MOG.A (MOG.A) Q4 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the Moog Q4 and Year-end Earnings Conference Call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Ann Luhr, Investor Relations Manager. Please go ahead, ma'am.

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 October 31, 2014, our most recent Form 8-K filed October 31, 2014 and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations homepage and webcast page at www.moog.com. John?

Good morning. Thanks for joining us. This morning, we report on the fourth quarter of fiscal '14 and reflect on our performance for the full year. We'll also reaffirm our guidance for fiscal '15. Fiscal '14 was a very respectable year for the company given the challenging market conditions we faced. Earnings were up and cash flow was very strong. Folks around our company put in a tremendous efforts to deliver an our commitments to both our customers and our investors and at the outset of this call, I thank them for their hard work and dedication. Start with the headlines. First, earnings per share in the quarter, excluding restructuring, came in very close to plan. Second, during the quarter, the outlook for some of our markets weakened. We responded swiftly with restructuring actions to rightsize the business to meet our fiscal '15 projections. Third, it was another quarter of very strong cash flow, as it closed out a year of record cash flow. Fourth, we completed the first phase of our share buyback program in the quarter ahead of our plan. And finally, we're reaffirming our guidance for fiscal '15 of $4.25 per share. Now let me move to the details, starting with the fourth quarter results. Sales in the quarter of $671 million was down 1% from last year. Sales in our aircraft and components segment were up, as sales in our other 3 segments were down from last year. Taking a look at the P&L, our gross margin's up and a slightly better mix and continued focus on cost reductions. R&D is up in the quarter on higher aircraft activity. Our total G&A expenses are also up marginally. We incurred $13 million of restructuring expense in the quarter, mostly in our Aircraft and Space and Defense segments. Our effective tax rate was relatively low at 25.2%, helped by the fact that the majority of the restructuring cost is in high tax jurisdictions. The overall results was net earnings of $40 million and earnings per share of $0.93 and excluding the effects of restructuring, earnings per share was $1.12. Fiscal '14. For the full year, sales were up 1% or about $40 million. Aircraft sales were up 5% while sales in Space and Defense, Industrial and Components were more or less flat. Sales in our Medical Device segment were down 18% from last year. Net earnings and earnings per share were up over 30% from last year, however, fiscal '14 included a couple of unusual noncash charges in our Medical segment. Exclusive of these charges, earnings per share in fiscal '13 was $3.26, which compares with earnings per share of $3.52 in fiscal '14, an 8% increase. The performance of our underlying operations was very comparable between fiscal '13 and '14, but lower interest cost in our share buyback program in fiscal '14 resulted in higher earnings per share. Free cash flow for the year of $208 million was up 32% from last year. Before moving to fiscal '15, let me provide a little color on the restructuring charges with took in our fourth quarter. On our July earnings call, we told the market we were anticipating restructuring charges of $5 million or about $0.07 per share in our Q4 numbers. At that time, our planned restructuring was confined to our Aircraft segment. As the fourth quarter unfolded, the outlook for our Space business started to weaken and in response, we broadened our restructuring actions to include the Space and Defense segments. In total, we incurred $13 million or $0.19 per share in restructuring charges in the quarter. $11 million of this $13 million relates to severance while $2 million relates to decisions to exit a couple of product lines. I'll provide a bit more detail on those decisions when I discuss be Industrial Systems and Medical Devices results. Moving to fiscal '15, we're affirming our earnings forecast for fiscal '15 at $4.25 per share. Sales would be up about 1% over fiscal '14 with sales in each segment pretty much in line with this year. In fiscal '15, we're anticipating operating earnings of 11.5%. Improvements in our Space and Defense and industrial segments are the driving increase. Margins in Aircraft and Medical will be about flat with fiscal '14, but margins in our Components segments would be marginally lower. We anticipate another year of healthy free cash flow. Now to the segments. I'll remind our listeners that we provided a 2-page supplemental data package posted on our website, which provides all the details and numbers for your models. We suggest you follow this in parallel with the text. Beginning with aircraft, Q4. Sales in the quarter, $283 million, were up 3% from last year. As in past quarters, commercial sales drove the increase, with military sales about flat with last year. Sales to Airbus were up on the A350 ramp, commercial sales to Boeing were flat with last year, a combination of higher 787 sales and lower legacy sales. Business jets sales had an unusual spike this quarter as we closed out in October. Commercial aftermarket sales were up nicely and continued strong 787 initial provisioning. On the military side, sales to foreign militaries were up nicely in the quarter, compensating for lower F-35 development sales and lower sales on various helicopter programs. Despite the continued pressures on U.S. defense spending, our military aftermarket was relatively strong, down only slightly from last year. Aircraft, fiscal '14. Fiscal '14 was another record sales year for our aircraft business. Sales topped $1.1 billion, almost evenly split between military and commercial. This compares with almost 2/3 military and only 1/3 commercial just 4 years ago. Over that 4-year period, military sales have grown 18% while commercial sales have more than doubled. Sales growth in fiscal '14 was all on the commercial side, with sales to Boeing and Airbus up over 20% and commercial aftermarket sales up 16% on 787 initial provisioning. Military sales were down 4% in fiscal '14, mostly driven by lower F-35 development revenues and reduced work on the V-22. Aircraft's fiscal '15. We're keeping our sales forecast for fiscal '15 unchanged from 90 days ago. Total sales of $1.1 billion will be marginally lower than fiscal '14, continued growth in commercial OEM will compensate for slower military sales. We're anticipating a weaker commercial aftermarket as the 787 initial provisioning slows down from a banner year fiscal '14. We believe '14 was an outlier for IP and that fiscal '15 could be much slower as our customers adjust their inventory holdings based on the fleet growth. Aircraft margins. Margins in the quarter were 9.8%. These margins included $5 million in restructuring charges. Margins exclusive of restructuring were 11.7%. Margins for the full year were 10.8%, excluding restructuring. These margins are down from 12% in fiscal '13. Last quarter, we explained the shift in outlook for our aircraft margins. Let me remind you of the 3 elements which have impacted the margins in fiscal '14 and which we continue next year. First, our R&D cost are running ahead of what we have planned 12 months ago, driven by the A350 certification process and the accelerated ramp up on the Embraer E2 program. Second, margins in our military business are coming under increased pressure domestically and we're seeing a less favorable mix with slower sales in foreign military platforms. Finally, the production ramp-up on new commercial programs is proving more expensive than we had expected. We're in the early stages of building our commercial portfolio, with significant OEM sales on new platforms and the aftermarket less than a quarter of our sales. As this book of business matures, the margins will also improve. Looking to fiscal '15, these margin headwinds will continue to weigh in our performance, therefore we're moderating our margin forecast for fiscal '15 to 10.5%, more or less in line with our fiscal '14 performance. Turning now to Space and Defense, Q4. Sales in the quarter were down 6% from last year. The weakness was all in the satellite markets, where we saw a slowdown in activity across our components, engines and avionics businesses. Our satellite business is going through a cyclical downturn at the moment, which we believe will extend into 2015. Sales in our state business are subject to 2 cyclical effects. First, the sales mix between developments and production contracts; and second, the success of our customers in winning new programs. We've seen this cycle in the past and we're now adjusting our cost structure going forward in light of the lower sales outlook. On a positive note, sales in the defense market were up nicely in the quarter driven by higher volumes in our missile programs. Space and Defense, fiscal '14. Total sales in fiscal '14 of $395 million were flat with last year. Sales are flat in both the space and defense markets. In the space markets, higher sales to NASA compensated for lower satellite sales. And in the defense markets, higher missile and security sales compensated for lower sales in military vehicles. Fiscal '15. Given the sales weakness we have seen in the space market over the last few quarters, we're moderating our forecast for fiscal '15 by $15 million. The reduction is about half in the satellite markets and the other half in the launch vehicle and NASA market. We're keeping our defense forecast unchanged from 90 days ago. The results is total sales for fiscal '15 of $403 million, up very slightly from this year. Space sales will be lower, but we're anticipating higher defense sales on strength in the missile markets as well as an improving sales on foreign military vehicle programs. Space and Defense margins. Margins in the quarter were a very disappointing 60 basis points. Exclusive of restructuring, margins were 6.2%. We have been anticipating higher sales in the quarter and significantly better margins. The sales shortfall relative to our forecast from 90 days ago was across all our markets. Anticipated bookings on various programs did not materialize. The lower sales drove the lower margins. We have been forecasting an improving sales picture for several quarters, but we've now concluded that we need to adjust our cost structure downwards to reflect the actual sales level we're seeing each quarter. As a result, we took a restructuring charge of $5 million in the quarter. We believe this lower cost structure will enable us to meet the operating profit target we've set 90 days ago for fiscal '15 of $43 million to yield an operating margin of 10.7%. Turning now to Industrial Systems. Sales in the fourth quarter of $148 million were down 3% from last year. Wind energy sales were up nicely in the quarter, with stronger sales in both China and Brazil. Sales for our flight simulation customers were 22% lower in the quarter as these customers continue to adjust their inventory levels. We believe we're nearing the end of this inventory adjustment phase and have new orders in how to support our forecast of higher sales to these customers in fiscal '15. Industrial automation sales were flat with last year. For the full year, sales of $591 million were flat with fiscal '13, although there was a slight change in the mix. The story for the year is similar to the story at the quarter. Wind energy sales were up with stronger sales in China and Brazil, industrial automation sales were up as our European business improved and on the downside, sales in the flight simulation market were lower as our customers work down the inventory they've built up in fiscal '13. Industrial Systems, fiscal '15. We're adjusting our fiscal '15 sales outlook as a result of the recent strengthening of the U.S. dollar. Much of our industrial sales were in Europe and the recent run-up in the dollar relative to the euro has a negative translation effect of approximately $15 million on our sales outlook for next year. On a positive note, over the last 90 days, we believe the demand for our products has firmed so much. Combining these effects resulted an $8 million reduction in our sales outlook for next year. The reduction is all in our industrial automation market. The results is total industrial system sales in fiscal '15 of $600 million, up about 2% over this year. Industrial margins. Margins in the quarter were 9.5%. There were 2 unusual items which negatively affected margins. First, as part of our ongoing portfolio review, we decided to stop our sales activity in the semiconductor market. As a result, we took a noncash charge in the quarter equivalent to 75 basis points of margin. We entered the semiconductor market back in fiscal '09, but over the last 5 years, the market has not developed as we have anticipated and with minimum sales, we've decided to focus our attention on more promising areas going forward. Second, in the quarter, we took a result for a quality issue. The issue was associated with 1 particular application that is limited to a specific customer. This reserve equates to 175 basis points of operating margin. Exclusive of these unusual items, margins in the quarter were 12%. Margins for the year were 9.8% and these margins also include several one-time charges we made over the course of the year as we continue to clean up the portfolio of product lines. These charges equated to about 150 basis points of margin headwind. For fiscal '15, we're projecting margins of 12.1%. The improvement over fiscal '14 will be driven by the absence of special charges and our continuing cost-containment activity. Turning now to our Components Group. Sales in the fourth quarter were up 6% from last year. Non-A&D sales were up 8% in the quarter as shift into the energy markets continued strong. Sales in the A&D side of the house were also up this quarter. In the aircraft market, we had some nice international aftermarket orders. On the other hand, component sales for military vehicles were lower in the quarter, a trend we've seen for several years now. For the full year, component sales were up 2%. The increase was driven by higher sales in the industrial markets as a result of our acquisition of Aspen Motion Technologies halfway through fiscal '13. Higher industrial sales compensated for lower sales across our A&D markets, with particular weakness, again, in the military vehicle markets. Over the last 4 years, our Components Group has managed through a significant shift in their sales mix. In fiscal '14, total sales were $425 million, of which only 42% went to the aerospace and defense market. Back in fiscal '10, total sales was $360 million, 63% of which went to the aerospace and defense market. So over this 4 years period, our A&D sales have declined 21%, while our sales into non-A&D markets have increased 87%. Moving to fiscal '15. Our forecast for fiscal '15 is unchanged from 90 days ago. We're projecting total sales of $440 million next year, a 3% increase over fiscal '14. In the A&D markets, we believe we'll see slightly stronger defense sales as some of our missile programs ramp up and international sales on military vehicles increase. In the non-A&D markets, we anticipate further growth in our general industry category as the U.S. economy continues to improve. Components margins in the quarter were 16.7%, resulting in full year margins of 15.3%. For fiscal '15, we're projecting margins of 14.8%, unchanged from 90 days ago. Turning to Medical. Medical Q4. Our Medical segment continues to perform well despite some significant sales headwinds. Sales in the quarter of $32 million were down $7 million from last year. Sales of pumps and in our other category were flat with last year, but said sales were up $7 million in the quarter. Last year's fourth quarter included a significant stocking order for enteral sets from one of our major distribution partners and that did not repeat this year. For the year, Medical Devices segment sales were down 18%. 1/3 of the decline is due to the divestiture of the Buffalo Ethox operation, which we completed in the third quarter of fiscal '13. The other 2/3 is primarily due to lower set sales. As mentioned already, fiscal '13 set sales benefited from an unusual stocking order in the fourth quarter while fiscal '14 sales were lower as our partner works down its inventory. Medical, fiscal '15. Full year sales in fiscal '15 are projected to be $120 million, in line with our fiscal '14 sales. We anticipate higher said sales with compensation while lower sales in our other category. Medical margins. Margins in the quarter were 10.1% to yield full year margins of 8.8%. In the quarter, we incurred a $1 million charge related to exiting an old product line. Absent this charge, margin in the quarter were 14.1%. Given the challenges this business faced during the year, this is an impressive result. For the first half of fiscal '14, the management team was focused on supporting the divestiture process which distracted from the day-to-day operations. When the divestiture did not compete in March 14 as planned, the second half of the year involves significant reorganizing. On top of these challenges, sales in the year were down 18% from fiscal '13. And despite these headwinds, operational performance was over $2 million better in fiscal '14 than fiscal '13. For fiscal '15, we're projecting full year margins of 8.8%, in line with the fiscal '14 results. We anticipate it will take us another couple of quarters to stabilize this business in preparation for a return to the market in the second half of fiscal '15. Summary. With fiscal '14 behind us, we're looking forward to the stronger fiscal '15. We're forecasting full year sales next year of $2.66 billion, up 1% from fiscal '14. Commercial aircraft OEM sales will continue to grow nicely next year, up 9% from fiscal '14. However, aircraft sales in total will be 2% lower on weaker military and commercial aftermarket sales. We're forecasting 2% to 3% increases in sales in our Space and Defense, Industrial and Components segments. We think medical sales will be flat at fiscal '14. We're projecting net earnings of $180 million and net margins of 6.8%. Earnings of -- per share of $4.25 will be up 21% over fiscal '14. we're also forecasting another strong year of free cash flow with conversion rates yield over 100%. As usual, we think the year would start out slowly with earnings in the fourth quarter of $0.85. As always, our forecast does not include any projection for future acquisitions. Fiscal '14 was a quiet year for acquisitions but we continue to look for adjacent opportunities which meet our strategic and financial goals. With patience, we believe the right opportunities will come along and our strong financial position will allow us to move quickly. In the meantime, as we continue to generate excess cash, we continue our share repurchase program. Note that our $4.25 outlook for fiscal '15 does not include any impact from additional share repurchases that we might undertake during the coming fiscal year, nor does it include any impact from financing decisions we might make in support of additional repurchases. We'll report on these items again at the end of our fourth quarter. As we look the fiscal '15, our focus remains unchanged. Our goals are growth, margin improvements and strong cash generation. We continue to invest in R&D to drive long-term organic growth and we continue to seek adjacent acquisitions. We continuously review our portfolio of product lines to ensure we're following a strategy which maximizes long-term value creation and enhances margin performance. We'll promote lean techniques to increase our cash flow and improve our returns and capital. Finally, we'll consider all capital allocation decisions in the light of long-term shareholder returns. As always, there are both opportunities and risks associated with our fiscal '15 outlook. On the opportunity side, we could see a pickup in our global industrial markets and the commercial aircraft's aftermarket maybe stronger than we're forecasting. On the risk side, defense spending remains a concern and media production costs targets our new commercial aircraft programs will continue to be a major area of focus for us. In recent drop in the price of all could also negatively impact our offshore energy business. The forecast we provided balances these pluses and minuses? Now let me pass you to Don, who will provide some color on our cash flow and balance sheet.

Thank you, John, and good morning, everyone. As John has already described, we had an impressive year for cash flow. Our strong fourth quarter resulted in free cash flow for the year of $208 million or a conversion ratio of 132%. Turning in fiscal '14, we have projected free cash flow of $165 million, assuming about $51 million of pension contributions. We actually contributed $80 million to our global defined benefit pension plans as we made discretionary incremental contributions during the year. And despite the higher pension contributions, we ended with free cash flow that was significantly stronger than our original projection. The $200 million of 2014 free cash flow compares with an increase in our net debt in fiscal '14 of $91 million and the difference relates primarily to $266 million of cash used to repurchase company stock during the year. In addition to our capital expenditures being lower this year than in recent years, we've also hedged success managing down our working capital. Working capital and that's excluding debt and cash, declined as a percentage of sales by 260 basis points in the last 12 months. And this equates to more than $60 million of capital that we'd freed up from our balance sheet. The improvement is shared between receivables and inventories. For '15, we're reaffirming our free cash flow forecast at this time of $190 million, which reflects a conversion ratio of 106%. Our 4 million share repurchase program that we announced in January of this year was completed as of the end of September. During fiscal '14, we repurchased all 4 million shares, representing about 9% of our shares outstanding at an average per share price of about $68. In addition, we remember our board authorized an additional 5 million share buyback in August of this year. We'll report on the progress of that buyback at the end of our first quarter of fiscal '15 and also to reiterate John's previous comment, our projections for '15 did not include the impact of any further share buyback activity or related financing strategies. We'll report them as they occur. Capital expenditures in the quarter were $21 million and depreciation and amortization totaled $28 million. For all of '14, CapEx was $79 million, our lowest level since 2010, while D&A was $109 million. For 2015, we're leaving our CapEx forecast at $100 million, up from 2014 due to increased spending in the Airbus A350 and Embraer E-Jets programs to support their production ramp-ups. D&A in '15 will be about $114 million. Cash contributions to our global defined benefit plans totaled $35 million in the quarter resulting, as I said, in $80 million of contributions for the full year. This compares with $43 million for all of fiscal '13. In the latter part of 2014, we've decided to make discretionary incremental contributions to the U.S. plan because of our strong cash position and in addition, we made some additional or initial contributions to our trust associated with a German pension obligation in order to utilize some of our idle offshore cash. In 2015, we're planning to make contributions into our global defined benefit plans totaling $62 million. Despite these increased contributions to our DB plans over the last couple of years, we've been able to report strong free cash flow results. Global pension expense for our DB plans in 2014 was $36 million compared to $51 million in 2013 and our 2015 global DB plan expense is projected to be about $42 million. Our effective tax rate in the quarter, in the fourth quarter was 25.2% compared with last year's 14.8%. Before the tax effects of last year's goodwill impairment charge, the Q4 fiscal '13 effective tax rate was a more normal 30.2%. So the comparatively low rate in 2014's fourth quarter resulted from the mix of taxable earnings, particularly affected by the larger than previously estimated Q4 restructuring charge associated with higher tax jurisdictions. For all 2014, the effective tax rate was 27.7% versus 27.0% for all of 2013. For '15, we're forecasting an effective rate of 30.0%, down slightly from our forecast from 90 days ago. The increase in our rate from 2014 to 2015 results primarily from a less favorable mix of taxable earnings around the globe. More precisely, we're forecasting our U.S.-based taxable income to be substantially higher in 2015 compared to 2014. Our financial ratios at the end of the fourth quarter are solid, even after spending $266 million of cash in 2014 from share buyback program, our leverage ratio was 1.85x compared with 1.56x a year ago. Net debt as a percentage of total capitalization was 32.3%, up from 26.4% last year. With respect to M&A, we've not had anything to report in the last 6 quarters, however, as John's noted, we continue to look for strategic opportunities. We consider M&A an important complement to our organic growth objectives and we remain actively looking. Prices are high in some of the markets and deal flow is on balance to moderate. In the meantime, our shareholders are benefiting from our strategy to return value by buying back some of our shares. At quarter end, we had $321 million of unused borrowing capacity on our $1.1 billion revolver that terms out in 2019. We also have an additional $200 million untapped accordion feature with our bank group that is available for us to exercise at any time. So in summary, we've got 2014 in the record books. Sales were $2.65 billion, net earnings were $158 million, margins were 6.0%, earnings per share were $3.52 after $0.19 per share restructuring costs and our free cash flow conversion ratio was 132%. As we look ahead to '15, we're projecting an increase in revenues of 1%. Despite this top line growth challenge, we believe that the benefits of the restructuring actions we've just taken, we'll see 2015 operating margins increased by 110 basis points or an improvement of 60 basis points ignoring restructuring costs and earnings per share will be $4.25. This will reflect and EPS increase over 2014 of 21%. Although many of our markets we're in are showing tepid growth or even decline in some cases, such as in defense. They believe the diversity of our portfolio of products, markets, geography, customers and technical capabilities positions us well for any recovery that we'll see in the markets that we serve. So with that, I'd like to turn you back to John for any questions and just -- Joshua, if you can help us out, that would be great. Thank you.

[Operator Instructions] We'll take our first question from Cai Von Rumohr.

As I look at your guide for this year, I see CapEx spiking to $100 million. I see payables that look like you were very generous to your suppliers. Can you comment -- is there further opportunity? What you're doing on inventory and receivables? And where could that cash flow number maybe go with if things work out a little bit better?

Cai, this is Don and of course, we're hopeful that, that is conservative estimate. We decided that based on what was a right now, there wasn't enough indication, I guess, for us to change what we had already put out on the street 3 months ago, $190 million of free cash flow for '15. It seems a reasonable place to start and we are coming off a real solid year, you've picked on a couple of things that yes, maybe our CapEx maybe conservative. However, we do have those programs that are referenced in the remarks A350 and Embraer E-Jets, that do require some support with respect to capital spending. So we're trying to be, like I said, conservative. We're also continuing to work hard to, I guess, perpetuate the benefits that we just realized in '14 into '15 as it relates to the rest of working capital. Inventories and receivables, inventories in particular. There continue a lot of areas that we're working and we're hopeful that we will see some continued improvement there. But we think right now, starting expectations at $190 million, just a little bit over 100% conversion is a responsible thing to do.

Okay, terrific. And then maybe if we could go to aircraft and R&D. Maybe kind of give us some color in terms of where was the aircraft R&D in 2014? Where is it likely to go in '15 and total R&D in '15?

For the total company, Cai, the R&D in '14 was just shy of $140 million and we think that will drop at about $135 million next year. So call it up, $5 million, 3% to 4% and for the aircraft R&D, that end up the year, fiscal '14, at about $90 million. And we're thinking that will be down a little bit about $85 million next year. Sequentially, that's essentially the difference, the rest of the operations will be kind of more or less in line with what happened in fiscal '14.

And maybe update us where you are on the 777X decision and kind of how you're doing on A350 and E2?

So we're doing very well done on the A350. As you know, that airplane is flying and we're looking forward to the initial deliveries on that, so that's all going pretty -- very well. E-Jets is still early in the program. I mean, we're working very closely with our customer, Embraer, on that and that's going pretty well. And then on the 777X, the competitions for all types of products have not yet been announced so it's a little bit premature for me to say what -- how that will play out, so it's still, I would say, that's not yet been decided.

Okay. And then the last one, maybe update us on your progress in terms of getting your suppliers on stream in Asia.

I'd say that's -- as we've described in the past, Cai, that's a long term, month to year process to build an Asian supply chain that we've started. I would say 4, 5, 6 years ago and it's a continuing process. It's -- so I think quarter-to-quarter, there's incremental developments but it's not something that I would say there's a large step change. And it's something that we're going to continue as we get into the 350 production ramp and the E-Jets ramp. So that's -- of course, we've been manufacturing ourselves in the Philippines since 1984. So in terms of the actual manufacturing site, we have a very well established facility there. All of the 87 products is essentially coming out of there and we're in the process of transferring the 350 products into that facility. So what we do is we do the initial units here in the U.S. in order to make sure that it's close to the engineers and any bugs that works out and then when it's stable, we move it over to the Philippines. So that ramp between -- from western to the Asian supply chain, or what I call it, the low cost -- lower-cost supply chain, continues. But it's -- I would say it's a gradual process over a multiyear span of time rather than a specific quarter-to-quarter that we would see major changes.

And we'll now take our next question from Michael Ciarmoli.

Maybe Don or John, I guess if you can maybe categorize what some of the real-time trends are looking like in your European industrial automation businesses? I mean, how confident are you? And I mean, you talked about the risk, I guess, in offshore with oil but we keep hearing Europe starting to weaken a little bit. Maybe you could just talk about some of the real-time order trends, what you're seeing from your European-related revenues?

Yes, so if I look at that industrial automation piece of business, quarter-over-quarter, it's flat, $75 million, $75 million, Q4, Q4 '13 to '14. If I look for the year, it's up from $293 -- $293 million in '13 to $307 million, call that a 4%, 5% increase. But next year, we're forecasting it back down to $300 million. So it's a business I would describe as kind of going sideways. Now of course, when you begin with $300 million with lots of different product lines and some are doing a little bit better and some are doing a little bit worse. But it's essentially been a fairly stable business. It's also a business that typically is on a lead time of 6, 8 weeks. So you don’t have a very large backlog like you do in some of the aerospace businesses, where you can, say, "We've got the next 6 to 12 months worth of backlog and we were seeing how that's fluctuating." It's really based on orders we take today, shipping them in the next month or 2. And therefore, you can assume that the order trends lines up very closely with the sales trends just time shifted by, let's say, 6 to 8 weeks. So there's -- I would say the order trend is supporting that kind of flat business outlook as we go forward. There's no significant change in one way or the other from what we saw in '13, '14 and now what we're projecting into '15, Michael.

Okay. And maybe just your updated thoughts on Medical. It's now looking like just from a organic improvement expectation and performance, Medical is probably got the best margin potential in the portfolio. I mean, is there any updated dialogue or internal discussion about how you're thinking about the Medical segment going forward?

I mean, of course, there's an ongoing dialogue about all of these things. Right now, our plan remains the same as what we said 12 months ago, which was we don't think that the medical pump business is a real long-term strategic fit for the company. And it really has to do with it's an FDA-type of product. It's a sale directly to an end user so it's kind of almost B2C although you go through medical providers, it's a consumer-based product and that's different from the rest of our business and I think that's one of the areas that we struggled with as we went through it. Now within the Medical segment, I mean, part of what we said when the deal didn't go through in March, is that we learned that there are perhaps 4 different pieces to that business and when we were looking for buyers, any one particular buyer was more interested in one piece than the other, but we had started out with a view to let's just set it all and let the buyer decide how we he wants to split it up. And when the deal fell through, we concluded maybe we need to be able to separate it out so we could market the individual pieces differently. And within the portfolio, for instance, there are some pieces, components like that, that we -- might be, our business, that we would say, "Well, maybe that takes a little bit more with our traditional businesses." But the pump, the business, which is the vast majority of it, at the moment, our thinking remains the same. It's an FDA-type business, it's a business that goes into the -- the sales are driven by medical reimbursement rates and stuff. It's not something we have a lot of expertise in and our intention right now is still cleanup the organizational structure, make sure we can carve it up in a way that's sensible for the market. We think that's probably going to take us another 2 to 3 quarters and then go back out to the market and look. Now if we go out and look and you do an analysis that says, "Boy, if we keep it, we can make -- there's a lot more value than if we sell it." And for whatever reason the market demand is not there, we will, I guess, retain the prerogative to say "Well, maybe it's a little bit different than we thought and at least, we've learned a lot and maybe it's going well." But right now we're still on that same path and just because it's doing well, just suddenly assume that we're strategically -- we've learned an awful lot and that we're really good in the medical pump business. It's probably a dangerous thing to do, I think, because who knows when it starts to go badly. The other thing is the statistics say that if you sell businesses on the up, most people sell businesses when they're down, when it's real tough to sell. If you can sell a business on the up, perhaps you capture more value so...

Got it. Got it. And then maybe just the last one, I mean, I'm just trying to get an understanding of you guys have been doing restructuring. It seems to be more reactionary in nature when the market starts to go bad. Maybe if you can just talk about broader process improvements you've got irregardless or irrespective of what's happening in the end markets. I know you've got the ERP system. Is anything see you else you're looking at enterprise-wide to sort of boost margins outside of kind of just the market's changed and we need to rightsize the business?

That is, Michael, across every piece of business we that we have, there's a focus on looking for opportunities to improve the margins. And it's a broad strategy in terms of lean implementation where we're walking across all of the operations and look at how we can accelerate our lead activities because we've been doing lean in various forms for the last 20 years but we really start to accelerate that and start to see some improvements there. But it's also, it's not just in the operational side of the business, it's also very much on the administrative side of the business. And let me give you a simple example, we take -- we look at the administrative functions, the HR functions, the finance functions, the IT functions across all of the business and say, "Where are the opportunities for our process improvements there?" And again, let me give a very simple anecdotal one. About 1 year or 2 ago, we just looked at life insurance, we have various life insurance policies for folks around the company and we discovered that we had 7 different life insurance providers. And most people don't know who the heck the life insurance provider is. So we consolidated those into 1 life insurance provider and that saved $1 million. Exactly the same insurance coverage, totally independent from what any particular person that's covered with care about. So that's one of the areas that we've -- again, just a simple anecdotal one that I would describe. But that's across all of the administrative functions as well as in the operations side, there are ongoing efforts to improve the underlying operating performance of the business.

Okay. And then maybe just one last one more, maybe housekeeping. You guys, I think you guys have content on Orbital Sciences' Antares rocket. I'm assuming is not, given your broad portfolio, but is that going to create a bit of a headwind next year if we see delays in kind of future launches of that rocket?

Yes, so we do have content on the Antares and -- but for our forecast for all of next year, it's only in the $2 million to $3 million range. It's the total amount that we've eventually forecasted, kind of where we are in the program. So could that get delayed? Possibly, but it's not a big number.

And next we'll move on to Tyler Hojo. Tyler Hojo - Sidoti & Company, Inc.: Just maybe to kind of further the dialogue on the restructuring front. Can you maybe give us an update in regards to what the expectations are, I guess, as it pertains your guidance for 2015, is there anything anticipated in the guidance? And also, maybe you could just kind of touch on kind of ERP system implementation and an update there?

So let me see if I can understand. When you say is there anything anticipated in the guidance, I'm not sure I understand that question. Tyler Hojo - Sidoti & Company, Inc.: Is any restructuring expense assumed in your guidance at this point for fiscal '15?

There is no further restructuring expense of any significance in our fiscal '15 guidance. So no. Tyler Hojo - Sidoti & Company, Inc.: Okay, okay. And just what about the ERP implementation? How is that tracking?

So we started -- we engaged on that about a year ago and I would say that we're still on that kind of early planning phase. We're working through that. Our objective in the whole ERP implementation is to make it totally transparent to the markets. In other words, we're -- there's no time driver that says we've got a system that's going to stop working in 2 or 3 or 4 years' time. And therefore, our approach is to move at a pace that allows us to implement it without having any major hiccup at any one particular quarter or any one particular year where we describe that as the market. So it's moving forward, but it's moving forward, I would say, at a pace that's not a breakneck pace, it's not going to be all implemented in the next 2 to 3 years, it's probably a 6-, 7-year project in total across the company and various parts of the company will do it at different time periods. So it continues, it'll be -- long-term, a significant advantage for us. But it is something -- it's a little bit like changing your car. You get to the point where you've got an old car and it keeps going but at some stage, you'd say, "I got to do it." And we're kind of in that stage. But as I say, it's not something that's going to have a dramatic impact, positive or negative, we hope and that's the approach that we're taking. Tyler Hojo - Sidoti & Company, Inc.: Okay. And maybe just a follow-up to the 777X question that you were asked. I totally get that the decision hasn't been made. I think when you last spoke with us about 3 months ago, you've indicated that your R&D guidance for '15 had a placeholder in there, for 777X spending. Is that still in there?

I don't remember that we said that specifically. So our R&D guidance for next year includes various -- includes the major programs, of course, the A350 and the E-Jets, those are, the vast majority of it, on the aircraft side. And there are -- there is funding available for our other programs. Should we win any position on the 777X, I think the spending in the first year -- so given that there hasn't yet been any announcements because it will be a process, that can probably take another while. So now you're only talking about maybe 2 to 3 quarters worth of the spending and typically, in the initial phases, it's a very slow ramp. So I don't anticipate that even if we were to win positions on the 777X that it would have any significant impact on the R&D spend next year. Tyler Hojo - Sidoti & Company, Inc.: Okay. And then maybe just lastly, as it pertains to kind of your extended repurchase authorization in terms of your common stock. I understand nothing incremental is assumed in the guidance. But I guess since that announcement has been made in regards to the additional 4 million buyback, have you been active in the market buying back your stock?

This is Don, Tyler. We are doing our program on a discretionary opportunistic way -- or in a discretionary opportunistic way. We communicated that through September, we've completed the 4 million share buyback. For us to comment on our activities in the market or not in the market isn't seemingly appropriate at this time. And so I think we prefer to punt that to the end of next quarter, we'll report on what we've done. Part of the reason also that we've decided not to provide any projection on what might happen with respect to buyback is also, as John and I both commented, we think, aspect -- so are there any financing aspects that might need to be taken into consideration as well. So for us to try to walk you through all these machinations of what might happen in terms of a pace or magnitude and how it might be financed seems like it would be very difficult to provide some guidance. So we're thinking the best thing to do is to say it does not include either aspect of that either the continued purchase activity or any financing related to that. Tyler Hojo - Sidoti & Company, Inc.: Okay. That's fair. Yes, helps enough. And maybe just lastly, if this was in kind of the supplemental and I missed it, I apologize, but typically, you give kind of a guidance by quarter in terms of how you think the year's going to stack out. Would you be willing to provide that?

What we've said in the text is that we think the first quarter will be a slow start. We typically see a kind of a slower start and then acceleration through the year. We're putting out -- $0.85 is what we think the first quarter will be and we're not providing guidance on the subsequent quarters set. We kind of do that as the year unfolds.

And we'll take our next question from J. B. Groh. J. B. Groh - D.A. Davidson & Co., Research Division: Just looking at the your forecast, the details in the supplemental there, you talked about commercial aftermarket being down about 15% in '15. And while I look at that, I remember that we had a lot of initial provisioning in '14, but it's also lower than '13. So is there something going on in the market there or is this just a lack of initial provisioning on new programs?

It is all initial provisioning. I mean, if you strip out initial provisioning from '12, '13, '14 and '15, the rest of the aftermarket is flat. So the difference is essentially all in the initial provisioning. And this year, we filled out, with 87 initial provisioning of $30 million, and we're forecasting it to be closer to $10 million next year and that is the difference. J. B. Groh - D.A. Davidson & Co., Research Division: Okay, so x provisioning, you said flat kind of forecast?

Yes, x provisioning, it's kind of $100 million run rate and then the provisioning is essentially layered on top of that. That's essentially the way numbers play out. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. And then just sort of a conceptual question, obviously, with 787 suppliers got a lot more, I guess, responsibility and risk potential. I mean, in the way that you're working with the big OEMs now, have you seen a shift there at all in terms of what your scope of work is? And does that have any implications for your R&D spend?

Well, I would say that's the story that played out, really, over the last decade, where the 87, we won that program back in 2004 and that was a dramatic shift for Boeing, as you know, from parceling out, particularly for our stuff, individual actuators and saying that we have one guy that does the flight control system and that model is then carried over to the A350 and the Embraer program. So we have seen over the last decade a significant increase in content on each of those major platforms and of course, the associated contractual elements that go with that. So there's nothing new in that. I think we've been in that situation, let's say, for the last decade. So I think, if anything, looking to the future and I think you can read this as well, I think Boeing in particular, perhaps felt that they overextended in terms of providing responsibility to the suppliers on the 87 and that, that was one of the challenges managing the supply chain and that perhaps, in the future airplanes, the pendulum may swing back somewhere closer to the middle. I don't know. But so there maybe a little bit of a shift in the other direction as we kind of look to the future generation of airplanes as Boeing and Airbus do the analysis of what worked and what didn't work so well on the last airplane. But so I don't -- there's not any significant change, if you look at the 777X, it's not a significance change, I would say, in the overall outlook for the kind of the business we do. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. So it seems like they're wanting to take a little bit less risk but that doesn't necessarily mean, like you said, the pendulum hasn't shifted that much. Okay. That's helpful.

And our next question comes from Steven Cahall.

Maybe the first one just on aircraft controls, the development in there, as you talked about last quarter, ended up coming in a bit higher for the year and we took margins down as a result. As you look into FY '15 and the development, if we compare that to '14, is there kind of more, equal or less risk as we work through the year that we may have to rebase our expectations in terms of development costs as you look out 12 months?

That's a really good question, Steven. So you're right, when we went into '14, we were anticipating that the development cost would be lower. And as we went through the year, they increased. There were 2 reasons for that. One was the reason that we -- one was the 350, there was more effort in getting the certification on that than we had anticipated. And the other one was that the Embraer E-Jets program accelerated quicker than we had anticipated. So that one we might -- the E-Jet acceleration was -- would have been tough to forecast. The experience on the 350 perhaps, we could have known better. But the 350, like every major airplane, is a different architecture and a different technology. It's an EBHA technology versus 5,000 psi, for instance, on an 87. So you learn every time. The first time you go through it, somebody once said to me, a friend governor said, "When you see one recession, you've seen one recession," and to some extent with the type of technologies that we have, clearly, there's a learning curve. But each one is different and therefore, there's always some elements of uncertainty associated with it. So it did -- it picked up significantly in '14. We hope that we've learned from that experience and therefore, as we move into '15, that we've got a -- we've baked in that kind of uncertainty. I would offer 2 things. The A350 is getting closer to the -- much, much closer to the end. So hopefully, we would see that, that would kind of closeout and that our estimates for that is good. Having said that, again, if there's ever a hiccup or something, you end up having to spend a little bit more. And the E-Jets, the technology on the E-Jets is not as difficult as the technology on the 87 or the 350. It's a little bit more of a traditional system so I would say the risk associated with that is lower than with those 2 major programs. So we've done the very best estimate that we can, we hope that we -- that the number is what the number is. However, we will spend what it takes to make sure we satisfy our customer requirements and we meet these programs. So if there's an issue that we have to spend more, we'll spend more and we'll report on the market that the margins were lower. But I think that's the absolute necessary thing to do with these types of programs and to be in this business for the long term. So we won't compromise what needs to be done in order to meet our customer's schedule and the technology and make sure it's all done properly.

Okay. That's very helpful. And then just the last one. If I just look at some of your sales guidance in the supplemental data for next year, the F-35 is on a lower run rate of both '14 and '13. Is that just that you've been shipping ahead of bit of the OEM? And then also on wind energy, which seems like it's been improving a little bit over the last couple of quarters, you've got that down next year. Is that conservatism and just short cycle visibility or anything else we should read into that?

Okay. Let me do the F-35. The F-35 is all, essentially, a function of the development contracts. So if you go back to '13, the development contract was over $20 million. This year, it was closer to $10 million. The next year, it's under $5 million. And that, the production's gone up a little bit, 68, kind of 75, 72, 73 next year. So the production has been fairly flat, '13, '14 and '15. They're not really ramping yet the quantities but it's the development contracts that's come down. So that's the effect there. And now the other question is the wind energy stuff. So wind got better this year, we've spent a long time explaining why wind kept getting worse so I'm happy that it got better this year. And the improvement was in -- a little bit in China and in particular, in Brazil, where we won some nice positions and we talked a little bit about that over the last couple of quarters. And as we look out to next year, we're forecasting wind pretty much flat with this year. So we think there will probably be a little bit of pickup in the Brazilian business that we're in and then Europe, down a little bit. Now keep in mind, there's a little bit of currency effect there and then the Pacific China's down a little bit. And I think we're cautious in China, the behavior of the customers there is less predictable than I would say in the U.S. or the European market and therefore I think maybe that's conservative. But I -- as I say, we've spent a lot of time apologizing that wind came in lower than we thought. So hopefully, now we can meet that number or maybe do a little bit better.

And there are no further questions at this time, sir.

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