MOG.A (MOG.A) Q2 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Moog’s Second Quarter Fiscal Year ‘15 Earnings Conference Call. As a reminder 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 May 1, 2015, our most recent Form 8-K filed on May 1, 2015 and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listener’s 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. Don?

Thanks Ann. Good morning. Thanks for joining us. This morning we will report on the second quarter of fiscal ’15 and update our guidance for the full year. As usual I will start with the headlines before diving into the numbers. First, earnings per share of $0.80 in the quarter include a couple of one time charges. Excluding these charges EPS of $0.96 in the quarter is up 17% over last year on slightly lower sales. EPS growth is a combination of slightly higher operating profits and more favorable tax rates and a lower share count. Second we had an accounting correction in the quarter. We recorded an $8 million non-cash charge to earnings of $0.13 per share. Correction related to an error which accumulated over the last three years, but was not material to the results of any prior period. I will provide little more color when I get to the space in the same segment in a few minutes. Third, during the quarter we completed the sale of two small operations in our medical devices segments. These were part of the [indiscernible] acquisition which we completed in 2009. The operations had combined sales of just over $7 million in fiscal ‘14 and were about breakeven. We received approximately $3 million in cash for these assets and took a non-cash charge of $1.2 million or $0.03 per share in the quarter. The sale of these operations continued the restructuring of our Medical Devices segment. Fourth, it was a mixed margin quarter with strong performance in both Space and Defense and medical devices but lower margins in Aircraft. Fifth it was another good quarter for free cash flow. We continue to return this free cash to our shareholders through our share buyback program. And finally we continue to see weaknesses in several segments as we look out over the next two quarters. Consequently we are adjusting our full year sales forecast down by $28 million. In response we are planning some restructuring over the balance of the year. From an EPS perspective the combination of the Q2 write downs, future restructuring charge and the impact of the softer business outlook resulted in full year earnings per share of $3.55. Now let me move to the detail starting with the second quarter results. Sales in the quarter of $637 million were down marginally from last year, adjusting for the effect of the stronger U.S. dollar sales were up slightly over 2014. Sales growth nicely in our medical and component segments, sales in aircraft were unchanged but space and defense sales were down marginally. Sales in our industrial segment were sharply lower, mostly the effect of foreign currency translation. Taking a look at the P&L our gross margin is down about 300 basis points, about one-third of this reduction is due to the accounting correction we made in the quarter. The remainder is the result of lower margins in our aircraft segment. R&D is down due to lower aircraft activity on new commercial programs. Our SG&A expenses are also down as a result of past restructuring and an ongoing focus on expense reduction. Our effective tax rate was usually low at 22% a combination of some onetime benefits and the changing mix of earnings projected for the year. $32 million and as I said earnings per share of $0.80. Fiscal ‘15 outlook; we’re moderating our sales forecast for the year by $28 million. $4 million of this reduction relates to the medical operations we sold in the quarter. The remainder is due to a weaker sales outlook in our space and defense and component segments. The result is full year sales of $2.54 billion and as I said we are also moderating our full year earnings outlook. We are reducing our full year EPS from $3.85 last quarter to $3.55. The reduction is made up of the following items; $0.13 of the accounting correction in Q2, $0.03 for the disposal of the medical operation, also in Q2 and $0.08 restructuring reserve for anticipated cost in the second half and $0.06 due to all other impacts, including operational headwinds offset by a more favorable tax rate and the benefit of a lower share count. As in previous quarters this outlook does not include the positive impact of further share repurchases over the coming two quarters. Should we continue our buyback on a pace to conclude our $9 million share authorization by the end of this fiscal year then earnings per share would be $3.60. Now to the segments, I remind our listeners that we have provided a two page supplemental data package posted on our website which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Starting with the Aircraft segment, sales in the quarter of $274 million were flat with last year. The mix shift continued its familiar pattern with stronger commercial sales and weaker military sales. Total commercial sales were up 5% in the quarter driven by healthy increases on the OEM book. Sales to Boeing, Airbus and on business jets were all up nicely over last year. Commercial aftermarket was down in the quarter, as the pace of initial provisioning of 787 slowed. In the military markets sales were down 5% from last year F35 productions can continue to grow and we had a pick up on a major helicopter programs. But some of our other military OEM programs were lower and in particular the KC-46 tanker development work is winding down from last year. The military aftermarket was also down in the quarter as a result of slightly lower sales across a wide range of programs. Aircraft fiscal ’15, we are leaving our full year forecast unchanged at $1.09 billion. We are also leaving the mix unchanged with 52% commercial and 48% military. Aircraft margins, margins in the quarters of 8.1% were disappointing. The challenge is all in the gross margin line as R&D was relatively low this quarter. There are three effects driving the lower gross margin in the quarter. First, the mix was particularly adverse with lower aftermarket contents on both the commercial and the military side of the house. Second, we had the quality issue with a vendor supplied parts which slowed production and resulted in higher cost, this issue is now behind us. And third, we continue to experience adverse cost variances on our new commercial programs. Margins in the second half will improve due to a more favorable mix of sales, particularly on some foreign military programs. However, given the cost challenges we’ve seen in the first half on the commercial OEM book we’re moderating our full year margin forecasts to 10%. Turning now to space and defense, sales in the quarter of $93 million were down 2% from last year. The weakness was all on the space side of the business. We had lower activity on various satellite programs as existing contracts wound down, compensated partially by additional work on NATO programs. In the defense market we had higher sales on our missile, Vehicle and Naval programs but lower sales in our security markets. In space and defense fiscal ’15, we are reducing our full year forecast by $14 million. The change is all in the outlook for our security business. This is a business which has struggled with profitability over the last few years. As result of a deep dive into the business this quarter we refocusing the portfolio to ensure the operations are profitably going forward. The result is we anticipate $14 million of lower sales as we stop some of our less profitable activities. Separately, we are adjusting our mix in the remainder of the space and defense business to better align with the experience of the first half. We reducing our Space forecast by $10 million and increasing our defense forecast exclusive of security by the same amount. Space and defense margins; margins in the quarter were 5.3%. This margin includes the effect of the accounting correction in the quarter. During the quarter we identified that some working capital balances including inventories receivables and payables has not been appropriately accounted for in one of our business units over a period of three years. The accumulated accounting correction this quarter totaled $8 million. This is a non-cash charge to earnings as we corrected the relevant working capital accounts. Exclusive of this charge margins in the quarter were a healthy 13.7%. From an operational perspective the restructure activities of the past years are bearing fruit and we are getting the program challenges on some of our smallest acquisitions behind us. For the year we’re adjusting our margin forecast to include the impact of the accounting correction in Q2 and this will result in full year margins of 9.1%. Industrial systems, Q2; sales in the quarter of a $129 million were 15% lower than last year. The decline was primarily driven by the stronger U.S. dollar. In addition, we’re seeing a general weakness across many of our global industrial markets. We had lower activity in each of our major market categories, energy, industrial automation and simulation and test. In each of these market the change in exchange rate [ph] is the dominant factor but we also experienced a small real sales decline in each market. On a positive note wind energy sales in Brazil continue to grow driven by the adoption of our new AC platform. Industrial systems fiscal ’15, remember that in our first quarter call we reduced our full year forecast by $70 million down to $530 million. This quarter we are leaving our full year sales forecast unchanged. We believe this forecast already captures the combined effect of currency shifts and the softening macroeconomic picture. Margins in the quarter were 9.8%. We continue to adjust our cost structure to align with the lower sales outlook. We anticipate that second half margins will improve to an average of 11.5% to yield full year margin of 10.7%. Now to our components group, sales in the quarter of $109 million were 7% higher than last year. Within our A&D markets we saw some nice increases on missile program, and various military vehicle applications, a similar trend to our space and defense segment. In the non-A&D markets we had an increase in our energy markets as we finished up a couple of large projects and completed shipments as anticipated. We also had increased sales in our general industrial markets, where our acquisition of Aspen Motion Technologies in 2013 continues to perform well. Performance in fiscal ‘15 we are moderating our forecast for the year by $10 million to $410 million. We are reducing our A&D outlook by $3 million as several programs which we had anticipated booking in Q2 have moved to the right. We are reducing our non-A&D forecast by $7 million, a combination of further anticipated weakness in the energy markets and slower growth in our general industrial business. Performance margins, margins in the quarter were 12.8%. These relatively soft margins are the result of higher costs on the new military development program and negative impact from the stronger US dollar. Through the first six months of the year margins are 13.7% and looking out to the balance of the year we anticipate some margin headwinds as sales into the energy market slow down. In response we continue to adjust our cash structure and we believe we can more or less maintain the margin performance in the first half. We are now forecasting full year margins of 13.6%. Medical devices, Q2, this is another good quarter for our medical devices segment. Sales were up 16% with strong gains in both pumps and sets. We are seeing a pick-up in demand for our IV pumps as other players remove some older products from the markets. In our sets business our enteral volumes have returned to more normal levels after inventory destocking by major customer in 2014. Fiscal ’15 we are adjusting our sales forecast down by $4 million with option related to the operations we sold in the quarter. Medical margins; operating profit in the quarter of $2.7 million includes $1.2 million of loss associated with the divestiture. Exclusive of this loss margins in the quarter were 12.1%, another very strong performance in this segment. We are adjusting our operating profit forecast for the year down by a million dollars to account for the Q2 divestiture loss. The result is full year margins of 10.4%. In summary, coming in to the quarter we were forecasting earnings per share of $0.90 excluding any additional buyback activity. During the quarter our buyback continues, adding $0.06 per share to the total. So our revised expectation for the quarter was $0.96. We did anticipate the impact of the accounting correction of $0.13 and while we were optimistic that we will complete the sale of our two small medical operations in the quarter, we did not include the $0.03 impact of that transaction in our guidance either. When we add these adjustments back our quarter came in pretty much on plan. We enjoyed an unusually low tax rate in the quarter, which contemplated for softer margins in several of our segments. In particular our Aircraft business continuous to be impacted by margin headwinds of a shifting mix and challenges in meeting our cost reduction goals on our new commercial OEM programs. The challenges are not going to be overcome in a quarter or two. However as we look out a few years the OEM problems will mature, R&D will abate and the aftermarket will grow to give us mid-teen margins. On a positive note our medical segment continues to perform well. We are seeing some real gains in our space and defense segments. In addition it was another quarter of good cash flow and we are maintaining our cash flow forecast for the full year despite the reduction in our projected net income. We are now forecasting full year sales of $2.54 billion and earnings per share of $3.55. At the halfway mark we have $1.66 in the bank. The last two quarters will average $0.95, but the exact EPS will be based on when the projected restructuring charges hit the P&L. As in previous quarters our forecast of $3.55 per share does not include any impacts from further share buybacks activity over the next six months. Should we continue our buyback program on a pace to conclude our $9 million share authorization by the end of this fiscal year then earnings per share will be $3.60. Over the last year it might seem as if our business is going through a period of one step forward, and one step back. Macroeconomic forces have combined with a shifting mix to dilute the impact of the internal improvement initiatives we are pursuing. To take a step forward with our medical and space and defense segments and we're seeing some nice improvements in those businesses. In our industrial segments our wind energy business continues to be a drag on margins, but another recent deep dive into this business has convinced us that we should stay the course for the next few years. If all goes to plan the rewards will be large [ph]. Our component segment has always been a strong performer and continues to do well. Finally our largest segment the aircraft segment is going through significant growing pains as we evolve into the number one supplier of flight control in the world. This journey is taking longer and is more expensive than we had ever anticipated, but most of the major investments is now behind us and in the long-term we'll all be glad we stayed the course. Day-to-day we continue to focus on operational improvements and cash flow generation through our lead activities by deploying capital to maximize shareholder value. Now let me pass it to Don who will provide some color on our cash flow and margins.

Thanks John and good morning everyone. Free cash flow in the quarter came in at $35 million bringing our six month total to $94 million against the year-to-date net earnings of $67 million for a conversion ratio of 139%. This focus - FY '15 earnings challenges that’s John described, we are affirming last quarter's forecasted free cash flow of $190 million for all of 2015, which will result in a conversion ratio of 134%. Our net debt increased by $58 million during the quarter to $769 million, a $93 million difference between our positive free cash flow and the increase in net debt outstanding as principally those all pressured the buyback program. Working capital as a percentage of sales continued its recent downward trend, while increasing attention to lean is having a positive effect on the amount of capital we have invested in the balance sheet. Over the last two years our trading networking capital as a percentage of sales has steadily declined by over 400 basis points. Our $9 million share repurchase program that we initiated in January of 2014 continued during Q2. During the three months ended March 2015 we acquired an additional 1.1 million shares for $82 million at an average price of $74. At the end of March we have 2.4 million shares remaining under our outstanding Board authorization. At present times we continue buying back these shares programmatically on the open market throughout the duration of 2015. Capital expenditures came in at $18 million and depreciation and amortization totaled $27 million in the quarter. Our forecast for CapEx and depreciation and amortization for all of 2013 is $9 million and $109 million respectively. Cash contributions to our global defined benefit pension plans totaled $18 million in the second quarter. We are still forecasting $51 million of global DB planned cash contributions for all of fiscal 2015. Our effective tax rate in the second quarter was 22.5%, down from last year's 29.6%. There are number of items that when added together effect this rate considerably. First and most significantly we're benefiting from a more favorable mix of taxable earnings due to the updated forecast that we described. Most specifically we're now forecasting less U.S taxable income taxed at higher marginal rates. Secondly we've recorded an incremental R&D tax credit benefit related to FY '14 based on some additional work that our tax team performed during the quarter. And lastly we have an accrual for a tax exposure at a foreign subsidiary which expired during the quarter. For all of FY '15 we're now projecting our effective tax rate to be 29.2% down from our last forecast of 31.4%. Our financial ratios at the end of the quarter reflect the continuation of our strategy to return capital to our shareholders via our share buyback program. Net debt as a percentage of total cap was 40%, up from 24% in last year's second quarter. Our leverage ratio net debt divided by EBITDA was 2.28 times at the end of the quarter. At the end of March we had $1.031 billion of total debt outstanding with about half of that either priced or hedged at fixed interest rates. Also as of the end of March we had over $400 million of unused capacity on a $1.1 billion revolver. Similar to many global companies we went challenging recent years by soft organic growth, we're using this time to focus on operational improvements they are hard to see as we're fighting against the headwinds that John described were the real nonetheless. For example, over the past nine months our total staffing has declined by nearly 5% while sales have been flat. Additionally, we believe we are in the early stage of embracing the principles that we're in throughout the company with a - everybody improving every day and we know that we have plenty of opportunities for further improvements. Despite our near-term challenges we are very focused on creating shareholder value. Our strong cash flow continues to force the opportunity to return capital to our shareholders to our share buyback program. Acquired growth for main and important complementary strategy for value creation along with our organic growth even though we haven't reported in acquisition in over two years. We are working on our way to increase our deal flow while increasing the likelihood of getting the right transactions across the finish line and remaining true to a disciplined approach. In summary John noted that our EPS for FY15 is now $3.55 including the negative effect $0.24 of specials that we haven't been anticipating in our last forecast. These specials include the accounting correction the loss on the disposal of the medical operations and some additional restructuring cost and response to our software business conditions. After adding back the effect of these specials our FY15 EPS will be $3.79 a share. This would reflect an 8% increase over the last year’s EPS of $3.53. So with that I would like to turn it back to John for any questions you have. And Alan can you help us up?

Thank you, sir. [Operator Instructions] Our first question comes from Cai von Rumohr with Cowen and Company.

This is Lucy [ph] dialing in for Cai, good morning. First there is a clarification question on your outlook revision the sixth sense operational weaker operations it sounds like you have some weaker aircrafts in the first-half but and you are expecting production challenges in the second-half your industrial margins are expected to improve in second-half but you have some headwinds components. Can you just maybe clarify how much of the six sense is in the first-half versus the first-half?

So, good morning Lucy. The way I described it was I described the change from 385 to 355. As Don mentioned of that $0.30 changed, $0.24 cents is specials and then the way I described it was the remaining $0.06 due to all other impact which includes operational headwinds and thereafter by the more favorable tax rate Don described and the benefit of the lower share counts. So there is a couple of different moving parts in that six sense. If I look at margin the margin projection first-half the second-half across the businesses in the aircraft the margin improves first-half to second-half quite substantially that is a mix issue we anticipate some foreign sales that we have already got in the backlog in the second-half which was the mix of military to commercial. So we see a pickup in the aircraft margin in the second-half and pick-up in the margin in the second-half and that is when you're driven by the fact that we have the correction in the first-half otherwise we are keeping the margin there fixed. Industrial we also anticipated a little of pick up in the second-half that is not mainly driven by sales increases it's more driven by the fact that we continue to focus on cost across that business components first-half second-half margins about the same issue there, in the second-half we are seeing some slower sales on marine side of the business which is a nice contributor I mean we compensate for that keeping the cost down so first-half second-half similar margin and now medical business is also somewhat first-half second-half similar margins at the hit of the one points just of million dollar from the last this and take that as medical gets a little better. So that's a mixed picture I would say Lucy, the second-half stronger than the first-half but it varies across the different groups.

That's really helpful. Thank you. And then just on commercial asset market it was down 16% on tough comps on the 787 provisioning from last year can you maybe talk about how much it was in terms of growth were decline ex provisioning and what you’re expecting for the rest of the year?

I can, ex provisioning essentially pretty much flat and when what we’re anticipating for the rest of the year so let me just, what are the actual numbers here so. Provisioning on the 787 in the second quarter last year was about over $9 million this year down to $5 million. But that kind of really is driving the different is about a $5 million different from the provisioning and that’s essentially the different to the bottom line. So much rest of its kind of puts and take but it’s pretty much to say. I know if you look at provisioning for the total year we’re anticipating about $13 or $14 million this year and that’s down from about $30 million last year and again if you look at the total for the year in commercial aftermarket that’s it was about 130 this year we’re forecasting 115 it is essentially all initial provisioning, the shift in initial provisioning ex-initial provisioning on the 787. The commercial aftermarket actually for the last two or three years have been almost flat year-on-year.

It's about a 100 million

Yeah. It’s a 100 million plus IP as really watching

Wonderful. And one more follow-up on pass it on restructuring this wondering how you’re thinking about the cadence of Sunday in the second half how should we kind of think about in our modeling? And maybe also how much better state you’re expecting going forward from your actions this year?

Yeah. So what we’ve said as we reserved about eight about $5 million taken our reserve in the second half or restructuring we haven’t describe where how that will take place and I don’t want to speculate on when that restructuring charge might come through. What I said as I think that the second half of average about $0.95 a quarter and then depending on when that restructuring hits that will obviously be the adjustments done in the third or fourth quarter. And in terms of the benefits, we won’t see any benefit in this fiscal year from that restructuring that’s the comps of the restructuring would not be recovered that fast. I would say this normally our restructuring has the benefit of somewhere between one to 2x in the following year but what we do anticipate is some of that restructuring will be structural changes to some contractual relationships that we have which our relationship that have tail on the couple of years. So the normal impact that we would have seen on typical restructuring will probably not be what plays on at least portion of that restructuring and as this happens we will describe that to the market and we will explain the benefits that we anticipate in fiscal ’15.

That’s terrific. Thank you very much.

Thank you.

Next will be Steven Cahall with Royal Bank of Canada.

Good morning Steven.

Yeah. Thank you good morning. Maybe a first question on the aircraft control margin. I was wondering if you could quantify what the quality issue impact was on the quarter. Just to give us a sense of kind of what to more normalize run rate since you said that behind you because what I am kind of getting at here if you just look at the second half of the year is certainly it looks like we’re going to see some underlying margin improvement the last few quarters going back into fiscal ’14 we certainly seen that margins start to track down what gives you additional confidence then it’s going to start to pick up?

So, the quality issue rounded as about 100 basis points in the quarter. And then improved margins in the second half totally makes issue and we have various problems particularly in the military side which tends to very quarter-over-quarter and year-over-year and some of those foreign military sales could be significant drivers of margin performance. It books, we have it in the backlog from business that we anticipate shipping over the next couple of quarters and that’s what gives us confidence that the second half will be better than the first half.

And I think you mentioned that there was cost growth on new programs is this primarily, I am guessing much stuff in development because we didn’t see R&D go up you said it was more in the gross margin so is this the transition brings in 787 or early A350 into your lower cost production or is this something else?

No it’s a new aircraft calls them 787, 350 and it’s not too much that I would describe it is as that I would describe that our anticipation how quickly we will down the cost curve that’s proving to be the challenge. So cost are coming down they’re just not coming down as fast as we were anticipating and we’re building into our forecast for the years and that’s essentially the effective foresee.

Okay. Thank you. And then just a final one a bit of a clarification on the tax rate. If I quickly take a look at that the new implied tax rate for the year is suggest me that we kind of a go back to that 31.5% in the back half. So how come we don't get that mix of earnings outside the US it's favorable repeating in HQ as it did in the second quarter.

Yeah this is Don Thanks for the question Steven. You're right the second half is forecasted to be little bit about 31% effective tax rate the accounting world more obligated and have estimated what we think that mix is going to look like as we look out for the balance of the year. And there is essentially a - catch up that happens in the second quarter. So we've captured that impact on for the most part all in the second quarter and we've normalized in the second half.

Thank you. I'll get back in the queue.

Thanks.

[Operator Instructions]. We'll next go to Ron Epstein with Bank of America Merrill Lynch.

Hey good morning guys.

Good morning Ron.

Hope you're doing well. So just a couple of questions in the aircraft segment, can you talk more about the quality issue had with the vendor. Does this kind of bounce back I remember what was it maybe two or three quarters ago. John where you're talking about you're having Asia supply chain issues. Does this related to that?

No it's not Ron. This is - we had an - it's a very small part that just cut across all of our products that was a mix up as a vendor and it's the quality issue would not visible. We discovered it was some software in production there was a big scramble [ph] to say okay we got to replace all those parts. And it was long standing vendor it was just as it is a just a large issue which we ended up having to clean up. But the cleanup was kind of expensive and difficult happened in the quarter is behind us won't happen again because we know how the fault mechanism as just the vendor it was just one of those kind of unusual event. Nothing to do with move vendors or agents like they nothing to do about it.

Okay. And then also you mentioned in the prepared remarks how R&D spending was down in the quarter. Can you quantify how much it was down in the quarter what drove that and how we should think about R&D for the rest of the year.

Yeah so for the rest of the year we were at a forecast of $135 million for the year and we've moderated that down to about to $130 million and that the $5 million reduction is in aircrafts and it’s really on the A350 that we're seeing the spending coming down. The A350 spending was down about $4 million $5 million in the quarter. so that's not driving out I have to temper that by saying the way the spending of the A350 and it's going as that you have quarters where it fluctuates quite a large and the reason is when you get into the point of the program where you have building hardware you go for having ahead of the fixed number of engineers working on it and then suddenly you're engaging in material purchases or engaging the machine shop you're actually making some so the R&D spend goes up significantly in those particular quarters. And on the A350 the expense came down last year towards over $11 million this year and the same quarters it slowed to the $5 million. That's the big difference. We see the picking up actually over the next couple of quarters. And then to start the next year as we give the A350 1000 --the rollout begin. So that's really what is happened Ron because heavy expense last year in the say quarter of A350 as we reporting a lot hardware that hardware run through this year and then but for the year we also anticipate that the 350 will be more than we have anticipate.

Okay. And then maybe one more if I can. On the Asia supply chain issue. How that going how is that proceeding I mean which you can give us any color how much better it is or what's going on there.

Let me I'll be a kind of a broader perspective onto that and that is that our move to forced off in Asia that continues we continue down that and we have our own facilities in Asia we trying hard A7 production and essentially all in our own facilities in Asia, 350 is not yet there we're starting that transfer we tend to build the at least as you can share on the US and then we start moving into the sum of things as we matured our ability to do that. And then to build up combination of supply chain that all continues. The broader issue that we're challenged is just our anticipation of how fast we will come down the cost or the cost whole range of our parts supplier’s internal yields all the things that go into that overall. And it's just proving to take longer than we had anticipated cost do continue to come down quarter-on-quarter we’re seeing the cost coming down and but it’s coming down slower that we had forecasted that therefore we are not adjusting our cost structure, we adjust our forecast for the year and that’s really what’s happening. Ron, it’s costing is more to new OEM problems in the commercial side, our costing is more than we were forecasting and that’s what we’re trying to identify as we look out for the forecast over the rest of the year.

Got it. And then just one observation if I could just get take on this. When I look at the margins in the quarter it looks like medical devices actually at higher margins in both aircraft systems in space and defense control, it’s kind of weird right?

That’s not quite right. Let me tell you why. But you’re right. Aircraft if you back out the effect of the disposal that medical just over 12% but if I back out the effect of the accounting correction space in defense, the space in defense was up close to 14%. They actually coming out of a lot of there but yes medical is doing very well. Actually if you look at medical on the EBITDA basis its common flows to 20% because of the heavy amortization in our medical segments because at the purchase prices that we’ve paid a few years ago. So, it’s actually done a lot better now we’ve described in the past part of when we couldn’t do the sale I wonder the things I’d mentioned was that we had a kind of the collection of different piece of the business that files valued at a different rate depending like buyer you are. So the sale of the two operations this quarter although they small that continues down this part of trying separate out the pieces of the business so that when we go back out and speak a buyer for us we’ve got a cleaner story and hopefully the market will value that at a price that we feel is commensurate what the value that will have within So, that will continue down that process and our plan right now is in the second half of this year that we will go back out to the market and take the market appetites for the property. Have been said that, our anticipation of value now is significantly higher from while two years ago, we’ve started this process where we will kind of maybe we didn’t have a good track record of make in real steady earnings with that business.

Got it. Got it. Thanks.

You're welcome.

[Operator Instructions] We’ll next go to Michael Ciarmoli with KeyBanc Capital Markets.

Hey, guys. Good morning. Thanks for taking my question.

Hi, Michael.

Just on the aircraft margins I mean you guys still are talking about getting back to a mid-teen level I mean how realistic is that I mean we haven’t seen mid-teens since 2004 you’re going to have I would imagine dilutive mix issues going forward when the number of program ramps up the 777 I mean is it really realistic that think that we can see mid-teen margins just given maybe a consistent shrink of new programs coming in?

Well, I think Michael it’s more a question of timing rather than if its and what I would say is that the when what changed significantly in our outlook over the last few years. So the underlying, if there is three things that will drive the margin overtime, there is the mix and how strong are we the military side of the business is because that’s a very nice margin contributor. There is the R&D spends and how quickly that will come down or not and then there is how quickly we can and that the commercial side gets the cost down on the OEM side under the aftermarket starts to run. The military mix obviously does not allow we can do about that, we’re on the major programs at 35 that is long-term that’s going to be a great problem there is no aftermarket in that yes, that we kick in that will be a great problem V-22 that’s real solid problem for us and we continue to look forward to new military opportunities. But there is not a lot of big problems on the military side so we’ll go to some extent but the budget spends and particular how the -- On the R&D side, the R&D will come down that will probably take another couple of years before we really see a falling up and the reason for that is will continue over the next year or two and as I mentioned the 350, we got the 350 thousand variants so we don’t think that next year we’ll see much of the change in R&D perhaps but then as you get 17, 18, 19 R&D will come down. And Boeing has not I think as our understanding is that Boeing has awarded the primary package on the 777 to another supplier so that’s not going to be at least in our R&D going forward the high left were not do what Boeing position on that is. But we’ll have to see how that plays out but in many events we would anticipate that R&D will come down over the next several years and then as I mentioned getting down the cost curve on the O&M business and there is a lot of plans and place a lot of work being done on that. We have the low cost facility offshore that we’ve had - for the last thirty years. So this is not a Greenfield site that we’ve just established over the last couple of years and are walking away through that. So that will happen, it just that it will take a while and there will be the headwinds of 787 yes it’s in the better shape the 350 will be already I mean that’s get into better shape in jets will be early stage. However, we do believe there Isa curve 787 with the first major systems job that we’ve done 350to last any jet we’ve learned anymore. So we would anticipate that we would be able to come down that cost curve faster from the 787 to the 350 and the 350 to the jet

Got it.

Plus the infrastructure around an agent supply chain will through the 787 period, we’ll optimize it on 350 we’ll hopefully be able to the plug in the last.

Got it. That’s helpful. And then what about you held the industrial revenue outlook. So is it safe to say that some of your oil exports business have maybe stabilize this in the right work but you kind of fairly contemplated that weakness when you looked at the outlook last quarter. I mean, can you tell us if those business have gone better worse or are they just kind of hanging in there?

Well, so let me add into two. So in our industrial segments, we have a little bit of oil and gas expose but it’s not a big piece of business it’s kind of $20 million piece of business so that’s up a little bit it down hold exploration but that’s kind of hold an reasonably steady probably weaker than last year but that’s not the big deal. The bigger piece is in our component segment where we have our energy piece is really what we call the marine business and that’ the business that did $75 million last year and I am now forecasting that’s going to do about $55 million this year. So that’s coming up quite significantly and it’s really in the second half that’s coming up because through the first half the run rate is about 70. So we’re seeing a significant drop on the second half is that what we I think we will projecting over the last couple of quarters what we said the drop of the price of oil let me take a little bit of while before that’s those are through just because capital of project they’re already approved that in gear and we did in the quarter we took that down by $3 million what we said three months ago so we’re anticipated be even softer. So, yeah we think it down a little bit more I think in our guidance 90 days ago we’ve tried to capture - there was just another little in the components group this quarter.

Got it.

The bigger aspect on our industrial systems business is more around the ForEx impact that we described last quarter.

Okay. And on that marine is that more offshore production or is it more exposed to exploration or it is just the mix of both?

It’s really a mix of both and there is two main one is - and remove the operated vehicles which I think are used both for maintenance so these are vehicles that go down to the sea they’re used both for maintenance and for I think installing new systems. And then the other big piece of it is while I called which are very large - think of the multi-million dollar type of sales that are used on floating production and storage offloading systems which essentially are shift that have a kind of that platform on them and that’s more the production side of the business. So it’s a bit of a combination of both and it is all offshore, it’s all offshore oil exploration.

Got it. And then just a last one from me. I have may have gone distracted on the call but you said you were keeping the medical segment now and I am just wondering if you could walk me through those internal discussions I mean it was at one point announced for sale afforded by shareholders the stock went up that was out the door the deal fell apart and now all the we’ve done the 180 on it I mean can you just give us a sense of kind of the internal dialog and analysis and how you guys have come for circle?

Yeah. Michael I definitely did not say that in the call

Okay.

What I said and I think I’ve been consistent with this over the last year or so is that we are restructuring on medical segments because, as we went through the sale process it turns out that we have the primary focus was on pumps and sets but because we did five acquisitions, we all blended up like product lines since what I would call it components product line within medical we call it sensors that we also had some stock like the lab services stock and when you went to sell it you had a piece 40% of it a PE guide of interest and because some of the cash pace business. Another 40% you had a strategic that was interest because they were interested in the pump business and then another 20% that really was kind of nobody was that interested in. So nobody was really willing to give you, you couldn’t get the strategic to give you full value, you couldn’t get the PE guys who give you full value and the other stock was essentially discounted. So over the last 12 months since the deal fall through which is 12 months ago now what we’ve been doing as we’ve been trying to divide it up into logical product line that are more suitable for sale and that we could offer to the right type of buyer and the piece of that was the sale of the two lab services facilities this quarter so we’ve got that over the picture now that the million dollars of sales is not a big deal. And we are continuing down the past, trying to make sure that what we would offer to the market is attractive to the right side of buyers and what I said consistently is that we will go out in the second half of this year so probably after the third quarter results and we will test the markets apatite or what were then offering. Now what I do want to say is that we will sell that what we’ve got at all cost in the sale because what we have now is actually a nicely profitable business and I think I said in the call it’s actually a 20% EBITDA margin business in our medical segment right now. We want to make sure that we get the right value for that that reflects on our shareholders what the value of the actual business as what. If we can find somebody its willing to pay the right price would be happy to sell us if we can so we’ll have to consider what the alternatives might be. But we will - the whole focus is on where we’re standing right now what’s the optimum shareholder value creation option with that business. So, our plan is go back and see what we’ve got it not that easy but I would also say that our situation today is very different from two years ago where we’re looking in getting out of these business. We found to way to make it a much, much stronger business that has nice financials so the price that we would expect is the significantly different number from what we would have been hoping to get two years ago.

Great I am definitely glad for that clarity. I’ll jump back in the queue.

Thanks Michael.

[Operator Instructions]. That we have one question left in the queue. We’ll take that from Robert Spingarn from Credit Suisse.

Hi, John. Good morning.

Good morning.

Just wanted to ask you again about commercial aftermarket, ex the provisioning why it is in actually trending up this year?

Yeah, we’ve got this question various times through the years and what I have to do is that I got to tell you that the number is fixed and I got to explains you what I think the number is to waited but I cannot give you exactly tells as to why it’s not doing some different. In fact that it’s about $100 million the provisioning and what you is kind of think about a couple of things. Our stop first of all is not on schedule maintenance it essentially when leads that comes back in so it’s not that you can tie it directly to passenger seat or number of airplane flights or number. Now it is true that those obviously a relation the more they fly the airplane the more our stuff gets used and the more comes back but it’s not like brake pads where you know for every landing or every ten landings we got to have the new spares. So that’s one thing. The second thing is that the mix of airplanes that anybody is on and how much planes are flying and are how much those airplanes are being retired. And in our case we’ve got some older 57, 67, 47 business and that’s obviously tailing up. Now we’ve got some newer platforms obviously 37, 87 and some of the airbus business but it’s that combination if you got older platform and they’re start to slow down you see that drop-off on the other hand you’re saying newer platform ramps up the end resulted it - it’s not a loss of market share or anything like that it’s the combination of old new how many flight hours et cetera. Is that helps?

It does help. Do you have some sense of what might be moving into a suit spot then or maybe another way to ask the question is that we look at the 100 million what percentage of that is on out of production versus in production models is that whether look at it that way?

Yeah. We don’t typically provide that level of breakdown and

I mean because the way you explained it John it sounds like for talking 57, 67 and 47 that’s at some point going to go down to zero there is a little bit of a renaissance with the 57. But if you have a good position on 37 for example or somewhere near maybe we start to see that growth at some point?

I think that our anticipation is that major future in our aftermarket business it will be obviously the introduction airplanes 777, 37 but then particularly that’s the 350 and 87 starts to go on here we will see the older platform drop up and we look out a few years, we think our aircrafts aftermarket business will definitely be but that will be the headwinds of the older platforms since we do that. Now let me - if you look at6-7 versus in 8-7. All comp which is the factor of 3, 4, 5 higher if you look at it 330 versus a 350 it's a multiple higher. So you have that impacts going on that we just have more content on the newer airfreights. The other thing that we've done on the newer platform as we actually have engaging in long-term contracts in some of the major airlines that have fly by hour type of contracts you may see - different times when we signed up for long-term deals. So a key future focus is making sure we've got long-term contracts in place and therefore you get out of the potential competition you have with job shops that are trying to just replace parts with new work style.

So just to tie to little peer on 78, you’re clearly saying nice ships at content there. Is it about 5, 6 years into the program where you'll start to see you'll get through the provisioning maybe 7-8 years and you'll see a nice - that way?

Yeah because there is also a four or five year larger periods in all of these air --. So you have to get through that periods besides. So what happens is begin into production they get an initial shop in the - provisioning that you'll probably get a little bit of slowdown and then gradually - the coming out of warranty and you start to do that. And actually I think the first 87 is coming of warranty kind of in the next quarter or two. So we're actually as they already say starting to get into that stage of the program.

Alright sounds like you're couple of years away. Thank you.

Very welcome. Any other questions Alan?

No sir we have no further questions at this time.

Thank you very much. Thank you for all for joining us and we look forward to catching up again in the 90 days’ time. Thanks Alan.