MOG.A (MOG.A) Q2 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Moog Second Quarter Fiscal Year 2013 Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Ann Marie 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 April 26, 2013, our most recent Form 8-K filed on April 26, 2013, and in certain of our other public filings with the SEC. We 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'll report on the second quarter of fiscal '13 and update our guidance for the full year. Sales, earnings and earnings per share are all up this quarter, so the news is generally good. However, fiscal '13 looks like it will continue to be a challenging year and we're taking further action to ensure we meet our operating goals for this year and position ourselves for a stronger 2014. Let me start this morning's call with the major items of interest and then move to the numbers. The headline story this quarter is higher aircraft sales and margins compensating for lower industrial sales and margins. The Aircraft segment had a strong quarter. The Military business is holding steady and the Commercial business is growing. Margins continue to improve as our sales grow and our operational initiatives bear fruit. We're anticipating continued strength for the remainder of this year. On the other hand, our Industrial business continues to struggle with weak demand in many of our major markets. We are in the middle of a restructuring effort to align our costs with our projected sales levels and are focused on positioning ourselves for double-digit margins in this segment in 2014. Since our last call, sequestration has gone from at rest to a reality. So far, we have not seen a direct impact on our business that we can clearly attribute to sequestration. We're paying particular attention to our Military aftermarkets which has shorter lead times than our OEM business. This aftermarket business has enjoyed significant growth over the last few years, as we've expanded our scope and supply and thus, cooperative arrangements with many of the U.S. Military depots. We think that sequestration could have a disproportionate effect on fleet maintenance and upgrades, which could affect this portion of our business. We're optimistic that our Military aftermarket should be okay in 2013, given our backlog and short-term visibility. We think any measurable impacts would likely be solved in 2014. We're working hard in these markets to expand our footprint, evidence the growth over the last 2 to 3 years. We're hopeful that these initiatives will mitigate the longer-term effects of slowing Defense spending. For our production programs in Defense, we believe 2013 will also hold up and are waiting to understand more about the impacts in the following years. We're already taking action to turn our overhead costs in anticipation of tougher times ahead. In our next quarterly conference call, we'll provide initial guidance for 2014 and at that stage, we'll give you an update on how we are factoring sequestration into next year's numbers. So looking to the second half of 2013, we think our sales will be somewhat lighter than our forecast from 90 days ago. Including the effect of acquisitions, our organic sales in fiscal '14 will be down about 2% from our January forecast. Our industrial markets continue to be soft and we're moderating our Defense look -- outlook slightly. In light of these trends, we're intensifying our restructuring efforts to position ourselves for 2014. So now to the numbers. Q2 fiscal '13. Sales in the quarter of $643 million were up 3% from last year. Sales growth in Commercial Aircraft balanced the sales decline in our Industrial segment. Acquisitions contributed $29 million of additional sales. So as I said in my opening, it's a story of strong commercial aircrafts compensating for weaker industrial markets, with growth coming from acquisitions. Net earnings of $37 million were up 3% and earnings per share of $0.80 were up 4% from last year. Taking a look at the P&L. Our gross margin is up nicely. R&D is significantly higher, driven by the continued spend on major aircraft programs. We incurred $2 million of restructuring in the quarter, the equivalent of $0.03 per share, but interest expense is down a similar amount. SG&A as a percentage of sales is in line with last year and taxes came in slightly lower than last year. The result was a net margin of 5.7% and as I mentioned, earnings per share of $0.80. Our fiscal '13 outlook. We're moderating our sales forecast for the year by $26 million compared to our guidance 90 days ago. The major drivers are lower Industrial sales and a slightly softer Defense outlook. Aircraft sales will be $11 million lower, mostly the result of slower sales in our Navigation Aid business. Space and Defense will be down $13 million, spread across their 3 markets: space, defense and security. We estimate that Industrial will be about $10 million lower on weaker wins and industrial automation sales. Components will be $12 million higher because of the addition of acquisition sales and finally, Medical will be about $5 million lower, reflecting the run rate of the first half. The good news is that our underlying businesses continue to perform well despite the lower sales forecast. Excluding restructuring, our EPS forecast for the year is in the range of $3.55 to $3.65. Last quarter, we estimated $4 million in restructuring this year, but given the softening sales outlook, we're increasing that total to $11 million or about $0.15 per share. So including restructuring, our EPS for the year should be in the range of $3.40 to $3.50 per share. We're often asked what we see at the risks and opportunities associated with our forecast. On the risk side, I would say that we may not yet have found the bottom of the present industrial cycle and the sequestration could bite sooner than fiscal '14. On the opportunity side, our Aircraft business continue to strengthen and we could see a bounce back in Industrial demands. As always, we try to provide a forecast which balances these pluses and minuses. Now to the segments. I'd remind our listeners that we provided a 2-page supplemental data package, also on our website, to provide all the detailed numbers to your models. I suggest you follow this in parallel with the text. So beginning with Aircrafts. Q2 was another good quarter for this segment. Total aircraft sales were up 10% to $259 million. 90% of the growth was in our Commercial OEM sales. We think sales are going up over 40% from last year. 787 sales were up almost 70%, as we continue to ship product to Boeing's original production plan, unchanged by the 787 grounding. We also saw nice pickup in our business jet sales. Commercial aftermarket was about flat with a year ago. In the Military market, sales were up marginally from last year, our OEM business was up about 5%, mostly the result of the timing on F-35 production sales. This should correct in the coming quarters, with some other puts and takes with some domestic problems, a little weaker balance by slightly stronger foreign sales. Industry aftermarket was also up nicely in the quarter, driven by better foreign military sales. Fiscal '13. We're reducing our sales forecast for Aircraft for the year slightly. The primary driver is weaker sales in our Navigation Aids business. We had anticipated some additional contract awards in this business unit in fiscal '13, which we are no longer planning. Overall, we're reducing our Military sales forecast by $11 million or about 2%. We're keeping our Commercial forecast unchanged from 90 days ago. We're tweaking the mix a little. We think sales to Boeing will be slightly higher, while sales to Airbus will be slightly lower. Aircraft margin. Margins in the quarter were 12.2%, in line with the first quarter. Higher sales and a nice mix drove the improvements over last year. The margin performance was particularly impressive given the relatively high R&D load this quarter. R&D was up nearly $5 million from our first quarter, We had higher R&D on the A350, as well as significantly higher costs on the 787-9 program. We will be reimbursed for the 787-9 development work, but because of the way the contract is structured, the reimbursement shows up on the gross margin line. We have previously expected it will be classified as an R&D credit. Development work on the 787-9 will continue for the next 3 to 4 quarters and combined with a higher run rate on the A350, our R&D line is likely to stay elevated for the remainder of this fiscal year before trailing off in 2014. Despite the higher R&D load, our Aircraft business continues to perform well. Given our strong showing in the first half, we're increasing our margin forecast for the year to 12.2% after restructuring, or 12.4% before restructuring. Turning to Space and Defense. Sales in the second quarter were up 18% from last year's $106 million. The growth is all a result of our 2 recent acquisitions, In-Space Propulsion and Broad Reach Engineering. Each of these acquisitions contributed $11 million in sales in our second quarter. Factoring out the effects of these acquisitions, we see that our legacy space business is down 12% from last year, our Defense business is markedly lower and our security business is about flat. The Space business is coming off a strong 2012. In addition to a general slowdown, we saw some mix changes across our program portfolio. Of note is the reduction in sales in the common TVC program, as well as the development phase winds down and the production phase has not yet ramped up. In the Defense market, our Tactical Missile business remained strong, while our armored vehicle and submarine businesses were slightly lower. And in the security market, sales are in line with last year. You may remember that previous comparisons of this sector were dominated by the effects of slowing DVE sales and that effect is now essentially behind us. Space and Defense fiscal '13. For the year, we're moderating our sales forecast by $13 million to $420 million, to reflect some of the softness we saw in the first half. We're reducing our Space forecast by $3 million, our Defense forecast by $6 million and our security forecast by $4 million. Despite the reduction in our full year forecasts, we're still anticipating a pickup in sales in the second half, as a result of acquisition sales, additional launch vehicle work for NASA and common TVC and increased Tactical Missile sales. Margins. Space and Defense margins in the quarter were soft at 7.3%. There are several reasons. First, our acquisitions drove all the sales growth and more, but did not contribute much, if any margin this quarter. Our legacy sales were actually down 6% in the segment from last year. Second, we encountered a technical challenge in the Space program this quarter and took a reserve of $2 million or about 200 basis points to cover the future cost to face this issue. Finally, our Space margins tend to fluctuate quarter-to-quarter, as the mix of developments and production programs shifts. In this quarter, we had fewer higher-margin production jobs than last year. We believe the second half will be much stronger and despite the lower sales forecast, we're keeping our margin forecast for the full year unchanged at about 12-point -- at 10.3%. Before I leave the Space and Defense segment, let me offer a longer-term perspective on our strategy in the Space market. Over the last 18 months, we've made 3 acquisitions in this market, almost doubling our sales run rate. Unfortunately, over the same period, the market for our Space component has softened a little, tempering our profitability. Historically, Space has been a great contributor for our company. However, our Space business tends to be cyclical, a combination of market dynamics and the mix of development and production programs we're involved in at any particular time. Looking past the short-term cycles, it is a great business for us, with high barriers to entry and limited competition for specialized components. We believe our recent moves to expand our scope and supply and broaden our geographical footprints put us in an excellent position to continue our growth's trajectory in this market and deliver double-digit profitability over the long term. Turning now to our Industrial Systems business. Sales in the second quarter of $144 million were 14% lower than last year. Sales were also down slightly from our first quarter total of $148 million. The good news, however, is that our incoming order rate picked up in the quarter and we hope to see moderately improving sales in the second half. Sales and energy were 27% lower than last year. The decline is in our Wind Energy business, which remains a challenge. In this quarter, we saw continued weakness in China, as well as a slowdown in Europe and the U.S. We continue to consolidate our activities around the globe and reduce our cost basis. The Wind OEMs are struggling with overcapacity and slowing demands, so we're riding that roller coaster with our customers. Turning to industrial automation. We continue to see a slowdown in most of the major industrial markets we serve, including plastics, metal forming and steel mills. The slowing in Europe has persisted this quarter, although our incoming order rate has improved over the first quarter. Our test and simulation business was down slightly in the quarter, a combination of higher simulation sales and lower test sales. For fiscal '13, we continue to look for the bottom in our Industrial forecast for the year. Last quarter, we projected the year at $600 million, more or less in line with the run rate of the first quarter. Given the weaker second quarter, we're now reducing our forecast for the year slightly, from $600 million to $590 million. The adjustments downwards are in our Wind forecast and our industrial automation forecast. Industrial Systems margins. Margins in the quarter were 5.4%. Exclusive of restructuring, margins were 6.6%, 50 basis points higher than the first quarter despite the lower sales. Last quarter, we reported that we had developed a restructuring plan to align our cost structure with our sales projection. We were planning for a restructuring charge of $4 million in 2013. In the global nature of our Industrial business, restructuring actions typically take longer to execute than is normal in our U.S.-based businesses. We moved about $2 million in restructuring in the second quarter. Given the continued weakness in the business, we now believe we will need to take additional actions to position ourselves for a stronger 2014. Therefore, we're increasing our anticipated restructuring costs in our Industrial segment for the year from $4 million to $9 million. We should start to see the benefit of these activities in the second half. For the full year, we're now anticipating margins of 8.8% before restructuring and 7.2% after restructuring. Let me finish our Industrial segment with some further thoughts on our Wind business. You may remember that we entered this business in fiscal '08 with the acquisition of LTi, a German company which provided electric pitch control systems for wind turbines. The first couple of years were great, but in the last 3 years, our business has declined, as the industry has consolidated and demand has waned. With the benefit of hindsight, our timing for getting into this market was not great. However, hindsight is almost 20/20 and the more relevant question, I believe, is whether we think it's a good business for us in the long term. And we believe it is. Many of you have heard me describe our company as the supplier of choice When Performance Really Matters. We believe that we deliver superior value in applications where performance, reliability and durability are key. In these applications, the cost of a component failure is usually far higher than the cost of acquiring that component. So a premium is put on performing first time, every time. This is where we excel. When we look at the Wind business, we believe the opportunity fits our profile. So despite the challenges in the business, the market is growing and it's here to stay. It's slowly settling down as the overcapacity which was built up over the last decade is reduced. We're starting to introduce new products, which we believe will put us in a better competitive position and allow us to capture market share. I have no doubt that the coming couple of years will continue to be challenging. But longer-term, I believe this will be a great business for us. Turning now to Components. Second quarter, another solid performance from our Components Group, with sales up 3% to $99 million. The growth was in our non-Aerospace and Defense markets, which were 5% higher than last year. The strength was all in the Energy category, where our offshore exploration business continues to flourish. Our recent Tritech acquisition has helped bolster our position in this market and we continue to win new applications for our technology. Our Medical sales were about flat with last year and our industrial component sales were down, reflecting the weakness we've seen in our broader Industrial segment. Our [indiscernible] with last year, in both the Aircraft and Space and Defense categories. For fiscal '13, we're increasing our forecast from 90 days ago by $12 million, to reflect the recent acquisition of Aspen Motion technologies. The sales increase all shows up in our Industrial capital. Components margins. Margins in the quarter of 15.5% were healthy and in line with the long-term average for this business. For the year, we're moderating our margin forecast slightly from 90 says ago to 16%, to reflect the effect of the higher sales due to the Aspen acquisition. Let me finish this segment with a word on our acquisition strategy in Components. Over the last 12 months, we completed 3 acquisitions in this segment. In March of 2012, we acquired Protokraft, a niche supplier of raw device connectors to the Aerospace industry. In August, we acquired Tritech, a supplier of sonar components used in offshore energy exploration. And last month, we acquired Aspen Motion Technologies, a supplier of small motors and controls for industrial applications. Each of these acquisitions are extensions of existing product ranges and expand our footprint in established markets. Our other segments are organized around end markets and our acquisitions have been market-focused. In contrast, our Components acquisitions have been more product-focused, expanding our product portfolio across multiple markets. We believe we've developed a capability to integrate bolt-on Component acquisitions very profitably and we'll continue to find opportunities to grow this business. Medical. Sales in the second quarter of $35 million were in line with last year. It seems our business has settled down into a pattern of fairly consistent sales quarter-over-quarter. We're seeing shift in the mix from 1 quarter to the next and in this quarter, we had higher comp sales compensating for lower set sales. For fiscal '13, we're moderating our forecast for the year to reflect the run rate of the first half. Sales for the year should be $141 million. Margins. Operating profit in the quarter was $1.3 million, in line with the average margin of 4% in the last 5 quarters. We anticipate slightly higher margins in the second half, as the result of some cost-reduction activities to give full year margins of 5%. So in summary, Q2 was a solid quarter despite the Industrial headwinds. We're engaged in cost controls and restructuring activities across the company, to mitigate the impact of lower Industrial sales and the moderating Defense outlook. We anticipate benefit from these [indiscernible], as we move through the second half of the year and into fiscal '14. For 2013, we're projecting sales of $2.59 billion, up 5% from last year. All of the sales scope coming from acquisitions completed in the last 12 months. Our operations should deliver earnings per share in the range of $3.55 to $3.65, but will incur a total of $0.15 per share in restructuring, which will reduce that range to between $3.40 and $3.50. Sales in the second half will be $60 million higher than the first half and we should see a pickup in earnings in both Industrial and Space and Defense. Industrial operating profit will be up as the cost base comes down, but Space and Defense operating profit will be up on higher sales and a better mix. Post-restructuring, we are anticipating EPS of $0.90 in the third quarter and $1 in the fourth quarter. Now let me pass it to Don, who will provide some color on our cash flow and balance sheet.

Thank you, John. Good morning, everybody. Our free cash flow during our second quarter was a positive $39 million. Our net debt increased by $50 million to $667 million, primarily related to M&A activity. We spent $77 million on the acquisitions of Broad Reach Engineering and Aspen Motion Technologies during the quarter. And for the first 6 months, our free cash flow is $45 million, about where we expect it to be after a slow first quarter. We're leaving our free cash flow forecast for all of 2013 unchanged at $135 million, resulting in a cash flow conversion ratio of 85%. Since we had a reasonable amount of M&A activity in the quarter, I'd like to dive a little deeper on acquisitions for a moment. The Space and Defense group closed on the Broad Reach Engineering Company on the first day of our second quarter, which was December 31. They're located in Golden, Colorado and they're a leading designer and manufacturer of spaceflight electronics and software for aerospace, scientific, commercial and military missions, in addition to supporting ground testing, launch and on-orbit operations. We're forecasting $32 million of sales for Broad Reach for the 9 months that we'll own the business in fiscal 2013. Aspen Motion Technologies was acquired by our Components Group on March 21, so just before the end of the quarter. Aspen is located in Radford, Virginia and John described them as a supplier of small motors and controllers for industrial applications. Aspen will contribute sales of $20 million for the 6 months that we'll own them in fiscal 2013. Strategically, we continue to look for acquisition targets that enhance our competitive technical, product and market positions. We think both of these acquisitions will contribute nicely to this strategy. Over the past 4 quarters, we've spent $150 million in acquisitions, which will generate a comparable dollar amount of first year revenues. We're confident that each of these will be strong top line and bottom line contributors in the coming years. Our recent pace of acquisitions is relatively consistent with our average historical dollar volume of M&A deals and complements our organic growth strategy. Turning to our financing strategy. We had a couple of refinancing events that, I think, are worth mentioning. First, on January 15, we did announce that we closed on the redemption of $200 million of our 215 -- sorry, 2015 high-yield bonds, that became callable without any market premium on that day. We effectively exchanged 6.25% debt through our 1.75% money through our revolving credit facility. Secondly, on March 28, so again just before the end of the quarter, we closed on a modification to our revolving credit facility by extending the term of the revolver by 2 years to 2018 and modifying the pricing grid in our favor by 0.8. It was a great effort led by our treasury team and catch it with our valued bank group. Regarding the balance sheet. Receivables were up $26 million from last quarter to $770 million, largely due to the timing of receipts at quarter end and inventories increased $7 million over the last 3 months to $559 million, principally related to the Aircraft Group's continued production ramp-up. Customer advances increased during the quarter by $5 million to $123 million and loss reserves were up $1 million from the prior quarter. Capital expenditures in the quarter were $23 million and depreciation and amortization totaled $27 million. Year-to-date, CapEx was $45 million, while D&A was $53 million. We're sticking with our forecast from last quarter for CapEx, for all of fiscal 2013 of $105 million and we're moderating our D&A forecast to $111 million. Cash contributions to our global defined benefit pension plans were consistent with our previous projections. We contributed $11 million in the quarter and $20 million for the first 6 months of the year. For all of 2013, we're forecasting pension contributions to be $39 million. Our effective tax rate in the quarter was 26.9%, down from last year's 28.9%, primarily relating to the retroactive reinstatement of the R&D credit during the 3 quarters of our last fiscal year. So we coupled it all up in this quarter. We're now forecasting our effective tax rate for all of fiscal 2013 to be 29.5%, down slightly from our last forecast of 30.0%. This compares with last year's full year tax rate of 27%. And that increase year-over-year is mainly due to an adjustment made last year that deferred tax asset valuation account at one of our foreign subsidiaries that won't repeat this year. And there were also some favorable mix issues going on last year. Our financial ratios at the end of the quarter were very respectable, even after considering the 2 acquisitions that we completed during the quarter. Net debt as a percentage of total capitalization was 32.8%, about the same as last year's 32.7%. Our leverage ratio, which is net debt-over-EBITDA, is now 1.86x and we currently have $372 million of unused capacity on our $900 million revolving credit facility that terms out in 2018. This is down from last quarter's availability of $583 million, primarily because we used the revolver to finance the redemption of the high-yield bonds. Our forecast for interest expense for 2013 is now $28 million, down a bit from last year's forecast because of -- around the financial engineering that we completed during the year -- sorry, from our last forecast. And to summarize, we continue to focus on improving our operating margin performance in a very challenging environment, that includes uncertainty surrounding sequestration and a soft global Industrial business. We've been managing our cost base down to correspond with the declining Industrial sales outlook and we're trying to stay ahead of what is likely to be a softening Defense outlook. We're working on a number of restructurings throughout our global company, resulting in significant restructuring charges forecasted for this year. As John stated, we're planning to come out of 2013 in much better shape compared to our first half, which will result in a solid foundation for improved margin performance as we look ahead into 2014. Now let me turn you back to John and we'll take some questions and we'll do some answers.

Thank you very much. Audrey, do you want to schedule the questions for us, please?

[Operator Instructions] We'll go first to Julie Yates Stewart at Crédit Suisse. Julie Yates - Crédit Suisse AG, Research Division: John, can you talk a little bit more about how you get to the double-digit run rate in Industrial Systems in FY '14, some of the primary drivers? And then can you detail some of restructuring actions that you're taking?

Well, the improvement, Julie, in 2014, we're not -- we can give more guidance next quarter, so I don't want to go into specifics. But we should be in double-digit territory and that's really just the fact that we're taking cost out of the basis this year. So we're focusing the business on the more profitable sectors, the product lines that are more stronger and we're reducing our overall cost basis. And that restructuring will come back next year and that should give us a double-digit performance even on sales that are somewhat similar to this year. You just asked about the restructuring. It's taking $9 million of restructuring this year. We should see that and more come back next year. The specifics of how many people, where and when, because that's all still in process, we took a couple of million dollars this quarter. We'll have more in the third and fourth. I don't want to go into the specifics with that on the call.

Just to clarify, John. That $9 million is the $9 million associated with the Industrial operations. We referred to it earlier to an $11 million number that's company-wide.

Yes, there's an additional $2 million on the Aircraft side of the business. Julie Yates - Crédit Suisse AG, Research Division: Okay. And then on the -- on Commercial aftermarket growth. How much of that 2% growth in the quarter was 787 spares-provisioning? I'm just wondering if you saw any impact from the grounding and if we should expect, say, an acceleration in H2?

So there was, in the quarter, a 787 -- a couple of million dollars higher initial provisioning over what we saw in the same quarter last year. So you could say that pickup is probably associated with that. We didn't see any particular effect on the grounding that I could put my finger on, Julie. So we had $3 million of initial provisioning in the quarter, would have been $4 million or $5 million, folks, if it wasn't grounded. I really don't know. I guess, I have to assume that if there were more airplanes flying and more airplanes being delivered, then you'd probably see some additional IP. And any of the airlines that probably were anticipating purchasing IP probably held up for a couple of months. But I can't give you a specific number that says it would have been this.

We'll go next to Cai Von Rumohr at Cowen & Company.

John, could you explain from the $38 million in R&D, you mentioned that some of that was 787-9 that was recoverable in the gross margin. How much was recovered in the gross margin?

So what I would say, Cai, is that the 787-9 in the quarter was about -- between $4 million and $5 million. And we had anticipated for the full year that the sales -- the R&D on that program are in the $10 million to $12 million range and that we would recover that in the gross margin line over the course of the year. Specific quarter-to-quarter are -- I mean, there's so many variables in the contracts in Aircrafts. But giving you a specific in this quarter, I think would be misguiding -- misleading if you were to just say, okay, it's simply that $5 million this quarter of costs, $5 million is the gross margin line, so I can add that back. I'd say averaged over the year is $10 million to $12 million. That's what we had anticipated would be an R&D credit. Now it's turning out that it's going to appear on the gross margin line because of the contract structure. And therefore, our overall R&D in Aircraft is up about $15 million from what we had said 90 days ago. But of that, as I say, $10 million to $12 million is more a reclass between those 2 lines. The other part of it is growth on the A350 as we try to push to first flight on that airplane.

Okay. So where was the A350 R&D in the quarter?

Specific? A350 R&D number in the quarter was -- I guess it was about $14 million.

It's about $14 million.

Yes, $14 million. About $14 million in the quarter.

$14 million. So it was up somewhat. And for the year, it's looking like what?

We're now in the high 40s. It's about 48, is what we're forecasting right now.

Okay. And then -- so if there's $10 million to $12 million of 787 total R&D and the Aircraft R&D for the year now, looked like what?

So it will be close to $80 million for the year, up from about mid-60s last time.

Okay. And for the total company?

For the company, it's $135 million, up from about $120 million.

Okay. So the other R&D also is a bit higher, it looks like. And what was the ending backlog in both Industrial and Components?

One sec, we're just doing that.

Industrial and Components, let's see here. The ending backlog in Industrial is $262 million. That's down from a year ago, but up from last quarter. And what was the other one, Cai?

Components.

Components, is $100 -- it's $200 million, up from last quarter as well as the year ago.

Okay. Those are actually quite striking increases from the prior quarter, so I mean...

You need to be cautious of 2 things, Cai. One is part of it is acquisition and the other part of it is ForEx. So you need to be a little bit careful. There are some other effects that's just not a simple incoming order change.

Okay. But so clearly, in Component, that's a factor. The M&A is a factor. It's not in Industrial. How much was the FX in that, in Industrial? Probably $10 million, $15 million? So I mean, any way you cut it, the Industrial number looks better.

Yes, the Industrial number is better. And as I said in the text, we had a book-to-bill ratio that was over 1 and they're kind of 1:5:1 this quarter, which is hopefully a positive sign. Now it's tough to draw a pattern from 1 quarter, but it's at least a positive sign. The last couple of quarters before this, we were typically seeing a book-to-bill ratio of just slightly under 1, so...

And given that this is a relatively short-lead business, how come -- I mean, it looks like your Industrial sales guide looks possibly a bit conservative. Is that fair to say or not?

You mean, in the forecast for the rest of the year?

Yes.

Yes. And there are pieces of this business that are longer term. So for instance, in this quarter, we did book an order, that's a 3-year order for a development contract in one of our simulation type of businesses. So it's primarily, it's -- I would say, 80% to 90% of the backlog is typically that kind of short 3-month lead time, but there are pieces of it that tend to be longer lead time in putting in the test and simulation businesses, that you'd booked larger orders that span out over 12 months and perhaps longer sometimes.

We'll move next to Tyler Hojo at Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: So just firstly, last quarter, I think you guys were talking about kind of reviewing the potential exit of some product lines. And today you kind of mentioned your decision to stick with the Wind business for now. Was that essentially the extent of the review? Or are there kind of more pieces moving that you could potentially talk about?

Well, Tyler, there's lots of pieces moving. What we've been doing in cross-sell businesses is looking at, so where are the most attractive margins? And looking at the businesses that have lower margins, is it a cyclical thing, is it a structural thing, is it something that we think is just not the type of business that we're -- that we should be in? Or is this something that we feel like, okay, let's invest and see if that has the opportunity to grow? So Wind, we think, as I described in my text, is a business that we think has long-term potential. Now that doesn't mean that I'm not going to spend the next 2 or 3 or 4 quarters describing how Wind continues to be a challenge. But I think over the long term, it's the type of business that makes sense for us and what we're going to do is we're going to continue to invest in new products and find our way to make that a successful business. So we think that's a good business for us. And we will continue to adjust our cost basis in line with the sales, so that we don't find it too tough. But as I said, I think it's worthwhile investing and I think long-term it would be a good business for us. There are a variety of other product lines that we don't particularly -- we don't talk about individually across all of our businesses, that where we're looking at and then saying, well, perhaps this product line is not such a great fit for us and let's look at putting those resources elsewhere. So it's not a major Wind or another major sector, that we particularly talk about on the outside that we say we are going to sell that sector or get out of that sector. It's underlying. There are probably 100 different types of markets that we're in. And I would say at that level of the smaller pieces that were moving pieces around that get captured in the segments as we described into the outside. So if I take industrial automation, there's 15 to 20 different market categories that we deliver products into on the Industrial side. Not all of those are as good as -- are the best businesses. And in those types of areas, we're looking at, so which ones do we want to be in and perhaps which ones don't we want to be in? And that gets to the question of, so why should business -- why should margins be better next year? Part of that is selecting the ones that we think are the real winners for us. Tyler Hojo - Sidoti & Company, LLC: Okay. So I guess taking what you said, it wouldn't be all too much of a surprise to see you actually announce some sort of product line divestitures over the next, say, 3 to 6 months. Is that fair?

No, that's not fair. I didn't say that. Because to make an announcement of a divestiture, it would be a large piece of business. We can -- there are various options as we look at these businesses. Some of them is essentially going from an investment to a cash cow situation. Some of it is just stopping it and actually taking the restructuring costs and getting out of it. Some of them may or may not be salable. But to jump to that we would announce something like that, I think, is -- I wouldn't jump there at this stage. I think that's leading the witness somewhat. So there may be things that we say, okay, that doesn't fit and would warrant some kind of an announcement like that. But right now, that's not what we're doing. We're looking at the portfolio and then tweaking it, I would say, to make sure we're investing in the right areas. Tyler Hojo - Sidoti & Company, LLC: Okay. Understood. And I guess just moving to something else. In your prepared remarks, you talked about bringing some new products to market within the wind turbine space. I'm just curious how you're approaching that. Is that to help you kind of compete on price? Or are these kind of new products with kind of a technological advantage?

The answer is yes; and yes. So right now, the product portfolio that we've historically operated are upwards. So now I'm going to get a little bit technical if -- for the engineering folks on the phone, is based on DC motors. DC motors, the advantage of DC motors is that if the electronics, the power electronic fails, you can essentially switch them across to battery and then the system becomes safe. If you switch to AC motors, there is -- they're alternating current motors. There are a variety of reliability advantages, but it changes the architecture. So part of what we're doing is we're shifting our -- we're offering new products that are based on AC motors that have a better cost basis but also provide some additional features to our customers which we think that they will value. One of the key differences is that you can get rid of the batteries and replace them with a capacitor bank and it turns out batteries are one of the areas, even in wind turbines, that tend to be somewhat challenging. It's not quite the same trickiness, I think, as flying them, but it's a component that typically does not have the highest reliability. So if you can get rid of the battery in a wind turbine, assuming that you can still maintain the safety, then that's probably a good thing. So what we're doing is we're developing new architectures that we think have advantages for our customer, but also provide some cost advantages that will allow us to continue to improve this business. Tyler Hojo - Sidoti & Company, LLC: Okay. Great. That's great. And then just lastly for me. I was hoping that you could talk a little bit more about the strength in the Military aftermarket. What I'm trying to understand better is, I mean, basically the Air Force has come out and said they're basically standing down roughly 1/3 of their active duty combat aircrafts. And I've got to think that's got to impact your aftermarket business at some point. So what gives the confidence?

Well, I think I said in the text on sequestration that the Military aftermarket is the area that we feel most -- that we're watching most closely and that we suspect could have a disproportionate -- sequestration could have a disproportionate effect on that area exactly in line with the comments we made about the Military outlook. I don't know that I would describe it as confidence. I would describe it -- I think I described it as potentially mitigating factors. And there's 2 things. If you look back at our Military aftermarket business back in 2010, it was $160 million. This year, we're forecasting about $230 million. Last year, we did about $215 million. So we've seen a very nice growth in that business and there's a couple of reasons for that. One is, we stepped into some new areas with -- we're starting to, and I described this before, we're developing a capability to repair product where the OEM is no longer either interested or perhaps no longer in business on various military platforms. So think of a -- as we know, military platforms are now flying for 40, 50 and maybe some of them, the B2s, would be flying for 100 years. So the original companies that manufactured components that are similar to ours but not necessarily ours, there's a need from the depots for somebody to be able to step up and maintain them. And as I say, a lot of times the OEM is no longer available or perhaps no longer interested. So we've developed capabilities in-house to remanufacture some of those products. And as part of that, what we like to do is we like to improve the product and insert some of our own intellectual property, so that as you move forward in the future, it now does become Moog hardware, essentially. So that's an effort that we've got going on that expands our footprint beyond our traditional market base. At the moment, it's not a huge business, but it's the tens of millions of dollars and that we think it's got some growth potential. Again, it's based on old platforms where the OEM was not there. The other piece is we've been working hard to develop partnerships with the depots over the last few years, where essentially we can manage -- that there is a certain percentage of the work -- repair work that has to be done by the depots, but the depots are very willing to help -- let the OEM help them manage that work. So we've been working with the depots to help them manage the work and schedule the flow of business. And that gives us a larger portion of the pie and it gives us greater control over the scheduling of that business. So you put those together, you add a little bit of foreign military pickup and that's what we've seen. And that's why, I guess, we're optimistic that those activities will mitigate. It does not work, by in any stretch of the imagination, say that we would be immune to sequestration or that we're optimistic that our Military aftermarket business will continue to grow or grow at all, perhaps, at the rate that we've seen over the last few years. But those are the reasons that I would say, perhaps we will be not as badly affected as might otherwise be the case. Does that help? Tyler Hojo - Sidoti & Company, LLC: It does, indeed.

We'll go next to Robert Stallard, RBC.

John, I thought if we can kick off maybe on the Aerospace aftermarket. You were up 2% this year -- this quarter. How do you think this is going to track over the next couple of quarters?

I don't know, Rob. That's the honest answer because if you -- so our aftermarket is not scheduled maintenance. It's based on usage and it's based on when typically the actuators leak. And then you get them back and we replace them with seals and stuff like that. So quarter-to-quarter, it's up and down. It's down or up 10%, 15% from the last quarter. We've had quarters, you're kind of -- you're $22 million, then your $19 million, then your $27 million. So quarter-to-quarter, it's real difficult to predict. We are forecasting that for the year, the Commercial aftermarket is down a little bit from last year. So we're forecasting a year that's going to be about $110 million, $111 million. That's down from about $116 million last year. And the basic underlying assumption in that is that the initial provisioning on the 787 will come down from last year, down from about $13 million to maybe $9 million. And that's essentially the difference. And that the rest of the business will kind of be in line with what we saw last year. So we're not forecasting a big uptick. We're kind of forecasting it's going to be pretty steady. And if I look at over the last 4 quarters, we did $20 million -- we did $30 million this quarter, we did $27 million the previous quarter, the quarter before that was $31 million, $30 million, $29 million. So they're up 2% from $29 million to $29 million to $30 million, is kind of -- it's an aberration. I could say also that it's down from $31 million in the fourth quarter, but it's up for $2 million from the first quarter. It's -- that variation is just natural in the way the orders flow and I wouldn't jump to conclusions. So I'd say, we think it's going to be flat this year with last year. The only adjustments being slightly lower IP on the 787.

Okay. And have you any sign that airline customers are changing their patterns with referred to -- with reference to deferred maintenance or destocking?

Not measurable, that I would say, in terms of destocking. And when you say preferred maintenance, Rob, can you -- do you want to explain that, just so that I don't answer the wrong question?

Yes, sorry, deferred maintenance...

Deferred. Sorry. I thought you said preferred. No, I don't think we've seen anything significant there. The one thing that I would say is starting to emerge is more, for our type of stuff, as we look to the future where we've got larger content on airplanes like the 87 and the 350 is the move towards a maintenance contract, a flight hour type of contract, a guaranteed-availability-of-spares type of contact, where it's essentially a continuous income stream rather than we sell initial provisioning and we wait for the units to come back. We're starting to see some of that emerge as we get a larger position on future platforms. So I think that will be an effect that we will see more of in the future, but hasn't really -- it's not really something that we're seeing in this year's numbers.

Okay. Then maybe one for Don. On the M&A side of things, you noted being fairly steady over the last 12 months or so. What's the pipeline look going forward? And then what sort of type of assets are you potentially looking at? And what sort of multiples are you seeing?

Well, we're always looking. We have an opportunistic model where we don't have a set -- a budget that we have to spend. We have -- each of our operating groups is not focused on looking for complementing their organic growth with a quarter growth. The multiples, it's -- it depends on, I guess, each situation. But in our history, over the past couple of years, we've been paying as low as probably 6x and as high as 10x or 11x. It depends on the transaction. And it's each of the -- like as I said, each of the management teams is out looking for those opportunities. I would say there's one exception right now and that is the Medical business. In Medical, we have been trying to focus on improving the internal operations and performance before we even consider trying to grow the top line through acquisitions again. So does that help answer your question?

Yes, that's great. I was just wondering, just a follow-up to that. Given what John said about Wind, do you think there might be some distressed opportunities there?

I think there's plenty of distressed opportunities in Winds, Rob. I'm not sure that we want to get involved in any more distressed opportunities. We got our own challenges that we're working our way through in that business. So you never say never. I'd be cautious if it falls a little bit into the Medical, I think we're -- given the drop-off in sales that we've seen over the last couple of years, we're -- we've got an internal challenge that we're trying to keep our cost base in line with that declining sales level. And at the same time we see this as an opportunity, long-term, so we want to make sure that we're investing in some new products and bringing new technology to market. Finding distressed assets is not typically what we're -- a strategy that we've adopted. It's some of the small pieces of technology that came up somewhere and we thought, that's interesting, we might look at that. But we're not a company that likes buying distressed companies then goes and fixes them up. Typically, that's not our strategy. So...

[Operator Instructions] We'll go next to J. B. Groh with D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: I just had a clarification question on this restructuring. There's $2 million in the quarter. Is the $11 million for the full year, so you've got $9 million remaining, or help me reconcile that? Okay. So and then of the $9 million, $7 million of that's industrial, $2 million is in Aircraft?

That's correct. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. That's helpful. And then what's your shipment rate on 787 currently?

It's about -- so we didn't slow down for -- there was no slowdown associated with the grounding. And there was also -- we are a little bit ahead of Boeing's shipments rate because, of course, we've been building products in advance for the last couple of years. So let me do this for you. We're forecasting that for the year we ship about 70 to 80 shipsets. So that's $1.00 value of shipsets. Our shipsets don't go out in 1 big box. They tend to be a lot of components. So it's -- oftentimes, it's hard to say it's exactly, this is a shipset and we shipped 5 this month, or this particular quarter we shipped 30, because it's not -- it's a myriad of a lot of different components and they order the components individually. But if you take a sales run rate of about $80 million this year, our content is roughly $1 million, give or take. It's about 80 shipsets that we will ship this year. And that's, by the way, I mean, that's in line with whatever Boeing's production schedule is. So we're not second-guessing their schedule. We're just shipping to their request. So we're -- and that's maybe -- it's probably a little bit ahead of their delivery of airplanes, of course.

John, as we're saying, at the end of last year, we came out about 3.5 shipsets a month. And we're targeting for 10 by the end of this calendar year. So we're ramping up, so we're someplace in the middle of that now. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. So there hasn't been any change in the way that you've been doing it. I see. And then just looking at the old guidance versus the new guidance, I mean, last -- the old guidance, it did have the $4 million. Was the 4 million included in that $3.50 to $3.60?

Yes. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. And so now the -- so if I -- I mean, so if I'm adding back the old restructuring and the new restructuring to the old guidance, the new guidance basically didn't change very much at all?

On an operating basis, we're keeping the guidance in that kind of $3.55 to $3.65. And then the restructuring goes from kind of $0.05 to about $0.15.

Now we'll go next to Michael Ciarmoli at KeyBanc.

Just one question, John, it's a follow-up maybe on Tyler's line of questioning. How do we think -- or how do you guys internally think about the Medical segment? You're talking about going through, I guess, some potential product lines, looking at things, lower margin businesses. I mean, this segment's sort of been a non-grower. It's dilutive to margins, presumably to returns. I mean, what sort of the internal analysis there or thoughts on the Medical segment?

So I've been saying for about the last year or so that what we would like to do with our Medical segment is settle it down, make sure that we are profitable, albeit very moderately profitable, it's nothing to write home about, and see if we feel that there is a real opportunity to grow the business over the coming years. And our strategy of getting into the business was we thought we can build a better mousetrap. We think that a company that's dedicated to building pumps, with the technology company that's focused on the pumps, could have a competitive edge in this business. And the reason for that is that the other pump manufacturers typically are more interested in selling the fluid that goes with it and the pump was a little bit of a slide show in order to sell the fluid. So the fluid businesses that a lot of these competitors have is a multibillion-dollar business and they've got a pump business that's in the, pick a number, $50 million range and, therefore, is not particularly interesting. So our original thought was, what if a company was really focused on the product, the pumping technology, and had the type of expertise that we had, maybe that could be a real success. So we got into the business. We've gone through a whole series of learning that I -- between supply chain, the sales channel R&D, FDA, et cetera. And what we're -- where we are right now and we've been in this for the last, I would say year, and we will continue through this through the end of this calendar year, is to say, okay, let's make sure we can make it, it's not bleeding money. And let's see if our original thesis still holds water, if we think there is that opportunity there. And that's where we are right now. So we are in a, I'd call a stable situation. And at the start of next calendar year, what we will do is we will say, okay, we see the opportunity and here's what it is, that maybe it will still take us a few years to get to where want and which we'll be in the double-digit margins. Or we don't see that opportunity and, therefore, we're on to Plan B. So I would ask for your indulgence for the next couple of quarters, 3 quarters that we're sticking with that timetable. The Medical business continues to kind of just trundle along in the background. We are reviewing all of the activities within that sector to see, so where do we think that updraft is in the coming years. And we'll decide, as I say, at the start of next year, as to how we'd like to play that out.

Okay. No, that's helpful. And can I assume that you won't be adding any resources in the form of M&A over this time period? You'll kind of look at, kind of organically, what you have in place now with Medical?

Yes. The last acquisition we bought in Medical was in the start of 2009, calendar 2009. We've not added any acquisitions since then and we will not be adding any acquisitions until we've come back and said, no, we really think this is a growth business and here's why and, therefore, we're getting back into the acquisition business. But we're not -- we will have -- that won't be in the next 9 to 12 months.

Okay. Perfect. And then just last one, on the business jet market. Good uptick this quarter, still forecasting down on the year. Is there just time -- obviously, the business jet market is still ailing. Some production getting cut. I mean, is that just a function of timing there? Or are you seeing any changes in that market?

Well, I think in our case it's probably a little bit more associated with new products. So we're on a couple of new business jets, the 650 to 280 and stuff. So I wouldn't say it's, generally, that the market is just getting a lot healthier. It's up quarter-over-quarter, but it's not -- for the year, we're forecasting actually moderately down from last year. So it's kind of in the noise. The year, we're forecasting at 43. Last year, we came out at just over 44. So I wouldn't draw too many conclusions in terms of a trend at this stage.

And that does conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to management for any closing remarks.

Thank you, Audrey. Thank you all for listening in. We look forward to speaking to you again in 90 days' time. Thank you.

And that does conclude today's conference. Again, thank you for your participation.