MOG.A (MOG.A) Q3 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Moog Third Quarter Fiscal '13 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn things 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 26, 2013, our most recent Form 8-K filed on July 26, 2013 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?

Thanks, Ann. Good morning. Thanks for joining us. This morning, we'll report on the third quarter of fiscal '13 and update our guidance for the full year. We'll also provide our first look at fiscal '14. This quarter has quite a few headlines. First, our operations came in on plan at $0.90 per share, in line with our last forecast. This is exclusive of a couple of asset write-downs which I'll describe later. In the quarter, our Aircraft and Components businesses were strong, and we've not yet seen any appreciable impact from sequestration. Second, our Industrial business is improving. The benefits of our restructuring efforts are starting to filter through. Third, our Medical business had its strongest operating quarter in 5 years. We benefited from some strong sales in our enteral pump line, combined with the continued focus on cost control. Fourth, our Space and Defense group had a very tough quarter. One of our recent acquisitions has turned up a significant technical challenge on a particular program, and we ended up taking a $5 million program charge to fix the problem. Fifth, we had 2 write-offs of note in the quarter. In our Medical segment, we took a $7 million pretax write-down on the divestiture of the Buffalo Ethox operations. And in our Industrial segment, we took a $2 million write-down on a technology investment that we made a couple of years ago. Sixth, we announced a strategic review of the remainder of our Medical segment in collaboration with the Royal Bank of Canada. We think this process will take 6 to 12 months. Finally, we're providing a first look at fiscal '14 this morning. We think sales will be up marginally next year, but margins and earnings will be up nicely. We're projecting EPS in a range of $3.90 to $4.10 per share on sales of $2.7 billion. Now let me provide you with some numbers, starting with the third quarter results. Q3 fiscal '13. Sales in the quarter of $671 million were up 10% from last year. We saw higher sales in every segment, except Industrial. Acquisitions contributed the majority of the $60 million sales increase. Excluding the effect of the write-downs I mentioned earlier, adjusted net earnings of $41 million were up 7% from last year and adjusted earnings per share of $0.90 were 6% higher. Taking a look at the P&L, our gross margin is down slightly, primarily as a result of the program charge taken in the Space and Defense segment in the quarter. R&D remains elevated as the A350 program continues to move to certification, but other G&A expenses came in lower as a percentage of sales. We incurred $5 million in restructuring expense in the quarter, mostly in our Industrial segment. Our effective tax rate was up slightly from last year. The overall results, after restructuring and the write-offs I mentioned earlier, was net earnings of $34 million and earnings per share of $0.75. The Medical write-down was equivalent to $0.11 per share, and the Industrial write-down was another $0.04 per share. Adding these back gives us the adjusted earnings per share of $0.90, in line with our April forecast. Fiscal '13 outlook. Last quarter, we forecast that the year would finish out with earnings per share in the range of $3.40 to $3.50 on sales of $2.6 billion. Sales for the year should be pretty much on plan, and the underlying operating performance of the businesses should end the year at the low end of this range. We also need to include the $0.15 per share of write-downs in the third quarter in our projection for the full year. And taken all together, EPS for fiscal '13 will be $3.25. Fiscal '14. For next year, we're projecting a 3% increase in sales and a significant improvement of profitability with earnings per share up 23% from fiscal '13. This year, our Industrial business has struggled with the significant slowdown in demand and our Space business has suffered from some technical challenges at a couple of our recent acquisitions. We've spent the year repositioning our businesses, and we'll see the benefits in our margins in fiscal '14. Sales next year should be up in Aircraft, Space and Defense and Components. We're assuming flat sales in Industrial, but sales in our Medical segment will be down slightly as a result of our recent sale of the Buffalo Ethox facilities. Organic sales in Medical will actually be up in fiscal '14. Operating margins for the company in fiscal '14 will be up to 12.4% from 10.6% in fiscal '13. We're projecting earnings per share in a range between $3.90 and $4.10. Now to the segments. I'd remind our listeners that we've provided a 2-page supplemental data package posted on our website, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Starting with Aircraft Q3. Q3 continued the pattern of strong organic growth and healthy margins. Total aircraft sales were up 13% in the quarter. Over the last several quarters, the commercial side of the house has been the engine of growth, but in this quarter, about half of the dollar increase in sales come from the military side. The F-35 drove most of this growth. In the third quarter, we received the long awaited order for LRIP 6, resulting in an unusual pop in sales. Next quarter will be a more normal revenue run rate for the F-35. We also had higher sales on the KC-46 tanker, the Korean T-50 and in the military aftermarket this quarter. On the commercial side, sales to Boeing were up nicely as the legacy books strengthens and the 787 ramp continues. Sales to Airbus were also up on higher production rates. Commercial aftermarket was down from last year, but that's the result of slowing initial provisioning on the 787. Aircraft fiscal '13. We're adjusting our full year fiscal '13 sales forecast upwards for the strength we saw in the third quarter, while keeping the fourth quarter sales in line with our April forecast. The result is that the full year sales will be $20 million higher than our forecast of 90 days ago, $10 million in Military and $10 million in Commercial. We believe the strength we saw in the third quarter will not repeat in the fourth, but compared to the third quarter, sales in the fourth quarter will be lower in the military market and about the same in the commercial market. Looking to fiscal '14 in Aircraft, we're projecting a modest 2% increase in total Aircraft sales in fiscal '14. Military sales will be down 5% on much reduced F-35 development work, lower V-22 production rates and a softer aftermarket. Our Military projection includes our best guess on the effects of sequestration. On a positive note, we should continue to see strong growth in the commercial market as the 787 continues to ramp and the A350 production starts up. Aircraft margins. Margins in the quarter were 11.4%, slightly lower than our first 2 quarters. We incurred a restructuring expense of just over $1 million in the quarter. Aircraft R&D in the quarter was up over last year, but down from last quarter. The spend rate on the A350 program slowed this quarter somewhat. We believe the R&D spend has turned a corner on that program and, assuming the airplane development continues on plan, we should see a continued reduction in A350 R&D through fiscal '14. On the other hand, our recent Embraer win on the new E-Jets program will start to ramp up through fiscal '14. Aircraft R&D in fiscal '14 will be about 50 basis points lower as a percentage of sales than in fiscal '13. Margins for the full year fiscal '13 should be in line with our last forecast at 12.2% after restructuring. For fiscal '14, we're projecting margins of 13%. In fiscal '14, we'll have a less favorable product mix as the sales shift from military applications to commercial OEM sales. However, R&D will start to moderate, albeit slightly, and our continuing lean activities should result in a nice uptick in margins over fiscal '13. Turning now to Space and Defense Q3. Sales in the quarter were up 15% from last year to $100 million. Similar to last quarter, sales from our recent acquisitions, In-Space Propulsion and Broad Reach Engineering, drove all of the growth. Factoring out the impact of these acquisitions, organic sales were down slightly from last year. In the space market, we've seen the commercial satellite and launch market soften over the last few quarters, and that trend continued this quarter. Defense was up this quarter as we benefited from some spares orders for the LAV-25 program. Security sales were flat with last year. Fiscal '13. We're moderating our Space and Defense sales forecast for the year by $17 million to $404 million to reflect our experience in the third quarter. We're reducing our Space and Defense forecast in response to the continued softening of the commercial satellite market. We're also moderating our security forecast slightly to the run rate of the last 2 quarters. We're keeping our Defense forecast unchanged. For fiscal '14, we're projecting a 7% increase in sales to $433 million. Space should be up about 8% as we include a full year's sales from our Broad Reach Engineering acquisition. We're also forecasting the Defense business up about 8% next year with growth on the THAAD program and some foreign military vehicle programs. Security should be up 3% with the additional sales coming from some recent new product introductions. Space and Defense margins. Margins in the quarter were a disappointing 6.7%. This quarter, we learned that one of our recent space acquisitions had significantly underestimated the technical complexity of a job they took on before we acquired them. A thorough review of the program resulted in a $5 million program charge to cover the cost to complete the present contract. The problem that we've encountered is a very subtle manufacturing issue in a very complex satellite subsystem. At the time of the acquisition, we could not have anticipated this problem. But we are where we are, and we believe that we've identified all the problems at hand. We've dispatched the necessary resources from across our Space and Defense segment to address the underlying systems issues and ensure we stay on track in the future. Given the poor performance in the third quarter, we're moderating our margin forecast for the year to 8.9% pre-restructuring. As a result of the challenges we're seeing in the segment, we're planning a restructuring charge in the fourth quarter of $1 million to better align our cost structure with the business conditions. Post-restructuring, margins in fiscal '13 will be 8.5%. Margins in fiscal '14 should recover to 10%. Turning now to Industrial Systems. Sales in the third quarter of $147 million were down 7% from last year, but in line with the run rate of the first half. We believe sales have stabilized at a run rate of about $145 million per quarter. Compared to the same quarter last year, energy sales were off $10 million, driven by the continued slowdown in our Wind Energy business. Our non-Wind Energy sales were actually up a couple of million dollars from last year. Industrial automation sales were down from a year ago, but up marginally from last quarter. Finally, our simulation and test business was up nicely from a year ago. So the macro picture remains unchanged, a very challenging wind market, a stabilizing industrial automation market and a strong simulation and test market. Industrial Systems fiscal '13. Our wind sales had another disappointing quarter, and as a result, we're reducing our forecast for the full year in that market by $5 million to $72 million. Despite the challenges in wind, it's our second largest single industrial markets after simulation and, we believe, an important opportunity for future growth. On a positive note, we just received an order for 300 pitch systems for Brazil over the next 3 years using our new AC technology system. This is a milestone for our wind business as it is the first significant production order for our new pitch control solution. We're keeping our industrial automation and test and simulation forecasts unchanged from 90 days ago. So the result is a total forecast for fiscal '13 of $585 million. Fiscal '14. Going into next year, we're assuming flat sales in each of our key markets. We believe we've found the bottom of the wind sales, only time will tell. We think industrial automation is stable, but with Europe in the doldrums and China slowing, there are few signs of a recovery in sight. Test and simulation was strong in fiscal '13, and with the continued increase in new airplane deliveries, as well as healthy investment in auto test facilities, the combination of these markets should remain strong in fiscal '14. Industrial Systems margins. Margins this quarter require a little extra explanation. Let me provide 2 margin numbers to help explain what's happening. First, let me discuss the underlying operating performance of the business excluding both restructuring charges and the effect of an asset write-down in the quarter. This underlying operating margin was 9.8% in the third quarter. This compares with 6.6% in the second quarter and 6.1% in the first quarter. Sales for the first 3 quarters were about flat, so our underlying operations are starting to recover nicely as our cost reduction actions take hold. Second, we had $3 million of restructuring expense in the quarter, and we booked a $2 million asset write-down, which brought our all-in margins down to 6.3%. Let me offer some color on the write-down. A couple of years ago, we took a small stake in a technology start up with a $5 million equity investment. The company had several interesting industrial technologies which we wanted to incorporate into our products. Our technical cooperation with the start up worked well over the last couple of years, but unfortunately, the majority owners have decided to sell their interest at a price which reduces the value of our investment to $3 million. As a result, we took a $2 million valuation adjustment in the quarter. Given the events in the third quarter, we're moderating our margin forecast for the year to 7%, down from 7.2% 90 days ago. For fiscal '14, we're projecting a significant improvement in margins to 12.2% on flat sales of $585 million. Now to the Components Group. Sales in the third quarter were up 25% over last year, with strength in both the A&D and industrial markets. In the A&D markets, we saw some additional spares activity and some stronger foreign military sales. In the industrial markets, sales in our energy sector were up almost 70%, a combination of continued strengthening in this market and the sales from our Tritech acquisition. Medical sales were up on stronger demand for motors for sleep apnea machine from Respironics, and our general automation -- general industrial automation sales were up as a result of our Aspen acquisition. Overall, a very nice quarter in our Components Group with growth in every major market. Components fiscal '13. We're tweaking our sales forecast a little this quarter as we include the results of Q3. We think our Military Aircraft business will be a little stronger than our forecast in April, but our industrial automation business will be a little softer. The net impact is a downward sales revision of $4 million. This results in full year sales of $421 million, a 12% increase over last year. Components fiscal '14. We're projecting a sales increase of 9% in fiscal '14 to $460 million. Component sales into the aerospace and defense markets will be down slightly from fiscal '13, but sales in energy and industrial automation should be up nicely as we enjoy the benefits of a full year of the Aspen acquisition and increased sales at Tritech. Components margins. Margins in the quarter of 16.3% were strong. The margin shift in this business quarter-to-quarter is primarily a function of the sales mix. Given the strong third quarter, we're increasing our margin forecast for the year to 16.5% from 16%. Full year fiscal '13 margins will be particularly strong given the mix of business and the benefits of an earn-out reversal in our first quarter on our Protokraft acquisition. This reversal contributed $2 million in operating profits and boosted the margins for the full year fiscal '13 by 50 basis points. For fiscal '14, we're projecting margins of 15% on a slightly less favorable mix of sales. Medical Devices. There was a lot of news in our Medical Device segment this quarter; we had strong sales and double-digit operating profitability. We sold our Ethox Buffalo operations on the last day of the quarter; and we announced a strategic review of the full segment. Let me start this section with a discussion of the strategic initiatives and then go to the numbers. We sold Ethox Buffalo this quarter for just over $5 million. This operation contributed sales of $12 million annually and broke even. We took a write-down of $7 million pretax largely associated with intangible assets. We acquired the Buffalo operation in our purchase of Ethox International in 2009. At the time, the facility was primarily a contract manufacturer producing products designed by its customers. However, the folks there were also developing some proprietary products which we thought were promising. Unfortunately, those products did not pan out, and Ethox Buffalo remains a contract manufacturing facility. Our broad technology base does not provide us any advantage in this market, and therefore, we decided to divest the operation to a buyer with more expertise in that area. Parallel with the sale of Ethox Buffalo, we've engaged Royal Bank of Canada to help us with our strategic review of the rest of our Medical Devices Group, including the possibility of a sale. You may remember that we first got into the Medical Devices business with the acquisition of the Curlin company back in 2006. In total, we acquired 5 companies between 2006 and 2009, all focused on pump technology. At the time we entered this business, we believed that a technology company like Moog could design a better and more reliable pump than the competition. We believe our capabilities in fluid control, reliability engineering and digitally-controlled systems would give us an edge in this market. Our strategy was based on introducing new products on a regular basis and winning market share with our superior performance. It was a strategy based on innovation, something we think we're really good at. In the first few years, our strategy worked well, our business grew and we were nicely profitable. Then, the regulatory environment changed. The Food and Drug Administration, which regulates medical devices, put an intense focus on pumps and changed the game for introducing new products to the market. A new pump that used to take 3 to 6 months to get regulatory approval was now requiring several years to get through the FDA. As a result of this shift in the FDA's behavior, the effectiveness of our innovation strategy has been greatly reduced. Therefore, we've decided to explore the possibility that another company employing a different strategy could be more successful. This process is likely to take 6 to 12 months, and we're relatively early in that timeline, so I don't expect there will be any more news for a quarter or 2. Now back to this quarter. Medical sales in the third quarter of $38 million were the highest in 2 years. Pump sales were up slightly, and we had a nice pickup in sets and other sales. Other sales include both aftermarket services, as well as a range of medical components. This quarter, we had higher aftermarket sales, as well as an unusually strong sales on a particular OEM product. For fiscal '13, we're revising our full year forecast down by $2 million. The divestiture of the Ethox Buffalo operation will result in $3 million lower sales versus our forecast from 90 days ago, but we think the remainder of the business will be about $1 million stronger. The result will be full year sales of $139 million. Medical fiscal '14. Full year sales in fiscal '14 are projected to be $137 million, down $2 million from fiscal '13. Organic sales will be up about $7 million, compensating for $9 million of reduced sales as a result of the Ethox Buffalo transaction. The organic growth will be in pumps as our sales efforts continue to gain traction. Set sales will be lower due to a shift in our contracts with a large customer, who is moving from a component sale to a royalty structure. This shift results in better margins, but lower set sales. Medical margins. Excluding the $7 million pretax write-down on the Ethox Buffalo transaction, margins in the quarter were 10.4%, the best showing in many years. Strong sales, a favorable mix and continued cost containment all contributed to the strong performance. Including the write-down, we had an operating loss of $3 million in the quarter. Fiscal '13 full year margins are forecast to be 6.4% excluding the write-down, up from our forecast of 5% 90 days ago. Full year margins including the write-down will be 1.5%. For fiscal '14, we're projecting full year margins of 7.1%. Summary. After all the various adjustments, our fiscal '13 sales forecast is now $8 million lower than our forecast from 90 days ago. Total sales in fiscal '13 should be $2.58 billion, up 5% from last year. The sales growth is a story of strong Commercial Aircraft combined with sales from acquisitions, compensating for lower Industrial Systems sales. Our operating margin for the year will be 10.6% and earnings per share of $3.25. Our EPS of $3.25 includes $0.15 per share in restructuring and $0.15 per share in asset write-downs. Exclusive of these charges, the underlying operations should deliver $3.55 per share. In fiscal '14, we're projecting a small sales increase, but a significant improvement in earnings. Sales in fiscal '14 will be $2.67 billion or 3% higher than this year. Aircraft sales will be higher on ramping commercial demands. Components and Space and Defense sales will also be higher on full year acquisition sales. Industrial and Medical will be about flat with fiscal '13. We're projecting earnings per share in a range of $3.90 to $4.10. At the midpoint of the range, net earnings will be $185 million, net margins will improve to a record 6.9% and earnings per share will be up 23% from fiscal '13. So what do we see as the risks and opportunities associated with our forecast for fiscal '14? On the risk side, I'd say that sequestration remains the major concern. Our forecast for next year includes our best guess as to how sequestration will play out for us. But given the uncertainty around how the DOD will achieve the mandated savings, there remains the same uncertainty in our defense projections. On the opportunities side, our Industrial businesses could see some pickup in demand and our Space businesses could perform better than planned. As always, we try to provide a forecast which balances the pluses and minuses. Now let me pass it to Don, who'll provide some color on our cash flow and balance sheet.

Thanks, John, and good morning, everyone. Free cash flow in our third quarter was a strong $52 million. Our net debt declined to $623 million. Through the first 9 months of fiscal '13, our free cash flow was $97 million compared to year-to-date net earnings of $105 million. Balance sheet account movements over the last 3 months were relatively quiet as receivables, inventories and accounts payables netted to show a minor decline. Offsetting those positive cash flow movements was a decline in customer advances to $109 million, resulting in a $14 million use of cash. Our loss reserve balances increased by $1 million to $45 million. Capital expenditures were $18 million in the quarter compared to $27 million of depreciation and amortization. For the first 9 months, CapEx was $63 million, while D&A was $80 million. We're now focusing -- I'm sorry, we're now forecasting our CapEx to come in around $95 million for all of fiscal '13, down $10 million from our forecast from last quarter and compared with our projected depreciation and amortization for all of fiscal '13 of $108 million. Turning to pensions. In our first 9 months of fiscal '13, our global DB plan expense was $38 million and cash contributions were $30 million. We're estimating that our full year 2013 global DB plan pension plan expense will be $50 million, while our contributions will be $43 million. All in all, we're expecting another strong free cash flow quarter in the fourth quarter, and that will result in free cash flow for all of fiscal '13 of $140 million, up slightly from our last quarter's forecast. This will result in a cash conversion ratio above 90% for fiscal '13. Our initial free cash flow forecast for next year, fiscal '14, is $165 million or a cash conversion ratio of about 90%. We're forecasting $105 million of CapEx, and depreciation and amortization will be $113 million. Our global DB plan expense for fiscal '14 will be $41 million, while our contributions will be $51 million. Turning to our finances, we had total debt outstanding at the end of the quarter of $785 million, and our cash balances were $162 million. Our total book equity was $1.4 billion. Our quarter-end net debt as a percentage of total capitalization was 30.8%, about the same as last year's. Our leverage ratio, net debt divided by EBITDA, was 1.74x. The quarter-end unused capacity on our $900 million revolving credit facility, which terms out in 2018, was $378 million. Interest expense will be $27 million in fiscal '13 and decline to $24 million in '14 as we called in our 6.25% debentures back in January of this year. Our effective tax rate in the third quarter was 28.1%, up slightly from last year's 27.2%. For the first 9 months, the effective tax rate was 28.5% compared with 29.1% last year. For all of fiscal '13, we're forecasting our effective tax rate to be 29.8%. Looking ahead to fiscal '14, we're forecasting an effective tax rate of 31.7%, up from this year's rate, largely due to fewer favorable tax adjustments, including the 2013 benefit of the retroactive reinstatement of the R&D credit. As John stated, we try to present a balanced outlook as we provide guidance. The biggest uncertainty for us at the present time as we head into fiscal '14 is sequestration. And we've tried to capture that -- we tried to capture the effects of what that might mean, showing a decline in our Military Aircraft business of 5% despite the belief that we're on some very good programs. We've almost got fiscal '13 in the record books, and we're happy to begin focusing on 2014. Thanks for listening, and we'll now turn the call back over to our moderator, and we'll take any questions you may have. Ricky?

[Operator Instructions] And we'll take the first question today from Julie Stewart with Credit Suisse. Julie Yates - Crédit Suisse AG, Research Division: Military aftermarket was strong again this quarter, and I know you've talked about the fact that it will eventually soften from sequestration. Can you just -- how do we think about your visibility, and then which quarter you expect this to begin to start softening?

The visibility in the military aftermarket is not great, Julie. We typically have framed contracts out as we go into a fiscal year for maybe half of what the fiscal year might hold. But they're essentially agreements in terms of conditions and pricing, et cetera, assuming that the business comes in. But if they don't send us back the stuff for repair, it doesn't guarantee you anything. So typically, you don't have very large visibility in the military aftermarkets. It's really a function of how many airplanes they fly and how much stuff they send back to us. Now it's -- we don't know when to expect the downturn, Julie. We keep thinking that we should see it this quarter or next quarter. So far, we haven't seen it. The folks that do the forecasting -- I mean, they're doing forecasting based on talking and having detailed discussions with all of their customers at the bases. They make the best estimate they can. We're forecasting next year, it will be down a little bit. I wish I could tell you exactly how much and when. But unlike the OEM side, where we know the V-22 is going to come down, we know the rates next year, and therefore, we've got a very solid projection on that. In the Military aftermarket, it's very tough to forecast. So that is the big uncertainty. As we said, that's the one that we don't know. This year, we're thinking it's going to come in at about $228 million. Next year, we're thinking it's just going to be below $220 million. I wish I could be more specific. The best I can say is, our folks are watching, and we'll be ready to react if we see it drop. Julie Yates - Crédit Suisse AG, Research Division: Okay. And then given the strong cash conversion both this year and next year, can you just remind us of the priorities for cash deployment?

In the short-term, we would use cash to pay down debt. And I think that we've got enough debt that we can keep going for several years on that. Beyond that, Julie, it's too early to speculate. Historically, we've used -- essentially, we've used free cash flow to acquire and grow the businesses, and we're still in the market for the right acquisitions, but at the moment, that's pretty quiet.

And we'll now go to Cai Von Rumohr with Cowen.

A couple of questions. So Medical, your margins were 10% if we take out all of the nonrecurring items, and you're projecting 7% next year. What's the reason for that?

Cai, so Medical had a particularly strong sales quarter. Sales were $38 million, and there was only once in the history of the company that Medical was above that. It was $38.2 about a couple of years back. So there was an unusually strong sales quarter, and that's a little bit of some stuff that came in a little bit early. We got some larger orders for some replenishments, and we're not anticipating that, that will repeat. And in the fourth quarter, we're thinking sales in the Medical business will drop to the more normal run rate that we've seen over the last several quarters of kind of $35 million on average. Actually, we're thinking, next quarter, we'll be down to about $31 million. Now that $31 million includes $3 million of lost sales on Ethox, so put that back in and your F-34. And the business has been running $1.5 million to $2 million of operating profit per quarter, and on the $34 million, $35 million, that's reasonable. When you get to $38 million, you get some nice profit in the sales, continued cost reduction and a nice mix. So it was a very nice quarter, and we're kind of taking credit for that. It's not that we would say this is a pattern and it's just going to continue to get better. And therefore, for the year, we were at margins in the 5%. We said now, with a strong third, we think we'll be at margins in the 6% range. But next year, there'll be a continued focus on the R&D to develop new products, and we think the margins will come in just over 7%.

Got it. And so if I look at your Boeing business, it's showing enormous growth. Were there any kind of contract renegotiations or anything there because you're really up basically $15 million, almost, what, 70% year-over-year?

Yes, so there's a combination. I'd say, it's a combination of 3 things, Cai. It's underlying production rates at Boeing; it's 787 ramping; and it's contract renegotiations that are up at around this time.

Okay. And so basically, you've done some price hikes then?

We've had some adjustments.

Adjustments. Okay, great. And then if we're looking at the aftermarket, you mentioned that 787 provisioning was down. I mean, others have mentioned that, too. But they seem to be indicating, others do that now, that deliveries are resuming, that they are resuming. If I look at your numbers, it looks like you're projecting another soft quarter in the fourth quarter. And then you have aftermarket down next year. Could you give us some color on that?

Yes. So actually if you look over kind of '11, '12, '13 and '14 and you take out the initial provisioning, the aftermarket is running flat at about $100 million. And I think what's happening there is that the combination of on the upside, you've got more traffic; on the downside, you're on some older platforms and there's more activity in terms of parsing out stuff. So I think we're kind of treading water there. The difference then between the $100 million and what we've done over the last 2 years, kind of $110 million, $112 million, is initial provisioning on the 787. That is really the only other kind of factor above that. And we're forecasting for this -- last year, it was $13 million. We think this year, it will be about $11 million. We're forecasting $7 million or $8 million for next year. Perhaps, that's conservative. I think it's based on the way that we anticipate the fleets will take some -- take the actual parts, plus the fact that we are working with the various airlines and with Boeing at trying to put fly-by-hour type of contracts in place. And what that does is it guarantees you a longer-term stream of revenue, but it doesn't give you that pop in the initial provisioning because what you do is you provision parts at locations around the world and you guarantee a turnaround time. Long-term, that's a better business model both for us and the airlines because it's based on having on-time on the wing. Short-term, you have the issue, though, that you see a little bit less initial provisioning. So I would -- I think it may be a factor that our products are slightly different from some of the other folks'. It may also be effect of the fact that we're trying to push to a longer-term fly-by-hour guaranteed multi-year contracts with airlines and less of the kind of initial provisioning.

Okay. And then the last one, could you give us what the R&D was in the aircraft sector and kind of where and how much of that was A350 and where you see that going?

So the R&D in the quarter for the Aircraft Group was about $90 million, and about half of that is on the A350. And we see that the year will be similar to last year. We kind of -- well, a little bit down from last year. It will be about $45 million. And as we look out next year, we think that will come down by about $10 million to $12 million next year.

And we'll now take a question from Tyler Hojo with Sidoti. Tyler Hojo - Sidoti & Company, LLC: Just a follow-up on the last line of questioning on R&D. What is your expectation for the entire company for fiscal 2014?

Well, this year, fiscal '13, our R&D for fiscal '13 is about $135 million. And for next year, fiscal '14, we'd see that coming down to about $130 million. And the difference is really lower R&D spend in the Aircraft business as the 350 starts to tail off. On the other hand, the Embraer Jets, the E-Jets, program for the primary that we just won, that will start to ramp up. So you don't see this dramatic drop off, but there is a little bit of a reduction from this year to next year. It actually -- the reduction, when you combine the $5 million and then the sales, it's about a 50 bps reduction in R&D in the Aircraft business from '13 to '14. Tyler Hojo - Sidoti & Company, LLC: Okay, got it. And just -- so if the Aircraft R&D is coming down, call it, $10 million to $12 million in fiscal '14, is there anything that...

No, no, no. Aircraft R&D is coming down about $5 million, I said. The 350 is coming down about $12 million. But on the flip side, you've got the Embraer Jets starting to ramp up, so that the net of it is only about $5 million. Tyler Hojo - Sidoti & Company, LLC: Okay, got it. I guess, there's no question there then. Okay, great. And then just 1 other one for me. Just in regards to Wind Energy business, I guess, that's a nice development in terms of the new orders that you just talked about in your prepared remarks. But I'm just kind of wondering, if you look at kind of the volumes of that business today, firstly, is it profitable at current levels? And just maybe if you could expand on, I think, you're looking for volumes to remain flat in fiscal '14, what are the puts and takes there?

Well, we don't go into profitability by individual market segment, so I'm not -- I don’t want to answer that question. But it's come down from $150 million business a couple of years ago to a $70 million business. So you can imagine it's not the highest margin business that we got right now. We have done some significant restructuring. We had a facility in Shanghai, we had 2 facilities in Shanghai, one was a facility we got when we acquired the Wind business. We have closed that facility, and we've moved it back into our other facilities. So we've taken out significant structural costs. We've taken out costs in Europe as well, lining it up with the underlying run rate of the business. So we think where -- we've cut the costs to the point where we think it's an okay business. We do believe that longer-term, this, and I said it before, this has real potential for us. If you look at the Wind business globally, it actually is a growing business. It's not growing at double-digit mark, double-digit rate, but it was a few years ago. But there is long-term sustainable growth in the projections at least from the market [indiscernible] the Wind business. The higher growth area is offshore wind, where the whole idea of performance really matters and failure being a very expensive thing. That's a stronger growth business, and that's an area where we think we've got some skills. And the key is innovation. And that's why when I described the contract we've received for Brazil, it's over 3 years, and it's not going to make our next year's forecast, but it will be a piece of it. But it is a step to say that the next-generation system, which gives us a significant cost reduction on our side, it gets us back to where we can actually make it a nice margin business. That's starting to take hold. And as you can imagine, introducing something like that to OEMs, it takes some time to do it. You don't just go 1 day to the next from 1 product type to the next. So that's the path. The path is, we have a new AC system. We have on the drawing board, in the next several years, we'll be developing the next-generation of systems after that. And we believe that's the opportunity to grow again in the business in the future. And the addressable market, as we see it for our stuff, is in the $300 million to $500 million per year, that's the addressable market. So we think it's worth the efforts to see if we can be a real success in it. [indiscernible] And the forecast we have next year is flat with this year. And every quarter, we have the internal discussion, we're reducing the forecast again, and eventually we're going to get to the point where we don’t that, but I'm hoping it's not because we get to 0. I think the forecast we have for next year, it's about $70 million, the forecast we have for this year, we've done a detailed look at that. We're hopeful that, that's the -- that's our best estimate that we can do. But I've said that before, so I'm hoping I'm right this time. Tyler Hojo - Sidoti & Company, LLC: Got it. Just a follow-up in regards to Brazil. When are shipments slated to begin on that contract?

It will be kind of '14, '15, '16. We really just got the contract, so assuming it takes a couple of months to get stuff squared away, it's really kind of laid out over fiscal '14, '15 and '16.

And we'll go to Michael Ciarmoli with KeyBanc.

I was wondering -- I don't know if you'd be willing to do this, but looking at that Commercial Aircraft, specifically the OEM growth, would you be able to or willing to parse out kind of legacy platform growth versus new aircraft like the 787 or A350?

Yes, I mean, I'd give you the sales on -- I can do that. That's -- so the 787 sales in the quarter were about $22 million, and the legacy was about $29 million, more or less, rounds to about $50 million.

And I was thinking, too, what about going into '14 next year, because you do have that 16% growth?

Yes, so 787 sales -- let me do '13 first. 787 sales in '13 are about $82 million and next year are about $100 million. And the other Boeing platforms this year are about $102 million and next year, they go up to about $122 million.

Okay, perfect. And then I've also noticed you've got a pretty nice uptick in business jet, what's -- is that just the introduction of some of these new platforms? I mean, how are you -- that market, especially the small-mid, continues to lag, so what's kind of behind that nice mid-teen growth rate there?

Yes, so the business jets go to about $43 million to about $49 million, $50 million next year, so about a $6 million to $7 million increase. And the big piece of it really the 280. So actually, if you take the 280 and the 650, you get probably 90% of the growth. So that's really what's happening in the Gulfstream business.

Perfect. And then just the last one for me. You've got the strength projected next year in satellites. And I know one of the smaller OEMs in the space just talked pretty nicely about some increasing orders and those geosynchronous satellites coming back. Are there any one -- is that your primary market there? Should we be looking at some of the larger satellite manufacturers? I'm just trying to get what else is behind that strength you're seeing there for next year.

Well, the strength next year is all acquisitions. It's just full year sales of acquisitions. And actually, the underlying Space business, a combination of satellites and launch, we think will be a little bit softer next year. So that's the kind of the pattern that we've seen for the last several quarters. Perhaps, that will be a little bit better. And if there's good news out there, we'd be delighted to take it. But right now, we're projecting that our underlying Space business will be a little bit soft, and you see the growth just from full year acquisitions sales on In-Space Propulsion and Broad Reach Engineering.

And we'll now go to Karl Oehlschlaeger with RBC.

Maybe just going back to that commercial aerospace aftermarket a little bit. You talked about how kind of stripping out the 787, it's -- or the 787 provisioning. It's roughly flat with kind of the puts and takes there and sort of the takes or your mix on older legacy and the impact of parting out. Looking not just sort of into FY '14, but kind of beyond, when do you see that or do you -- how do you think about that business in terms of sort of that reaching a horizon and not being quite of an issue that's sort of offsetting the growth in traffic?

I think if we look out to the next few years, the underlying aftermarket business, that will be pretty flat. I mean, there may even downward pressure on it. The flip side of it will be 787 initial provisioning we'll be starting to see, initial provisioning on the 350, which probably not next year but maybe the following year, you'll start to see that kick in. Some aftermarket growth on some of the business jet platforms. We just chatted a little about the Gulfstream. And then longer-term, of course, the growth associated fly-by-hour type of contracts that gets you a long-term growth of the 87 fleet and the 350 fleet then grow. C919, some say that's going to kick in as well. And then Embraer Air, but now you're out in '17, '18. So I think the underlying business, it will be -- we'll work hard to try and keep that flat, but the -- in traffic growth, I think the fact that the fleets are aging and the fact that there's more and more parsing out, I think that may be a challenge for us, but I think there are long-term growth drivers behind the business. It's just probably going to take a couple of years.

Okay. And then on sales, you have overall sales growing 5% this year and 3% next year. Maybe talk a little bit about how you think those numbers are on an organic perspective?

They're all organic. Are you talking about the aircraft business [indiscernible]

I'm talking about overall company sales.

Sorry. For the total business for this year and next year, so this year the total sales are up about, call it, $125 million. Of that -- most of that is acquisitions. About 70% to 80% of that is acquisition-driven. And then next year, sales in total are up just under $100 million, and of that, about 2/3 is organic and 1/3 is just the effect of the acquisitions that we owned for a partial year this year.

And at this time, there's one name remaining on the roster. [Operator Instructions] And we'll now go to Neal Dihora with Morningstar.

Just 2 clarifications. One on the F-35, is this still the development versus production, I guess, [indiscernible] trying to say it, but the transition from those 2 things? And then two, I think, you guys said is that -- is the industrial margin improvement only due to the actions taken in the last couple of quarters?

So your first question on the F-35, the top end sales in the quarter was not a development production split issue. It was the fact that we received an order for LRIP 6 and we have put some inventory into place to guarantee lead times for that. The order comes in, the contract absorbs the inventory and you get a temporary pop in sales. So that was just a kind of a one quarter phenomenon, and next quarter, we'll be back to a more normal run rate on the production of the F-35. The development, this year, we're looking at about $21 million of development efforts. Just to put it in context, that's roughly the same level as we saw in '11 and '12. They were kind of in the low-20s. Next year, we think the development effort will drop to about $6 million. So you drop from kind of $22 million down to about $6 million on the development side. On the production side, it's roughly the same level. It's kind of running in the mid- to high-$60 million range. So the total sales on the F-35 next year are down about $17 million from $90 million this year to call it low-70s. And that really is the development contract winding down significantly. We've been expecting the development contract to wind down for years, to be honest. And each year, something new comes along or some derivation or some upgrades, and it's kind of held at that $20 million. But now we're forecasting next year, it really will drop off. So that's what's happening there. And now I'm going -- I'm trying to remember your...

[indiscernible] operating profit margins, is it all due to restructuring?

Yes. So yes, if you take -- the number I gave in the text, if you back out the effects of the asset write-down in the quarter, that's $2 million, and the effects of the restructuring in the quarter, that's $3 million, the underlying operating margins in the quarter were close to 10%, they were 9.8%. We've had approximately flat sales and approximately the same mix in Q1, Q2 and Q3. And that margin went from -- so the underlying operating margin on same sales went from 6.1% in Q1 to 6.6% in Q2 to 9.8% in Q3, and we're forecasting getting it to 12.2% for all of fiscal '14. So that is a benefit of the restructuring. That's essentially what happened.

And we'll now go back to Cai Von Rumohr with Cowen.

Can you give us what your estimates are, assumed for corporate expense of FAS 123, the stock and for interest expense this year and next year for the full year?

Let me do it. Cai, yes, if I heard you right, you're looking for corporate expense for the full year. Let me give you the '13 and '14, and then I think you said the equity base comp as well. So the corporate expense -- net interest, okay. Let me start with corporate expense. Corporate expense, we've got $26 million, forecasted for '13, going up to $28 million in '14. Interest expense is $27 million in '13, coming down to $24 million in '14. And then the equity base comp is $6.5 million in '13, going up to $7.5 million in '14.

Terrific. And then another housekeeping, can you give us some rough color -- I don't know whether you've done this yet, it's premature to tell me, but how should we think about the quarterly pattern on fiscal '14?

Yes, we haven't done that yet, Cai. So we'll do that next quarter.

Okay, very good. And then a larger question. If I look at Aircraft, did I hear you correctly that the R&D there will be down approximately $5 million, with the A350 down and the E-Jets starting to build, that's essentially the pattern?

Yes, that's the story.

And yet, kind of if I back out all the other adjustments with your margin guidance, that seems to apply that the margin before R&D is relatively stable with the mix that's really kind of going a little bit against you, going more towards commercial OE. So what's happening there? Is that lean initiatives? Is that the better mix on the F-35? What are the key elements?

Yes, actually, I would say that it's -- I think there's more margin increase than you're looking at. The forecast for this year is about 12.2% in margins, and next year, we're projecting 13% margin, so that's 80 basis points. About 50 -- 40 to 50 of that is on the R&D line. And the other piece of it is continued operational improvement in the face of, as you described -- as you're correct, a negative shift in the mix. I mean, we're forecasting Military down. We're forecasting military aftermarket down. And we're forecasting the growth is going to be in the commercial OE side, and that's not as profitable as the military side, particularly in the early phases of the programs. So it is the result of continued focus on operational improvements across the company.

Got it, okay. And then a broader question, kind of we're seeing more in terms of restructuring, we're seeing more in terms of kind of write-offs. I noticed it's sort of a process, John, but as you look at '14, are there more things that maybe need to be done in terms of restructuring, more things that maybe need to be kind of cleaned up in terms of like the technology that was a one-time thing, but outside of Medical, they're in your thinking potentially?

I'd say at this stage, Cai, our forecast for '14 is a clean forecast. It does not include any restructuring. It obviously does not include any future asset adjustments, write-downs or anything like that, that we may take. We're feeling like we've done some fairly big things in '13. I'm hoping that the restructuring is behind us, and that we are starting to see some significant operational improvements. I did mention the Space and Defense Group had a tough quarter. They're looking at doing some adjustments in the fourth quarter. It really depends then on how the businesses play out next year. I could imagine if sequestration has a significant negative impact, then clearly, we will be going back around and looking at how we adjust for that. And in terms of other businesses, I mean, the big one is the consideration for the Medical business right now. That's probably going to keep us busy for the next 6 months or so, and I wouldn't like to speculate beyond that at this stage. I think that would be -- I don’t think that'd be a sensible thing. I think we've got a good portfolio of businesses. But we're constantly reviewing them. And as I said, I think, before, through the course of '13, a lot of the restructuring has been about picking which businesses we want to be in, and some business that we decided, they weren't long-term viable for us. We just haven't called them out in that particular light. They've kind of been restructuring, but it has been saying, this line of business to that line of business, we don’t think there's a great future in that market for us. We haven't performed particularly well, so let's not invest a lot more there. So typically, they were smaller pieces of business. And I'd say that kind of reviewing where we are, what the businesses are, we'd really continue that. But sitting here today, I'm not anticipating significant changes next year. A year ago, sitting here, I wasn't anticipating everything that was going to happen in '13 either, so who knows. But that's not in the plan right now.

And there are no other questions. So I'd like to let everyone know that there will be a replay of today's call, and it will be available starting today, July 26 at 12:00 p.m. Central Time, and will run through July 31 at 12:00 p.m. Central. And you may dial (888) 203-1110 or (719) 457-0820, and enter code 1990152. And thank you very much.

Thanks very much for joining us. And we look forward to seeing you again next time. We're chatting with you in 90 days.

Thank you very much. That does conclude our conference for today.