MOG.A (MOG.A) Q1 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Moog’s First Quarter FY15 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Investor Relations Manager, Ms. Ann Luhr. 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 January 30, 2015 and our most recent Form 8-K filed on January 30, 2015 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 will report on the first quarter of fiscal ’15 and update our guidance for the full year. Overall it was a mix quarter for the Company. On the positive note although sales were about flat, earnings came in slightly over planned and cash was very strong. However looking to the balance of the year we are introducing some caution in our forecast today at several as macroeconomic forces are starting to way in our business. Starting with the headline. First, earnings per share in the quarter came in slightly over planned. We delivered this performance despite the challenge of seven feet of snow in November in Buffalo which resulted in one week shutdown of our facility. Second, it was another quarter of very strong cash flow. We continued to put this free cash to work through our share buyback program. Third, our medical segment continues to improve with great margins in the quarter. Four, three macroeconomic forces are starting have an impact on our projection for the year. These are the strengthening U.S. dollar, the general industrial malaise outside the U.S. and the falloff in the price of oil. The stronger U.S. dollar has an adverse impact on our sales in several segments; our total operating profit should be relatively unchanged. The major impacts are in our industrial segments and in our aircraft segments. Sales and operating margins in our industrial segment will weaken as the dollar strengthens, but conversely sales in our aircraft segment will be essentially unchanged but operating margins will strengthen. Next the industrial stagnation in Europe and the continued slowdown in growth rates in Asia are having a negative impact on our industrial segments. And finally the sharp and sustained drop in the price of oil is unwelcome news for our energy businesses, particularly in our component segments and to a lesser extent in our industrial segments. The impact of these macroeconomic headwinds combined with some minor shifts in our underlying market is a reduction in our sales forecast for the year of $95 million and a reduction in our earnings per share forecast of $0.30 to $3.85. Now let me move to the details starting with the first quarter results. Sales in the quarter of 631 million were down marginally from last year. Adjusting for currency effects sales were essentially flat with 2014. Sales in our aircraft and space and defense segments were unchanged, but sales in our Industrial Systems components and medical devices segment were slightly lower. Taking a look at the P&L, our gross margin is down almost 200 basis points driven by an unusual quarter in our aircraft business. R&D is down 60 basis points on lower activity and our major aircraft programs particularly on the A350. There is no change in SG&A expenses. Our effective tax rate was relatively low at 28.7% as we benefited from reinstatement of the 2014 R&D tax credit in the U.S. The overall results with net earnings of 35 million, earnings per share of $0.86 and that’s an increase of 23% over last year on a lower share count. Fiscal '15 outlook, we are moderating our sales forecast for the year by 95 million principally due to the impact of the three macroeconomic headwinds I mentioned earlier. First the stronger U.S. dollar will result in a negative translation impact on our foreign sales of approximately $40 million concentrated in our Industrial Systems business. Second the industrial malaise outside the U.S. will have a negative impact of $30 million on our Industrial Systems sales. And finally the estimates that the drop in the price of oil will adversely impact sales in our component segment by about 20 million. And our other markets were adjusting a military aircraft forecast down slightly while on the positive note we are seeing strength in our medical devices segments and are increasing our sales forecast in that segment modestly. In terms of earnings, we estimate that the stronger dollar will be essentially neutral to earnings with the negative translation effects transferred by the positive transaction effects. The $55 million lower real sales however results in the negative impact of $0.30 per share. The overall result of total sales for fiscal '15 of $2.57 billion and earnings per share of $3.85. As in previous quarters our guidance does not include the positive impact of further share repurchases over the coming three quarters, should we continue our buyback program on a pace to conclude our 9 million share authorization by the end of this year then earnings per share will be $3.95. Now to the segments. I'd remind our listeners that we provided a two page supplemental data package posted on our Web site, which provides all the detailed and numbers for your models. We suggest you follow this in parallel with the text. Starting with the Aircraft Segment Q1. Sales in the quarter up 266 million were flat with last year. It was another quarter of strong organic growth on the commercial side contemplating for slowing defense sales. Commercial OEM sales were up 12% with growth at Boeing, Airbus and in our Business Jet product line. The major increases were on the 787, A350 and our Gulfstream program. The commercial aftermarket was flat with last year. In the military markets sales were down 8% as a result of lower OEM activity. F-35 sales slowed on lower development revenues and a relatively light production quarter. Sales to foreign customers were also down this quarter and sales on the KC-46 tanker program were lower as the development was back to wind down. On a positive note we had the very strong quarter for V-22 shipments as we caught upon some over dues from last quarter. Aircraft’s fiscal '15, we're reducing our full year forecast by $10 million, the reduction is all in the military markets, based on the first quarter results we believe the KC-46 tanker program will be about 5 million lower this year than our original forecast. We also believe that some foreign military programs will be weaker so we have adjusted that forecast down by 5 million. On the commercial side, we are not changing the forecast in total but we are adjusting the mix slightly. We are increasing our forecast in the aftermarket by 5 million driven by continued strong 787 initial provisioning and we're reducing our A350 OEM forecast by the same amount on the slightly slower production run rate. Aircraft margin, margins in the quarter were 9.2%, this was a relatively unusual quarter for our aircraft group. So let me provide a little more color. Although R&D was down this quarter from an elevated level a year-ago the gross margin was also down from last year. In Q1 our gross margin was about 200 basis points below the average gross margin for this business. This lower gross margin was the result of an adverse mix of military programs in the quarter and in particular lower sales on some foreign military platforms. This will correct as we go through the year, so that our full year gross margins will be close to last year. For the year there is no change in our operating profit forecast, but given the slightly lower sales our margin performance will pick up to 10.6%. There are two factors influencing our operating profits, one position the other negative. On one hand the stronger U.S. dollar results in a positive transaction impact to operating profit of about $3 million for the year, but on the other hands the $10 million reduction in our military sales forecast will have an adverse impact on operating profits of the same amount. So net-net, no change in operating profit. Turning now to Space and Defense Q1. Sales in the quarter of 100 million were flat with last year with stronger defense sales compensating for lower space sales. In the defense markets the production rates on our missile programs continue strengthen while in the space market we saw lower demand for our avionics products. For fiscal '15, we’re keeping our full year forecast unchanged from 90 days ago at $403 million. Space and Defense margins, margins in the quarter were 8.7%. These margins are an improvement but they are still not where we want them to be, and we continue to take actions to improve the underlying performance. One of those actions has been the combination of two facilities involving our security markets into one. As a result of this consolidation and an associated review of the product portfolio, we determined that we should write down the value of inventory by $2 million, depressing margin by about 200 basis points. For the full year we’re keeping our margin forecast unchanged at 10.7%. Turning now to the Industrial Systems business, Sales in the first quarter of 133 million were down 7% from last year. There are two major effects impacting our industrial business, stronger the U.S. dollar and the general industrial malaise outside the U.S. For the quarter two-thirds of the sales drop was due to foreign currency movements, and one-third was lower activity. The lower sales were primarily in our non-wind energy business and in our simulation and test markets. In the energy sector, we had lower sales on steam and gas turbines particularly in Asia as the economies there continued to slow. In simulation and test, some orders we had anticipated booking in Q1 have moved out into next quarter. Fiscal '15, we’re moderating our forecast in the industrial systems segments to reflect the twin headwinds we’re facing. We are reducing our full year forecast by $70 million, 40 million due to currency effects and the other 30 million due to slowing activity at our customers. The reductions are spread across each of our major markets; energy, industrial automation and simulation and test. Our new forecast as soon business continues at about the run rate of the first quarter with some slight improvement in simulation business as we move through the year. Industrial systems margins, margins from the quarter were 9.9%, we had been anticipating higher margins in the quarter but lower sales and adverse impact of the stronger dollar did not help. Moving to the remainder of the year we believe margins will improve as we move through the year and we adjust our cost base to align with the lower forecast in sales. We’re now protecting full year margins of 11.5% down from 12.1% 90 days ago. Components Q1, sales in the quarter of 100 million were down 3% from last year. With our non-A&D markets, our industrial components continued to perform well as well benefit from the ongoing improvements in the U.S. markets. Sales into the energy markets were lower in the quarter as we shift fewer FPSO products for last year. FPSO was our floating production and storage offloading ships used in offshore oil production. We saw a very large slip rings used on these ships with average selling prices of over $1 million. Given the high sales value and low quantities, sales from quarter-to-quarter can vary significantly. Sales into our medical markets were also lower as one of our major customers adjusts their inventory levels as they work through some regulatory issues. Sales in the Aerospace and Defense markets were down slightly. We had some positive gains in the military aircrafts aftermarkets which partially offset weaker demand for commercial helicopter and slip rings. Component systems '15, we’re moderating our forecast for the year by $20 million to $420 million. The reduction is all in our energy markets as we try to anticipate the impact that lower oil prices will have on demand for our products in the second half of the year. Margins, margins in the quarter were 14.7% on a slightly adverse sales mix. For the year we’re moderating our margin forecast to 14% from 14.8% based on our lower forecast in the energy markets. Medical, medical in Q1, this was an excellent margin quarter for our medical devices segments despite slightly lower sales. Strong demand in our other category mostly compensated for lower sales in our enteral pumps and sets. This other category is made up of range of medical sensors and components sold to medical device OEMs. Fiscal '14 outlook, given the strong first quarter sales, we’re increasing the full year forecast by $5 million to $125 million. The increase is all in other category. Margins, margins in the quarter were very strong at 14.9%. A favorable mix combined with continued operational improvements drove this performance. Based on the strong first quarter we’re increasing our margin forecast for the full year to 10.9%. So let me provide a summary. Q1 was a slow start of the year but in line with our guidance. During the quarter, we saw our industrial market soften however and the outlook for our energy businesses weakened significantly. Commercial aircraft is very strong and our Medical Devices segment continues to improve, but they don’t make up for the macroeconomic headwinds we’re facing. So therefore we’ve moderated our sales forecast for the year by 95 million to 2.57 billion and we’re also lowering our earnings forecast for the year as we see the impacts of the global industrial weakness and the sharp drop in oil prices filters through to the bottom line. We’ve been continuously adjusting our cost structure as we go through the year in response to the changing sales outlook. Taken altogether, we’re now forecasting full year EPS of $3.85 and comparing this total with our $4.25 from 90 days ago, there are four impacts of note. First, the net impact of our first quarter high yield bond issuance combined with our share repurchases will decrease our EPS by about $0.07 per share. Second, the slowdown in our industrial markets will have a negative impacts of about $0.13 per share. Third, the lower price of oil and the associated reduction in exploration activity will have the negative impact also of about $0.13 per share. And finally, we’re forecasting a higher tax rate on a less favorable mix of taxable earnings the results of the other two macro effects, which will reduce our EPS by about $0.07 per share. The second quarter should be slightly better than the first with earnings per share of about $0.90 while the second half should improve to just over $1 per share in Q3 and Q4 as sales pick up slightly. As I mentioned earlier this total of 385 does not include any impacts from further share buyback activity through the next three quarters. Before I pass it to Don, I’d like to provide our listeners with some general thoughts on our business. Last year at this time we revised our forecast for fiscal '14 downwards based on the experiences of our first quarter results. It is disappointing to have to go through a similar revision this year. When we put a forecast together, we work very hard to provide the market with a plan which we believe is both realistic and achievable. This quarter our plan has been impacted by three global forces; exchange rates, oil prices and the continued weakness in our industrial markets. We’ve always prided ourselves that the diversity in our businesses has allowed us to show sales and earnings gain even in periods of weak demand in one or other markets. Unfortunately we find ourselves in a situation today where growth is challenging in most of our markets, defense, industrial, space and medical. Our growth engine is commercial aircraft OEM but we’re in the early production phases of this business and therefore the margin contribution is muted. In challenging times we find it’s helpful to remember our primary goal and remain focused on the long-term. Overarching objective is to generate a shareholder value. On an operating level we focus on sales growth, margin expansion and cash flow. Over the last few years sales growth and margin expansion has been challenging, but cash flow has been very strong. We've continued our search for acquisitions while remaining disciplined in our capital allocation process. We've decided to return cash to shareholders through our buyback program rather than overpay for top line growth in the presence throughout the acquisition environments. We continue to restructure our operations and focus our portfolio on the best performing sectors. We’re investing in R&D to fuel future organic growth and focusing on lean initiatives to improve operations. In time our markets will improve and our internal initiatives will be bear fruits. In the meantime we'll continue to respond to the changing market conditions and provide the financial community with the best possible information to help you understand our company. Let me finish with this thought. Despite the challenges we’re facing, fiscal '15 is forecasted to be another year of strong cash flow and a record year for the company in terms of earnings per share. Now let me pass it to Don, who will provide some color on our cash flow and balance sheet.

Thanks John and good morning everybody. Free cash flow in the quarter was $58 million was a great start to fiscal '15. We had very strong receivables collections in the quarter, this equates to 165% cash conversion ratio. Although we don’t expect this conversion ratio to persist throughout the balance of '15, we are affirming last quarter’s forecasted free cash flow for all of 2015 of $190 million. This is despite our moderated earning projections that John has just described and will result in the conversion ratio for all 2015 of 125%. Our net debt increased by $69 million during the quarter $711 million, a $127 million difference between our positive free cash flow and the increase in net debt outstanding is principally the result of our share buyback program. Our 9 million shares repurchase program that we initiated in January of 2014, so just a year ago continued during this first quarter. During the three months ended December 2014 we recorded an additional 1.46 million shares for $1.3 million or an average price of just over $70 per share. At the end of December we still got another 3.5 million shares remaining under the existing authorization. Our present plan is to continue buying back these shares programmatically in the open market throughout the duration of 2015. Our EPS projection for 2015 does not include approximately $0.10 per share of positive impact associated with our plan to continue repurchasing shares during the next three quarters. On November 21st we closed on the sale of $300 million of eight year high yield debt for the coupon interest rate of 5.25%. Our strategy was to term out some of the variable rate debt under our revolver and increase our borrowing capacity. This will allow us to comfortably continue our share buyback program and as well as consider any moderately sized acquisitions that may opportunistically come along. At the end of the quarter we had $952 million of total debt outstanding with more than a half either a price or hedged at fixed interest rates. Also as of the end of the December we had $535 million or unused capacity on our $1.1 billion revolver before considering the $200 million unexercised accordingly. Capital expenditures were $20 million and depreciation and amortization totaled $27 million in the quarter leaving our forecast for CapExd and depreciation and amortization for all of fiscal '15 unchanged at $100 million and $114 million respectively. Cash contributions to our global defined benefit pension plans totaled $9 million in our first quarter. These Q1 contributions were low relative to our forecast for all of '15 due to us pulling in $10 million of domestic plan contributions in the last year’s Q4. We are currently forecasting $61 million of global defined benefit plan cash contributions for all of fiscal '15. The discount rate used to determine our domestic DB pension expense for 2015 was 4.4% down from 5.0% used last year. Lower discount rates as you know caused global DB pension costs to be higher than in 2015 versus 2014, this increases $6 million which is already captured in our EPS projections. Our effective tax rate in the first quarter as John mentioned was down 28.7% when compared to last year’s 31.5%, including the Q1 2015 rate is the retroactive R&D tax credit benefit due to the credit extension passed by Congress in December. This benefit does not repeat in future quarters resulting in a projected effective tax rate for all of 2015 of 31.4%. As 2015 rate is higher than our last forecast which was 30.0% as we are now projecting softer results from our non-U.S. operations. This results in proportionally more U.S. taxable income which is tax at relatively higher corporate tax rates. Our financial ratios at the end of the quarter are solid. Net debt as a percentage of total cap was 36.5% up from 24.8% in last year’s first quarter because of our share buyback program. And our leverage ratio was 2.07 times at the end of the quarter. In summary our balance sheet is strong. We are generating strong free cash flow which is feeding our current share buyback program. M&A activity has been quiet in recent quarters; however we continue to remain active and looking at opportunities. The couple of perspective deals have gotten closed, but has simply not crossed the finish line. Our due diligence includes making sure we've got a solid strategic and financial value. Eventually we'll have something to report. So despite challenging market conditions we are still projecting improved bottom-line financial performance this year. EPS in 2015 of $3.85 will be a record year as John said reflecting an increase of 9% over last year. After consideration for the continuation of the share buyback program that's estimated to add another $0.10 per share in 2015, the increase in EPS over '14 will be 12%. And this is all happening in the year when our top-line revenues are forecasted at the present times to decline by 3%. So with that now like to turn it back to John for any questions you may have.

Thanks Don. Jaime we'll go to Q&A now please?

[Operator Instructions] And we'll take our first question from Robert Spingarn.

So, John when I look at the change in your operating income between the current forecast for '15 and the previous. You spoke to the $0.26 in industrial and oil impact on the earnings, and that is about 6% or so, and I noticed that you are dropping an EBIT shows some pretty high detrimental margins for both components and medical actually where -- let me stick with components to begin with. What’s going on there exactly?

Let me see Rob if I have the question you're asking me, what’s happening in the components groups because...

It seems to be the most extreme impact so it’s either -- is it every negative operating leverage? Is it high margin products that aren’t selling through in this environment?

Yes, the answer is yes for both of those. Our components business, the oil exploration part of that business is a separate facility, it's a facility in Halifax, so it’s not if it’s integrated with other parts of the facility, so it’s grown over the last few years, so we have an infrastructure there design to support the business that’s in the $80 million range that business we see dropping up to about 60. There is obviously some cost reduction opportunity that you can get, but you do have relatively high operating leverage combined with the fact that it is a nice contributing product line and that’s why you get detrimental margins in the 30% range which is approximately the number I think we provided.

Right, and then what I was attempting to say, is the opposite effect to medical where the sales go up a few million but the profit goes up nicely with the 60 there incremental?

But you got to be careful, I mean there are so many moving pieces in a business, for the medical business it’s 120, we’re increasing, its 125. The mix in the first quarter -- the margin in the first was way ahead of what we saw. For the experience of the first quarter, you look at the mix going out, yes, we’re increasing the sales but it would be a mistake to say $5 million sales increased $3 million profit increase. It’s all just due to higher activity that is definitely not a line that you can draw. There are too many other moving parts, its better mix better cost control reflecting on the performance in the first quarter out for the rest of the year. So even if the sales wouldn’t go up increase in the margins which is an infinite increase in margin contributions, so it really is a lot of different pieces and as I say you got to be a little bit careful about drawing that line.

And then just on the sensitivity of oil prices. In you new forecast is there a particular level of oil price that you embedded? And frankly can even get comfortable yet that you can really frame the impact for the year?

No we can’t Robert. I mean, we are like the rest of the people that are involved in. I mean it’s a huge part of our business, but it is a nice piece and as we talk about it’s a nicely contributing piece of the business. So 90 days ago we did a call and for that time the share price was in the low 80s and we said, one of the risks as we look out to fiscal '15 might be that oil continues to drop and then that might have a negative impact. But we felt like the year was probably going to be okay because it’s the type of stuff we’re on. A lot of it is capital investments; those are probably set 12 months with most of the oil guys. And therefore any impact might be definitely towards the end of our fiscal '15 and probably we feel it more into '16. Well, 90 days ago, we didn’t anticipate nor did anybody else, so I think the oil today would be in the $40 range and seems like it’s going to stay there, now, because all the pundits that can now explain why it dropped with nobody could forecast it, so who the heck knows. So what we’re doing as we've made a best estimate. We said based on, our customers based and what we’ve seen and based on past history because oil prices dropped into 40s back in '09, this is what we think. It could have 20% to 30% impact on our top line and then the associated bottom line. Having said that back in 2009, they dropped into the 40s but then they started to recover reasonably quickly, so it really depends on how oil prices develop. So we’ve made our best estimates. We've always said that oil prices above the $70 to $80 range usually means expansion and that’s really positive for our business, clearly we’re under that. And every oil services company and all the oil guys stand and take drastic actions in terms of reducing their costs. So this is our best guess, but hey in 90 days time we'll know more and we'll provide the market with what we know. Backlog in the second quarter looks okay, so we think this is a second half effect, but it’s our best guess.

And then just lastly, it looks like you’ve built in a little bit of improvement in commercial aftermarket, is that oil driven or are you seeing some benefit there yet or maybe later in the year?

No that’s not oil driven that’s the fact that the 787 initial provisioning which we had an absolute bumper year last year. We anticipated that this year would be much lower, we thought that what happened was a lot of people got head of the curve put in place last year and there wouldn’t a lot of this year. It turns that the first quarter again, we’re stronger than we were forecasting so for the year we bumped that forecast up by about $5 million. It’s definitely not place to our underlying oil prices. If that happens, probably again six months to nine months. And I think given hedging that the airlines and everybody has, it will take a while for all that filter through. So no, it’s not -- I am not correcting now because in fact it’s more what we’ve seen just in 787 initial provisioning.

We'll take our next question from Cai Von Rumohr.

So to follow up on last question, if you have a good backlog at marine for the second quarter. Have you’ve seen the cutbacks for the second half because basically isn’t your business keep to production where the spend is more likely to hold off and exploration was clearly going to be hit?

It’s tied the both. As I described, these are FPSOs, huge slip rings that go on, major ships. And then we also do a lot of work that goes on remotely operated vehicles. So remotely operated vehicles are a combination of maintenance with overhaul types stuff, monitoring offshore oil rigs, but it’s also driven by the count of oil rigs and if there is new stuff going in. But as it goes offshore and gets deeper, they need new technology. And then the FPSOs, those are very large capital investments and they’re linked to production but it’s a very long capital cycle. I think what we’re concerned about is that in the past when we've seen a situation like this even though we have backlog our customers can come back to us and say, we don’t think we want that stuff right now, can you hold on for us, can you slow it down and while you contractually may have backlog there is no point in telling your customer but they’ve got to take it if they’re not going to want this, and in the end you’re going to upset the customer. So it could be, again history has told us that we could see a reaction like that. So it’s a combination that we may see our present backlog as to what I do soften to some extent albeit not as firm in terms of the extra shipment days plus the fact that on some of the stuff its shorter lead times, it’s not nine to 12 months, it’s much shorter and we anticipate that that could slowdown.

And then if we turn to the aircraft sector, you mentioned the R&D was low in the quarter A350 down. Are we still looking for 85 million for the year and 135 for the company in R&D? And is there any change in the mix now that the A350 is relenting?

No, not really. I mean it was really just a few -- if you look at our R&D quarter-to-quarter even last year it went 24 million in the first and 25 million, this is aircraft R&D then it dropped to 20.So this quarter was 19, so it was a little bit soft or lower but it kind of reflects the way some of that activity plays out. And we think for the rest of the year as it will pick up back into that kind of average of 21, 22. But it’s not really a significant shift. It’s really on plan with what we thought, except this quarter is a little bit lighter.

And then you had mentioned the $10 million detrimental sales and 3 million, so 30% in detrimental margin. How can it be that big? Because if you drop off 5 million of development work that’s fairly not going to have that kind of margin?

So I would offer the same thought as I offered the last question which is, there is a piece of it that is the detrimental sales but there is also a piece of it that you just look at the overall business and there would probably be some other little mix shifts reflecting on the first quarter and looking out that’s the best estimate of what we feel. So it’s not one for one clearly $10 detriments, is a negative and part of it is as you say cost plus developments which has some margin, not typically it’s not typically 30%. Although in cost plus development side you do have this phenomena that have engineers that go from generating revenue to growing directly into your cost line. So to some extent it’s actually an even much higher multiplier to go back into the R&D so that we end up spending more on R&D. And then there is the drop off in some of the military programs which are strong particularly the foreign military stuff. So it’s the detriment in sales but it’s also as I say just looking at the overall portfolio and seeing how we think that would play out.

And then a last one for Don. So great job on the cash flow and maintaining the number in the face of lower net income. So what are the offsets that kind of get us to still stay at 190 million?

Meaning so if we annualize the 58, we should be a lot better than that, right? Well it may prove to be the case Cai, we’ve decided that at this juncture it’s not worth trying to do get ahead of ourselves, we got one quarter behind us, mentioned that receivables collections were really strong in the quarter, some of that is timing but we are continuing to work on working capital and I think we’re seeing some progress there. But we’ve also got the aircraft group continuing to build up, ramping up run rates and the A350 which puts pressure on inventory. So there is a lot of mix parts and I'd like to think we could beat the 190, but like I said we have one quarter on our belts and we’ll not get ahead of ourselves.

Actually the question was you have this drop out of net income, so you have less net income and yet still at 190. So something this is complement same like you are doing a great job, something obviously is a plus up to offset the loss of net income. What is it? And what are you doing in terms of improving the work on that?

I am not used to the compliments, and John deserves some of this credid.

How come John gets all the compliments Cai.

I think the onset is obviously working -- obviously on the working capital side. We’ve got focus and lean activities as John has continued to talk about we think we’re getting some traction, there is an increased focus on cash performance throughout the company, capital expenditures were holding that forecast right now but it was light in the first quarter relative to our forecast in for the year. So all that plays through and I think we do think we can do the 190.

We’ll take the next question from Tyler Hojo.

So just first question in the prepared remarks you guys talked about the fact that the snowstorm went through a one week shutdown of your facilities up in Buffalo I guess. Just curious if you could maybe quantify what the sales impact was?

So we did go through about a one week shutdown here in Buffalo and there was a little bit of a negative impact. On the other hand the quarter was a little bit longer for us than previous quarters just the way based out. And there was real focus on a lot of overtime, lot of folks really kicking into try and help that out. So probably once couple of million dollars that we had a negative impact and on the other hand we have responded to people hedged in. So we really not try to quantify it because the quarter really kind of spread out pretty much where we saw, and if we didn’t have the snow storm, it would have been a little bit better maybe, but I have a friend that says this thing, it will be a nice day if it didn't rain but it did rain. So it’s not really materialized, I thought that’s I would leave it. But if you were here there was a lot of snow that’s for sure.

Yes and then we got a lot, where we are too. So I understand. And just in regards to the simulation in past, down 16% year-on-year in the quarter. And I know you talked about some of the push outs of orders, but I am just trying to gauge your confidence level in context with the fact that for the year you're only expecting simulation in tests to be down 4% or 5%.

So the simulation test is kind, a couple of large customers flight safety, there are some of the big guys. And then there is a lot of smaller customers that buy one or two systems for various types of testing applications, simulation applications, so for example we sold one in a Formula One simulator a few years ago. And the bigger customers are looking pretty solid and it’s really the smaller customers we had anticipated that some of the orders that we have been chasing were come in the first quarter, we're still thinking that for the year it will be fairly solid business pretty much in line with last year but we did, we have kind of reduced what we thought from, what we said 90 days ago, we know a lot more at the end of the second quarter. I mean we're anticipating that we will get orders in the second quarter that will help solidify that for the rest of the year. This is again -- and based on what we are seeing right now we have reduced it, we saw it after first quarter but we think the year is looking pretty okay.

Just out of curiosity, what was your expectation for Q1 volumes? Just a kind of frame, was it flat? Was it down 5%? Just some sort of order of magnitude?

We don’t typically breakout the forecast in the submarkets. Well actually we don’t breakout the forecast quarter-by-quarter, I can do that whole business was $133 million which was down 7% from last year and we were forecasting for the full year that our year this year would be kind of in line with last year. So if you wanted to do a round number you might say well sales were up by about 7% from what last year was and we were anticipating that this year will be somewhat of a redo of last year. So that then is spread across all of the market. So simulation was probably a little softer than we had anticipated little bit of that would be ForEx, some would deals and some would be orders that we might have expected. So it’s softer and as I say rather than get into specifics Q1 by market, I don’t think that’s -- that gets into our level of detail which is probably not going to helpful long-term.

And just lastly from me. Obviously nice to see kind of the strong results in medical. I assume not but just curious if kind of strengthening kind of fundamentals of that business is making you guys kind of rethinking kind of the strategy to sell?

So let me give you a little bit of perspective on that. So when we said we were going to sell it back in '13. We launched a process, went out to the market and went through nine months of the process and as we described just about nine months ago got a buyer to the alter and then it fell apart. And we learned a couple of things in that process. We learned that we had acquired a series of business that had different product lines and individual buyers were interested in one or other product line, but because it was a little bit of mix in stuff we felt we couldn’t get the value for the business that we felt was justified if we did some of the product calculation. On top of that the business while it hadn’t been performing particularly well and when we decided well, we are going to breakup, at least the buyer walked away, we decided we need to do some fundamental restructuring. And over the last nine months, that’s what we have been doing. We restructured the business, we have restructured the management, we have taken a lot of cost out, we're really focusing on improving the margins. And at the same time we've been working to try and make sure that the next time around we can separate the business into what seems like the logical product lines that potential buyers might be interested in. And we are probably spend another couple of quarters really doing that, and then we will go out and we will test the market again and see if we can get the value for the business that we believe it’s worth. In the end our focus has to be on making sure that we are doing that absolute best in terms of shareholder value or you folks that hold the stock. And we do not want to sell the business as what we believe is a significant discount, and just looking at the performance over the last nine months. If we look out at the 12 months of EBITDA it’s probably a $5 million improvement over what we were looking at 12 months ago based on where we are sitting right now. And if I do take a multiply of 8 or 10 on that that’s a $40 million to $50 million value creation that has happened by us holding it rather than selling it at the wrong price. So we'll go back and we will test the markets, we want to make sure that if we can get the best value for the assets then we will sell it. But we're also looking at what is the best way to make sure we create the maximum value.

We will next go to Steven Cahall with Royal Bank of Canada.

Maybe just first question, you’ve talked a lot about what you’re thinking on oil for the rest of the year, are there anything you could just let us know what’s your underlying assumptions for the FX and sort of macro industrial growth side. And basically I am sort of asking, do you think the things kind of stay where they’re now and that’s what you’re planning for or do you assume that things possibly get worse from here on FX and industrial growth?

The industrial growths are contraction that we’re forecasting. We described it as a $30 million real on call it $600,000 million of business, so all that 5% relative to what we thought 90 days ago, this was a wrong number. And it’s hard to get down to the FX one, but let me ask you this first. We forecast based on what we know today because we have the foggiest notion what the rates are going to do tomorrow, more than I think anybody else has. So we always worked with the best information we’ve got right now and we don’t assume that we know where rates are going in the future, and having said that, we look at the mix of our business. But let me pass it to Don to give you a little bit more specific.

I would like to start Steven with the question; can you tell us where you think rates are?

I know but I am not going to tell you.

I think we believe that in the forecast over the three months and the assumptions that we built into our outlook last quarter versus this quarter obviously the dollar has strengthened and I would say in assumption we had built in and it’s in the mid to high single-digits of strengthening of the dollar. And we haven’t tried to outsmart or outguess the market and say well we know that rates are going to go up or down. So essentially we’re assuming that and at this juncture rates are relatively consistent with where they’re now. I would say that from -- John touched on this earlier from a macro prospective; our business is relatively well hedged. We talked through the top line drag on our outlook of about $40 million related to currencies. But John also said that net-net or bottom line or impact on operating profit is essentially nothing. And that’s the result of us paying a lot of attention to our cross currencies exposures were scattered all around the globe. We have a robust quarterly process where we take a look at our exposures. We’ve got hedges where hedges make sense, and net-net we think that we’re doing the right thing. So that as we do have these swings in currencies, we’re not reporting some dramatic results on our bottom line. I think what we just reported is a testament to I think what we’re trying to do is actually working.

So would it be logical for us to conclude that let’s say currency the dollar gets a lot stronger or a lot weaker between now and the next quarter or we'll be revising accordingly as it moves, assuming it moves a lot?

I think the answer would be yes. It looks good the other way, so if the dollar weakened 10% back to where it was three months ago, would we be changing our outlook for the balance of the year probably to some extent, but again it’s more likely not going to be just top line impact as oppose to the operating profit impact.

And then also the aircraft margins you talked a bit about the mix and little bit less contribution from FNF contracts. As we look at the remainder of the year and the guidance, does that factor in FNF contracts that are yet to be awarded or it’s just the timing of the OEM that’s already on contract and how they’re working with you to procure?

It’s little bit of both. I mean having said that these are the foreign military stuff is on platform, old platforms established platforms. So it’s not as if this is more a question of just having a normal run rate in terms of supporting some foreign military platforms, so it’s not that, it's a brand new program that has to be awarded, it’s more business as usual.

And then just a final one, if we look at the change that you made to the wind energy forecast for the year. I would think that would be less impacted by oil. So is that just the impact of the broader slowdown in the macro?

We actually did not change; we do not change the wind energy forecast for the year.

Our next question comes from Michael Ciarmoli.

Sorry Mike before I do that, I apologies I got to go back to previous speaker. We actually did adjust our wind energy forecast but it’s primarily a ForEx issue because we have European wind energy. So it’s a ForEx impact of the wind energy. It’s not a real change, so I apologize that was my mistake.

Just to clarify it’s a modest change. We brought it down $5 million, so $71 million as our current forecast for wind.

Maybe the aircraft margins, I know you guys talked about the mix but I mean they’re at the lowest levels since 2009. And if you look at the individual line items, the commercial was up; it’s really just that military OE. I mean I just surprised we haven’t seen anything like that before. Was it truly the case of just higher margin legacy? I mean is there anything else you can kind of give us in there and just again surprising that they were so low and we haven’t seen them that low in quite some time.

It was low in the quarter Michael, but for the year we’re anticipating that they’ll be aligned with last year pretty much, actually marginally up in the kind of the 10.5 range. So last year if you looked at the quarter they tend to bounce around as well. Second quarter last year was 9.4% on higher sales and then they jumped up to 10.3 in the next quarter. So there is volatility that plays through in the gross margin and of course the R&D varies as well. The macro thing is that the defense sales has been slowing down for the last couple of years and the growth is all commercial OE. And as we’ve said we’re early production, early phases of production and you’re not getting a lot of contribution from that. So you just have lower sales with nice margin replaced by higher sales with low margin and you get that impact. But if we look to the year we think we’re on plan with what we’ve said before margins in there the mid 10.5% range to 10.6% range. So it’s a little bit of this particular quarter was unusual.

And then just the other, you guys talked about oil and some of the energy. But if I go back you guys used to kind of expand out the reporting on that industrial segment, there was clearly some metal forming, some steel. I mean, is that an area where you could potentially see additional weakness from these lower oil prices and how you’ve kind of captured the impact there to the kind of metal exposed businesses in your forecast?

So we’ve taken down that whole industrial automation piece, so all of those metal forming plastics all that stuff is within the industrial automation side of the business. And we have taken that forecast down. A lot of that as we said in the past the European OEM, machine builder type business, so it has the two affects that has clearly euro sales, so you got the translation effect and the underlying business which is softer. How much of that is oil and at this stage I don’t know that we could tell you that European machine builders are affected directly yet by the price of oil. Hopefully as you look out lower euro [QEN] Europe, lower prices of oil improving consumer sentiments in various parts of the world, starting to drive capital investment and you see those guys actually starting to pick up. So lower oil longer term should be positive for Europe, as shows the lower euro the ForEx impacts in terms of just the competitiveness. So we hope that we would actually see a pickup in that business. But that’s out of ways and right now we’re just seeing a slowdown and it’s reflecting the slowdown in Europe, the slowdown in Germany, slowdown in their major export markets into Asia and the currency effect. So I think we’re seeing the first wave which is the downsize and hopefully euro starts to recover. But our industrial business and particularly that industrial automation business, the way I’d like to characterize it is you read the headline in the journal and it says Europe is stagnant, China is slowing down, Asia is kind of on a go slow, the U.S. is doing better but a lot of our business is outside of the U.S. So the consumer is depressed, no GDP growth and the cycle is you start to see GDP growing six to 12 months after that capacity utilization rates are going up, people start to invest more in CapEx. And then you see a high data, multiple other GDP growth in our industrial business as we see products into that capital investment cycle. And we’re not seeing that, I am not reading that headline unfortunately that anybody has told us about GDP in Europe are in terms of stronger GDP in Asia. So right now we’re thinking the risks are to the downside eventually we'd hope to see that recover significantly.

And then just the last one. Should we expect the conditions stay the same get a little bit worse, should we expect or have you guys incorporated or starting to plan for any restructuring maybe in that industrial segment this year in some of those specific businesses or even in the components?

I think you can imagine all of this particularly they get the sharp drop, it’s all happening very much real time. And we are looking at so what we’re projecting for the year what are we now projecting for the year. And to some extent as I described in the oil our second quarter is we got some solid backlog. So we’re anticipating what might happen in the second half, so we're not yet sure. We were projecting sales growth in our industrial business and our components business, so little bit as we went through the year. So the first thing of course is the first line is defense as well so probably there is going to be some extra resources we were going to add to realize that sales growth and clearly we won’t be doing that. There was a natural attrition that happens in the business. And then of course if we continue to see sales softness we will take the necessary actions. But as we’re sitting here today we’re not putting a reserve in place for some amount of restructuring because we’re not yet at the point where we’ve actually seen this. This is projecting what the future might look like more than we’ve seen exactly in this quarter. And the business is where we are seeing a little bit of challenges we are going to respond but it’s not material that we’re calling it out at this stage. If in 90 days or 180 days we’ll continue to see some significant challenges, we may report that we’ve had to do some restructuring. But as up to date as we sit here right now we’re not making a -- we're not taking a big reserve for this.

And we’ll take our last question from J. B. Groh.

I just had kind of a housekeeping question for Don. Don, what’s embedded in the forecast on the interest line? What should we view as run rate there? And then also on the corporate non-cash comp.

Thanks for the circle. Interest line -- so because of the high-yield deal we've obviously increased that quite a bit or up to $28 million of estimated or forecasted interest cost in 2015. And then the equity base comp we have got an estimated on model right now of about $6 million.

And there are no more questions over the phone.

Thanks Jaime. Thank you very much to all our listeners. And we look forward to updating you again in 90 days time. Thank you.