. Margins. Margins in the quarter were 10.1%. For fiscal '12, we're moderating our margin forecast 30 basis points to 10.3% to reflect the slowing sales outlook. In fiscal '13, we have a margin range associated with the sales range. At the higher sales level, we're projecting margins of 11.4% as we benefit from the higher sales. At the lower sales level, margins should be around 10%. Now to the Components Group. Sales in the quarter were up slightly from last year, the result of sales contributions from acquisitions. The mix shift from aerospace and defense to industrial markets continues, although the pace of this shift is slowing. Sales for the year will be in line with our last projection. Looking to fiscal '13, we're anticipating 6% sales growth. Q3. Sales in the quarter were up 3% to $90 million. On the positive side, we continue to see strength in our industrial markets: marine, medical and industrial automation. Marine remains strong as investment in offshore exploration continues. Medical was up marginally in the quarter as increased sales to Respironics compensated for slightly lower CT scan sales. Industrial automation was up nicely, with most of the growth coming from our Animatics acquisition. On the aerospace and defense side, sales were lower in military aircraft as programs continue to wind down. Sales in defense programs were actually flat with a year ago. We believe that we've hit the bottom in this market and are anticipating some further future growth due to foreign opportunities. For the full year fiscal '12, we're adjusting the mix of sales between the various markets slightly, but the overall result of the full year forecast is down marginally about $2 million from 90 days ago. For fiscal '13, we're projecting a 6% increase in sales to $393 million. Fiscal '12 sales are split 50-50 between aerospace and defense and industrial. In fiscal '13, we're anticipating a similar split, with increases in both major markets. On the A&D side, we believe our aircraft sales will be down slightly from fiscal '12, but our defense sales will be up as work on our missile defense programs ramp up. At the industrial side, the growth will be primarily in industrial automation. In our Components Group, our industrial automation sales are principally in the U.S., and this market continues to show signs of strength. Margins. Margins in the quarter were 14%. For fiscal '12, we're forecasting margins of 15.5%, up slightly from our last forecast. In fiscal '13, we're projecting margins of 15.6%. Now to medical. Our medical business continues to perform to plan. Sales and profits were in line with the last 4 quarters. For the year, we're moderating our sales forecast slightly to reflect the year-to-date experience. And looking to fiscal '13, we're projecting modest sales growth. Q3. Sales in the quarter were $34 million, down from $38 million last year. Sales this quarter were in line with the average for this fiscal year. Sales in the third quarter last year were a record high for this business and was the result of some unusual factors. Both pump and set sales benefited last year ironically as the result of product recalls, which had slowed sales prior to Q3 and then resulted in catch-up shipments in that quarter. Last year, we were coming out of issues with the software on our IV pumps and some quality issues associated with our sets. I'm happy to report that we are no longer struggling with these types of issues this year and our business is improving. Our sensor business was also inflated last year as a result of increased shipments to a major customer, who was capturing market share from another competitor who was also struggling with a product recall. We sell sensors to a wide range of medical pump manufacturers. You may remember that our sensor products are used to detect air bubbles in administration sets. For the full year fiscal '12, we're moderating our sales forecast slightly to $139 million. This assumes a fourth quarter in line with the run rate for the year. Looking out to fiscal '13, we're projecting a 4% increase in sales to $146 million. The increase will come in our pump products as our IV sales channel gains traction in the U.S. Our set sales will be down slightly as we change our supply arrangements with an international customer from a parts sale to a commission structure. Margins. This quarter we had an operating profit of $1.4 million or 4% of sales. This was similar to the last 2 quarters. For the year, we're keeping our profit forecast unchanged at $6 million, resulting in operating margins of 4.4%. For fiscal '13, we're projecting margins of 6%. Higher sales will yield margin improvements. However, under the Affordable Health Care Act, there's a new medical tax on the manufacturers of certain medical devices being introduced in 2013. We estimate that this will be a headwind of about 100 basis points of operating margin for the business next year. Our medical business has improved dramatically from last year and is now stable. We're pleased with that progress. We recognize, however, that we have a long way to go to make this a real success. Improving performance will be based on higher sales as we develop our dedicated sales channel and develop new products. This will be a slow process and we think we'll need another year or so of steady albeit modest performance before we start to see some significant improvements. In summary, after all the various adjustments, our fiscal '12 sales forecast is now $21 million lower than our forecast from 90 days ago. Total sales in fiscal '12 should be $2.45 billion, up 5% from last year. When compared to our forecast last quarter, sales in 4 of our 5 segments will be off slightly as we factor in the results of the third quarter. On the other hand, sales in the aircraft group will be $11 million higher as commercial programs grow. We're maintaining our operating margin forecast at 11.3%. The result will be earnings per share of $3.31, a 12% increase over fiscal '11. In fiscal '13, we're projecting both sales and earnings increases. Just to remind you, in this projection, we are not assuming that sequestration will happen. We are, however, providing a $50-million sales range in our industrial business in recognition of the uncertainty in global markets. At the high end of the range, sales for the company will be up 7% to $2.61 billion, and earnings per share will be up 12% to $3.70. At the lower end of the range, sales will be up to $2.56 billion, and earnings per share will be up 6% to $3.50. As in most years, our quarterly earnings will start out a little slower and then accelerate through the year. Assuming we hit the high end of the range at $3.70, we anticipate quarterly earnings of $0.85 in the first quarter, $0.85 in the second quarter, $0.95 in Q3 and $1.05 in our fourth quarter. Now let me pass you to Don, who will provide some color on our cash flow and balance sheet.

Thanks, John, and good morning, everyone. Free cash flow in our third quarter was strong at $43 million, and our net debt declined by $40 million to $582 million. The difference is mostly related to foreign currency translation effects on the balance sheet. Through the first 9 months of fiscal '12, our free cash flow was $64 million, compared to year-to-date net earnings of $111 million. After a slow first half, largely due to the timing of receipts, cash flow is showing the second half strength that we've been forecasting. We expect our fourth quarter free cash flow to be similar to what we just achieved in the third quarter, so our last forecast for all of fiscal '12 that showed a range of $95 million to $110 million is still a pretty good forecast. This will result in a cash conversion ratio of about 70% in fiscal '12. Averaging the last 3 years, our cash conversion ratio will end up being a respectable 90% over that time period. Focusing on the balance sheet. Compared to 3 months ago, receivables and inventory levels were flat. Customer advances increased by $5 million to $112 million, largely related to military aftermarket orders on the C-5 program. Capital expenditures were $25 million in the quarter and $75 million for the 9 -- first 9 months of the year. We're still forecasting that our CapEx will come in around $105 million for all of fiscal '12. Finally, depreciation and amortization totaled $25 million in the third quarter and $74 million year-to-date. We're forecasting depreciation and amortization for all of fiscal '12 to be about $101 million. For fiscal '13, we're forecasting $100 million of capital expenditures, and depreciation and amortization should come in around $114 million. Regarding pensions, we've previously described how last year we doubled up on our contributions into our U.S. defined benefit pension plan, making our forecasted contributions in fiscal '12 on the lighter side. In our first 9 months, our global defined benefit pension plan expense was $26 million, while our contributions were only $6 million. We're estimating our full year '12 global DB pension plan expense and contributions to be $35 million and $8 million, respectively. For fiscal '13, we're planning to resume the funding of our domestic DB plan with $30 million of contributions throughout the year. And for all of fiscal '13, we're estimating our global DB plan expense to be approximately $38 million and our contributions will be about $39 million. So putting the pieces together, we're forecasting our fiscal 2013 free cash flow to be $135 million or a cash conversion ratio of about 80%. Turning to our finances. We had debt outstanding at the end of the quarter of $721 million, and our cash balances were $139 million. Our total book equity was $1.3 billion. Our quarter-end net debt as a percentage of total cap was 30.9%, down some from last year's 32.9%. Our leverage ratio was 1.7x and the net -- and I'm sorry, the quarter-end unused capacity on our $900-million revolving credit facility, which terms out in 2016, was $651 million. We've got plenty of capacity to handle the pending acquisition of AMPAC In-Space Propulsion that John referenced earlier and the flexibility to pursue other opportunities. Our effective tax rate in the third quarter came in at 27.2%, up slightly from last year's 25.9%. For the first 9 months, the effective tax rate was 29.1% compared to 27.4% last year, and that's up primarily related to lower foreign tax credits and research and development credits. For all of fiscal '12, we're forecasting our effective tax rate to come in at 29.1%. And looking ahead to fiscal '13, we're forecasting an effective tax rate of 30.6%, up slightly from this year due to the mix of global taxable earnings. To reiterate John's summary, our first 3 quarters have been pretty solid. Our fiscal '12 sales will end up being up by 5% to $2.45 billion while earnings per share will be up 12% to $3.31 a share. And with that, we're ready to answer any questions you may have, and thanks for listening.

[Operator Instructions] We'll take our first question from Tyler Hojo.

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

Thanks, Tyler. So the commercial aftermarket was up 25% in the quarter and of that, 3/4 of that was essentially initial provisioning on the 787. So if you exclude the 787, it was up about, call it, 7% -- 6%, 7%, 8%. I would caution you that our aftermarket, as we said over the years, it tends to fluctuate up and down. It can go up and down plus or minus 10% quarter-to-quarter without it actually being a trend that is easy to put your finger on. So the underlying shift of 7% or 8%, I would say, I don't know that, that bodes a particular trend up or down. I would say that's within the normal range of fluctuation that we might see quarter-to-quarter. So the big difference was the 787 initial provisioning. And as I said for next year, we're forecasting that, that initial provisioning, the aftermarket will actually be down slightly from this year and really the difference is that we think the 787 initial provisioning will slow next year.

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

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

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

No. I don't want to go into those. I don't want to get down into margins at the level below the -- kind of the segment operating level. We don't provide margins product line by product line within the segments.

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

So this quarter was more or less flat with a year ago in terms of the wind sales. We are seeing -- the wind story continues to be the same. It's the same in that it's -- the volatility continues. There's a lot of volatility in China, and we've seen our wind business in China really come off from a couple of years ago. It's down 50% from what it was 2 to 3 years ago. On the flip side, we've seen nice growth in Europe and -- but there is some volatility there as well, or there's potential volatility in Europe as we look out to the future. And that's why, when we provided a range, we said part of that range would be lower wind energy sales if it doesn't materialize the way we're thinking. So it's the same story as it's been before. It's fairly significant volatility. We're working -- we're trying to manage our way through that as best we can. But given the big shifts quarter-to-quarter, we're kind of constantly in a catch-up mode. Now some of it is large customers that place large orders. So if you get the order, you got to run to try and keep up. If you don't get the order, you're looking to see, so how do I size the business to make sure I'm at the right level? So I would say it's a volatile business that continues to be a management challenge. Having said that, longer term, we believe that this is exactly the type of business that we're a very successful company at. It's a high reliability, tough environment, difficult application, and that's the type of thing that we, as a company, generally speaking excel at. What we're going through right now, I would say, is a dramatic shift in the wind energy market rather than a shift in our position within it. So we're riding the waves up and down as the market consolidates, growth rates slow, overproduction capacity is taken out in China and perhaps to some extent in Europe. And we're essentially trying to ride our way through that wave with a view to when that all settles down, this is really the type of market we think we'd be very good at.

Okay. And you mentioned kind of in wind the expectation, I guess, at the lower end of your guidance that wind is down pretty substantially. Just wondering, I mean, do you need to take some costs out in regards to your current footprint? Or how should we think about that?

Well, if the wind energy sales are down, we will adjust accordingly. But we have quite a large temporary workforce in this business because of the volatility that we've seen in it, so we think we'll be able to react pretty quickly to a downturn.

We'll move on to our next question from Cai Von Rumohr.

So could you give us a little bit more color on aircraft profitability in the quarter -- it looks like your contract reserves -- loss reserves went up -- and give us some color on how the Wolverhampton move has ended?

Let me do the second one first. So the Wolverhampton move, that's almost done. There were still some hanging costs, I would say, in the third quarter but nothing particularly significant. And there's probably going to be a small little bit in the fourth quarter just as they do a little bit of cleanup, but again, not as significant as we saw last quarter. [Audio Gap] of contracts, development contracts, production contracts. And as the quarter unfolds, that contract loss reserve fluctuates with activities in the various contracts. So the shift this quarter is not something of -- out of the ordinary in terms of what happens in the business. As they say, it lines it up from where we started the year.

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

Yes, yes.

Okay. What contract in particular? Is anything notable, because it's like $4 million or $5 million?

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

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

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

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

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

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

Are you talking about into fiscal '13?

Fiscal '13, yes, the margin in aircraft. I mean, you have lots of big benefits. $5 million from R&D down. Wolverhampton is down. Why aren't the margins better?

The margins next year will be up 50 basis points from this year is what we're projecting. We would like to see the margins stronger, but we are still in the early phases of a lot of the commercial ramp-ups and the major defense one, which is the F-35. And in that ramp-up phase, in the early phase, the 87, the 350, which starts to kick in next year in terms of production, some of the biz jets and the JSF, the initial margins just aren't proving to be quite as positive and supportive of margin expansion as we would have hoped. Having said that, there is margin expansion. We came from 9.9% last year to 11% this year to 11.5% next year. And we're confident that, that trend will continue. It's just perhaps unfolding a little bit more slowly than we had anticipated, given, as I say, the startup costs associated with those major production programs.

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

Well, let me do the biz jet piece for you first. Let me just look up the specifics of it. I think what's happening is Hawker is down next year. One sec here and I'll -- so Hawker this year, Cai, is going to be $2 million to $3 million and that's gone next year, and that gets compensated then next year with some of the other newer programs coming in. So there's a loss of a couple of million dollars there. And what was your other question, sorry?

The Boeing contract.

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

And the last one, your fourth quarter margin in medical, how come it's not better given the lift in the admin sets?

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

Moving on to our next question from J. B. Groh.

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

Are you looking at quarter-to-quarter?

Yes.

I'm looking at, let's see here, corporate expense. Hold on a second. I don't -- let me look at -- calibrate here...

$5.7 million versus $8.5 million, and I know there's the -- I combined the comp in there too, but...

I'm looking at numbers in front of me, and this is off the press release information that we sent out that had corporate and other, including equity-based compensation, at about $5.8 million or so this quarter, third quarter, and it's about the same a year ago, so [indiscernible].

I'm just talking sequentially. I think it's down sequentially. Well, the question behind the question is, what do we bake in for 2013?

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

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

I think there are -- there is the potential of some surfaces on -- you're talking about the MAX or the neo, I guess. Boeing and Airbus haven't, as far as we know, yet settled exactly on the actuation architecture and the suppliers for both of those airplanes. And there are open RFPs or RFQs floating around. Having said that, it's for a surface here and a surface there. They are not, as far as we understand, planning a wholesale change-out of the flight control system. I mean, you'd do that if you were getting a new wing, but I think they're trying to minimize that change. So it might be a surface here or a surface there. It's a relatively small -- if we were to win something, it's probably a relatively small effort and it's probably spread out over the next couple of years. And at the moment, it's still not clear to us. We haven't won anything, but I'm not sure that we have -- we know that we have lost anything either. But as I say, it's probably going to be a smaller effort. It's not a whole new flight control system and a program, say, on the scale of something like the 350 or the 787. I think they'll probably go vastly with the incumbent and it may well be that we're just doing financial gymnastics to see whether or not they can put a price pressure on the incumbents.

Right, right. And could you address A350? I know there's been a couple of little issues with the program. But how is that trending? And what's your outlook there?

Our program is -- we're doing okay on the program, and we're working to the schedule that Airbus has. We haven't had any significant hiccups on our end, so I don't know that it's -- from our perspective, as I say, we're marching to the schedule that Airbus has published and we're kind of pretty much on plan.

Okay, great. And hey, maybe you could talk about your attitude towards acquisition and cash flow deployment. What sort of things, what sort of areas would you be looking at?

Well, our history in acquisitions kind of follows up with -- follows in line with the overall diversity in the company in terms of -- each of the operating groups typically is looking for opportunities to grow their business. And if you go back over the last 10 to 15 years, you'll see we've acquired kind of at irregular intervals, and that's based on opportunities as they arise in each of the operating groups. So we would be open and interested in acquisitions that fit from a strategic perspective, a product and technology perspective and from the financial hurdle perspective in any of our businesses, except the medical business for a period of time. Until we convince ourselves and convince the market that we have a solid plan in medical and that we can see our way to double-digit earnings, I think we need to bed down what we've got and make sure we find that, so -- but in the other businesses, I guess, if you pick them out, defense, obviously, we'd be very cautious in defense and particularly over the next 6 months or so until we all know what's going to happen with sequestration and perhaps the future of the budget. But if the ideal opportunity came up in defense, we'd still be open to looking at it. And I'd say the same in each of the other businesses. You have seen we've signed a deal that hasn't yet closed for an expansion of our space business, the In-Space Propulsion business. So we're open. We'd be open in the industrial business. We're open -- I'd say, we're open for business. It's a matter of, can we find the right opportunities at the right price that fit with our strategic direction?

We'll move on to Julie Yates.

John, on defense, for FY '13, if you're not including additional cuts in your formal guide, can you offer some sensitivity to further cuts? And I ask this because clearly the bias leans heavily towards some level of incremental cuts, against no more cuts, even if sequestration is avoided.

So I'm not quite sure of your question, but let me do this for you. If you take our total defense business, it's just -- for next year, it's just short of $1 billion out of, let's call it, $2.5 billion, $2.6 billion, so kind of in the mid-30%, 35% range. Of that, about $800 million is DOD funded in one way or another through primes. I mean we don't supply directly, except to the aftermarket, to the DOD. But $800 million of it is DOD. Of that, half of it is on the aircraft side and then the other half is a combination of defense, space stuff. So if you say -- so that -- you can use that as a calibration. So if there's a 10% cut and it's just a straight cut across the board, that would be $80 million of potential exposure. On the other hand, I think the real difficulty, Julie, for all of us, you guys and us included, is, so how are they going to cut the money? If it were a major cut to the JSF, that would have a disproportionate effect on us. On the other hand, if it's a military thing or a guns-and-bullets type of thing, that wouldn't have such an effect on us. So I think that's as much as I can -- in terms of sensitivity, hopefully, that gives you enough to at least think about it. The devil will be in the details, of course.

Right, right. Okay. And then just back to the A350. The schedule you mentioned that Airbus had provided, does that include the additional 6-months delay that Airbus announced today? And how does that impact you?

Well, we wouldn't -- when you're involved in these programs, typically from the inside, you get to see how the program is coming together. And I think our folks internally would have suspected that the program was probably going to be delayed. So the pushout today, I mean, in terms of our work on the program, there will probably be a relook at where we are versus what they're doing. Typically what happens, Julie, unfortunately, is when programs get delayed, you just keep spending at the same level because the program discovers, well, we can now optimize a little bit more or change a little bit something else. So from a supplier perspective, like us, what happens is you keep spending at kind of the rates that you were spending at pretty much. So I think the delay today, as I say, internally, is probably something that folks were thinking was going to happen. I don't think it has -- it doesn't have any major change that I would say to you. Yesterday, we were thinking R&D. Next year, it was going to be this. And today, we're thinking it's going to be that. It will just mean that we'll probably have an extra 6 months of spending R&D more than we thought that we were going to have. And it wouldn't have been yesterday. Originally, say, when the program got kicked off.

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

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

[Operator Instructions] We'll move on to Michael Ciarmoli.

Maybe just a follow-up on the topic of some of your defense exposure. What would be the most damaging cuts that would negatively impact your current revenues or profitability throughout the JSF? I mean, are there programs that you're looking at where you would really see some disproportionate pressure?

Well, Mike, maybe a different way of approaching it is to say, "So how does our military business goes up," if you talk about the aircraft side. And it's -- as we explain it to people, there's 4 major OEM programs and there's the aftermarket: the JSF, the F-18, the V-22 and the Blackhawk/Seahawk. Now off the back of an envelope, I can't do exactly how much that adds up to. But I would say that's probably a little bit -- 50% to 60% of our military aircraft budget -- of our military aircraft and then there's aftermarket. And the aftermarket -- the military aftermarket is about $200 million, and that's a whole collection of various platforms. So if -- and we are planning for lower V-22 rates as we look out to the future, so we've already baked that in. We're planning for JSF rates in line with what Lockheed is and the government is telling the world, I mean, slightly time shifted just in terms of the work we would put in. But we're not second guessing those folks. F-18 seems like it's solid. If the F-35 dropped down, the F-18 might probably pick up a little bit. That will be a little bit of an offset. And the helicopter, the Blackhawk/Seahawk business, again, we line up with what the defense procurement folks are saying that they're going to buy. So if any one of those programs took a major hit, then we would see that disproportionately. And if the aftermarket is tougher, I think, because, as I say, it's a very wide range of programs and it would depend on -- you could make the assumption or you could think of, well, if they're not going to buy as many new platforms, maybe they're going to have to keep the old ones flying, but maybe the aftermarket won't be as adversely affected. Or they could just decide that they're going to reduce fleet capability and not have as many repairs and overhauls done and just suffer the loss of capability that might go with that, at least temporarily. So does that help? I mean, this is one of the things we keep asking ourselves. And as I say, the devil will be in the details once we know how the Department of Defense is going to allocate the cuts, if they go through.

No. Yes, that's perfect. That's helpful. And then maybe just shifting to the other side of the business. On the industrial market and even for your planning next year, can you maybe take us down a notch into some of the specific end markets? I mean, I know you guys touch a lot of different markets from plastics and what have you. Maybe where you're seeing some of that slowness specifically, and kind of what are some of those swing factors?

Well, first of all, let me calibrate. So we got a $50-million range on our industrial business for next year. The low end is kind of in line with the second half of this year, and the high end would forecast $50 million of growth on $630 million of sales. So it's up single-digit percentages. So we break the industrial business into 3 main categories: energy business, industrial automation and test and simulation. Now let me start with the energy business. Energy is 2 pieces: renewables, which is wind; and nonrenewables. The nonrenewable business in the next year, which is mostly gas and steam -- controls we do for gas and steam turbines, that's actually looking pretty good, more or less kind of flat with this year. And then we've got some -- actually, no, it's up a couple of million dollars. And then we've got some oil and gas exploration businesses where we do a variety of products for the Schlumbergers and the Halliburtons of the world and that looks pretty solid, up marginally next year. And right now, with our forecast, we're saying wind will be flat with 2012 at about $115 million, more or less, so wind flat but the other energy pieces up a bit. So you get some growth in the wind -- or in the energy business. If you look at industrial automation, on the low end, we'd see it down a little bit from this year. But the industrial automation, it's -- that's also a couple of pieces there. A lot of it is driven by machine manufacturers in Europe, plastics injection molding machine manufacturers, metal forming machine manufacturers. And we think we would see some weakness there. On the other hand, at the moment, at least, the Americas, our business in the U.S. in industrial automation is looking pretty strong. Now will that hold up forever? I'm not sure. But if you think -- if I remind you of my comments in the prepared text on our Components Group, industrial automation for our Components folks is looking pretty good for next year. They're feeling -- and that's a U.S.-based business. They're feeling pretty good about that. So the industrial automation, we think, Europe -- if there's a softening, Europe could see that. The Americas might hold up pretty well. And keep in mind that as we go through these businesses, we're constantly bringing out new products and looking to expand our scope of supply. So it's not just a response to the market. It's also how we're doing with introducing new products, extending our scope of supply at a variety of customers. So the business shifts gradually as we move forward. So you've got the down -- the headwinds of perhaps market forces. Hopefully, we have the tailwind of new products and larger scope of supply into various customers. And then the third piece is the test and simulation business, and that's driven -- the simulation business is going very well. That's really flight training simulators. And test -- the test business next year, we think, will be stronger, and that's on the auto test side. And there's 2 reasons for that. One is, if you remember, we described we have a large contract in India to equip 3 government test centers that they're building there to essentially put in indigenous capability to test new cars. And that has kind of shifted to the right. Nothing to do with us. That's just the Indian government in terms of procuring land and doing building. That's kind of shifted to the right, and perhaps, to some extent, we might have been able to anticipate that. So that shifting to the right and that moves a little bit more sales into next year. But we also believe that there is actually an investment in Asia starting to emerge in automobile capabilities, like the Indian thing that we've described. That in China and some of the Asian economies, there are opportunities for auto test facilities. And we think we're well positioned to capture those. So we should see some growth on the auto test side next year. So you put it together, you got a little bit of strengthening on the energy side, driven by the nonrenewables, oil and gas, and then steam. You've got industrial automation, some strength in the U.S., which hopefully will hold up, maybe some weaknesses in Europe, but as against that, some positives in terms of new products; and then test and simulation, which continues to look strong -- simulation strong with some growth in auto test in Asia. So like so many of our businesses, it's a mixed picture. It's diversity across markets, across products that makes it difficult just to take a single trend and project that, that's what's going to have the impact. The other thing I said in the text, which I think is important, is our high-end forecast is based on a detailed roll-up by customer of what the customers think is going to happen. So it's not something that we cook up at the corporate level. It really is based on a ground-up approach. The difficulty we saw with that in -- back in '09 was that we thought our customers were seeing positives and then suddenly everything changed. And that's why we put in the range this time to try and say, "Well, even though that's what the customers are telling us and that's what traditionally we'd be passing on to the outside market, we think that maybe we're all potentially overly optimistic, and therefore, we'd like to put this range in." And internally, we'd be managing with that in mind, so we'd be trying -- we'd be watching very carefully for shifts. And as I said, our industrial folks describe it as driving with one foot on the accelerator and one foot on the brake, because we've got a lot of business that we're working hard to get to customers, and at the same time, we're trying to anticipate, will they slow down? So it's a challenge. But we've got diversity across markets and geographies, and we think we'll be able to ride through it over the course of the next year.

[Operator Instructions] And ladies and gentlemen, it looks like we have no further questions at this time.

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

Thank you.

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