MOG.A (MOG.A) Q4 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Moog's fourth quarter FY '15 earnings conference call. [Operator Instructions] At this time I would like to turn the conference over to Investor Relations Manager, Ms. Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of November 6, 2015, and our most recent Form 8-K filed on November 6, 2015, and in certain of our other public filings with the SEC. We have 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 webcast page at www.moog.com. John?

Good morning. Thanks for joining us. This morning we will report on the fourth quarter of fiscal '15 and reflect on our performance for the full year. We'll also affirm our guidance for fiscal '16. As usual, I'll start with the headlines for the quarter. First, earnings per share in the quarter of $0.75 included $0.13 of incremental restructuring and impairment costs and $0.04 of higher tax expense than our forecast of 90 days ago. Operating profit came in very close to plan. Second, we had a record quarter for free cash flow to close out a record year. Third, we repurchased 938,000 shares in the quarter to bring our full year repurchases to 4.8 million shares or 12% of the outstanding shares from the start of the fiscal year. Finally, we're leaving our guidance for fiscal '16 unchanged from 90 days ago at $4 per share. In fiscal '15, we responded to a series of challenges across multiple fronts. Our defense businesses had both top line pressure and negative mix shifts. Our industrial businesses wrestled with foreign currency movements and the deteriorating economic conditions in both Europe and Asia. In addition, our sales into the energy markets were particularly hard hit by the drop in oil prices. Our commercial aircraft growth slowed and our supply chain did not meet our cost targets as quickly as we had hoped. In total, it was a year of significantly more headwinds that we had planned for 12 months ago. In response, we sold some small businesses and identified some others for future divestiture. We exited several smaller product lines as we continued to focus our portfolio on the most promising opportunities. We reduced costs in areas where sales were down, while continuing to invest in opportunities for future growth. In the face of these challenges, we delivered solid earnings and record cash flow. We deployed our cash to buy back shares and recapitalized our balance sheet to provide for future flexibility. The Moog employees around the world put in another year of hard work to meet our commitments to our customers, and as we close out fiscal '15, I'd like to personally thank them for their dedication and service. Now, let me provide some details on the quarter. Sales in the quarter of $623 million were down 7% from last year. Just over half the drop, is due to weaker foreign currencies relative to the dollar. Setting the effects of currency movements aside, real sales were down slightly in every segment with the biggest drop in our Components segment due to the continued slowdown in our energy markets. Taking a look at the P&L, our gross margin was up slightly despite the lower sales. R&D is also up on higher aircraft activity, while SG&A expenses are down in dollar terms, but up slightly as a percentage of sales. We incurred $9 million of restructuring expense in the quarter, mostly in our Aircraft and Industrial segments. Interest expense was up due to last November's sale of high yield debt and increased borrowings as a result of our share buyback activity. Our effective tax rate was unusually high at 33.3% reflecting a shift in the mix of global earnings. The overall result was net earnings of $28 million and earnings per share of $0.75. Fiscal '15, for the full year, sales were down 5%. 80% of the decline is due to the stronger dollar. Real sales were down slightly in every segment except medical. Operating margins, exclusive of restructuring, were down in Aircraft, Industrial and Components, but up in Space and Defense and medical. Net earnings were down 17% from last year, while earnings per share were down only 5% on a lower share count. Free cash flow for the year of $254 million was a record for the company, representing a conversion ratio of close to 200%. Fiscal '16 outlook. We're affirming our earnings forecast for fiscal '16 at $4 per share. We're also leaving our sales forecast unchanged at $2.57 billion, up 2% over fiscal '15. The growth is due to the ramp up on the A350 program. We're anticipating full year operating margins, exclusive of specials, more or less in line with 2015. We anticipate another year of healthy cash flow. Before I go into the details by segment, I'd like to explain a change in our Medical Devices business. Within this business we have a product line we call sensors and handpieces. These products are sold to medical OEMs, similar to the motors and slip rings we sell to medical OEM's within our Components Group. It is a nicely profitable product line and has a lot of future potential. Therefore, we've decided to keep it and have transferred the management of this business over to our Components Group. For reference, the full year fiscal '15 sales of sensors and handpieces was $25 million. Now, to the segments. I'd remind our listeners that we've 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 Aircraft, Q4, sales in the quarter of $275 million were down 3% from last year. On the military side, sales were about flat with last year with higher F-35 production rates compensating for lower V-22 OEM sales and a softer military aftermarket. The drop in the military aftermarket is due to the wind down of our refurbishment program on the C-5. On the commercial side, we had slightly lower sales at Boeing. We also had slightly softer business jet sales. Last year we had a one-time sales benefit from the close out an older business jet program. Airbus sales were up on the continued A350 ramp. The commercial aftermarket was down this quarter, a combination of lower 787 initial provisioning and slowing business jet activity. Aircraft, fiscal '15. Fiscal '15 was a challenging year for our Aircraft business with full year sales down 3% from fiscal '14. In addition to the lower sales, there was a significant negative shift in the mix, which weighed on margins. We saw declines in our foreign military OEM programs, as well as in the military aftermarket. We also had lower commercial aftermarket sales as 787 initial provisioning slowed. Growth in commercial OEM sales was due to the ramp up on the A350 program. Aircraft, fiscal '16. We're keeping our sales forecast for fiscal '16 unchanged from 90 days ago, up 4% from fiscal '15. The A350 program will be up significantly, and we're anticipating slightly higher OEM sales to Boeing. We're forecasting you the commercial aftermarket will be down, as 787 initial provisioning continues to moderate. On the military OEM side, the continued ramp up of the F-35 production will compensate for lower V-22 and F-18 sales. The military aftermarket will be down as the C-5 refurbishment program closes out. Aircraft margins. Margins in the quarter were 9%. These margins include $3 million in restructuring expense. For the full year, margins excluding restructuring were 9.5%, down from 10.8% in fiscal '14. The drop is all due to the negative sales mix, with lower aftermarket sales in both military and commercial as well as lower foreign military OEM sales. Looking to fiscal '16, we're forecasting that the negative shift in the mix will continue. However, we anticipate continued improvement in the performance of our commercial OEM book of business. We expect R&D expense next year be about flat with fiscal '15. The result will be full year margins of 9.5%, in line with fiscal '15. Turning now to Space and Defense. Sales in the quarter of $93 million were down 4% from last year. The story is the same as the first three quarters, lower Space sales, compensated partially by higher Defense sales. Our Space business is going through a cyclical slowdown and we're seeing the effects on both our satellite and launch vehicle product lines. Of particular note, sales to NASA on the Space Launch System and on the Soft Capture program were down from last year. The defense market on the other hand were seeing stronger sales on both domestic and foreign military vehicles. Space and Defense fiscal '15, full year sales came in slightly lower than last year. Space sales were down 12% for the year reflecting the story we've been telling each quarter this year. The present slowdown in our space business started in the second half of 2014. Defense sales, on the other hand, have continued to strengthen over the last year with higher sales on missiles, vehicles and naval products more than offsetting lower security sales. Space and Defense fiscal '16, there is no change in our forecast for fiscal '16. Sales will be marginally higher with a continued shift in the mix from Space to Defense. Space sales will be slightly lower across a broad range of programs and platforms. Defense sales will be higher on increased volumes in our missile product lines and continued strength in the vehicle markets. Space and Defense markets. Margins in the quarter of 14.5% were very healthy, supported by a termination gain and unusually strong sales on various vehicle platforms. The underlying margin performance in this business has been steadily improving over the course of the year as our restructuring actions have taken effect. Full year fiscal '15 margins of 8.7% include both restructuring charges and the impact of the accounting correction we made in the second quarter. For fiscal '16, we're forecasting margins of 11.5%. Industrial Systems, Q4, sales in the quarter of $128 million were 13% lower than last year. Over 80% of the drop is due to the impact of the stronger dollar. Excluding the impact of foreign exchange movements, sales were down in energy, in both the renewables and non-renewables markets, while sales in Industrial Automation and Simulation & Test were up marginally. Industrial Systems, fiscal '15, full year sales of $522 million were down 12% from last year. Similar to the quarter, over 80% of the drop was due to sales in foreign currencies being translated into a stronger dollar. Setting aside this foreign exchange impact, Wind Energy sales were about flat with 2014, but sales into the non-renewables market, which includes sales on power generating turbines and sales to oil field services companies, were down almost 10%. On a positive note, sales into the general industrial automation market were up slightly despite the economic slowdown in both Europe and China. Sales into Test and Simulation were about even with 2014. We're keeping our fiscal '16 forecast for Industrial Systems unchanged at $525 million, a very slight increase over fiscal '15. As I said last quarter, there's nothing in the macro-economic outlook, which suggests an improvement in our industrial business any time soon, and the positive impact of several organic growth initiatives will probably be beyond fiscal '16. Industrial Systems margins. Margins in the quarter of 4.7%, included over $5 million of restructuring costs. The continued challenges in our energy markets, as well as softness in our European test business drove the bulk of the restructuring. Margins for the full year were 8.6%. And looking to fiscal '16, we're forecasting that margins will improve to 10.7%, as the impact of the restructuring takes effect. Next, the Components Group. Sales in the quarter of $102 million were down 13% from last year. The decline is almost exclusively due to the drop in our energy markets, which are down nearly 60% from the same quarter last year. The fall in the price of oil and the resulting impact on spending at the oil-field services companies has now fully filtered through audits. For the full year fiscal '15, Components sales up $437 million are down 3% from last year. Similar to the fourth quarter, the major drop was in our energy markets. This energy business held up through the first half of the year as we completed deliveries on projects, which were already underway before the drop in the price of oil. However, by the fourth quarter, we saw the full effect of the slower spending by our customers. Apart from energy, we saw slight increases on sales for military vehicles and in our U.S. industrial markets. Fiscal '16, we're projecting sales next year of $425 million, down 3% from 2015. The mix of sales, however, will be different from fiscal '15. We anticipate higher sales on military vehicle programs, particularly in Europe, as well as on some missile programs. On the other hand, we believe we'll continue to see weakness in our energy business as well as lower sales of our medical products as demand from our major customer for sleep apnea motors slows. Margins in the quarter were unusually low at 10.6%. Excluding restructuring, margins were 11.1%. The drop in our energy business, combined with cost overruns on some military programs drove the relatively soft margins. Full year fiscal '15 margins of 13.4% were down from last year, primarily the result of the lower energy sales. For fiscal '16, we're forecasting margins of 13.2%. Now to our Medical Devices segment. With the transfer of the sensors and handpieces product line to our Components Group, our Medical Devices segment is now focused exclusively on pumping technology. We're also changing the reporting within the Medical segment to focus on the two main product lines we offer, namely Enteral and IV. This change aligns better with the markets we serve. Within each product line we offer both pumps and the associated administration sets. All our published numbers this quarter reflect this new reporting for both past and future periods. Medical Q4, sales in the quarter of $24 million were down 5% from last year. In Q4 fiscal '14, however, included $2 million of sales in our Life Sciences product line, which we sold in March of this year. Enteral sales in the quarter were higher, while IV sales were lower. Last year we shipped an unusually large number of IV pumps, as we caught up on some overdue shipments from the previous quarter. This made the sales comparison with this quarter look unusually unfair. Medical fiscal '15, full year sales of $99 million were up 3% from last year with growth in both our Enteral and IV product lines. Compared to last year, fiscal '15 has $4 million of lower sales from our Life Sciences operations, which we sold the end of the second quarter. Excluding these Life Sciences sales, organic sales in pump technology were up an impressive 8% in fiscal '15. Medical, fiscal '16, we're projecting sales next year of $102 million. This translates into 7% organic growth in our combined Enteral and IV product lines. Medical Margins, for the quarter, margins were 8.2%. Full year margins fiscal '15 were 8.7%. These margins are up nicely from 3.1% in fiscal '14. For fiscal '16, we're forecasting margins of 11.4% as sales grow and our focus on cost containment continues. Before leaving our Medical segment, let me update you on our strategic review process. Two years ago, we started this process with a business that was struggling financially. At that time, our Medical segment included an unusual mix of business lines, the result of our acquisition campaign between 2006 and 2009. We had a pump product line, a life sciences product line and a components product line, which we called sensors and handpieces. During our sale process, we couldn't find a buyer who was interested in all three pieces. Strategics were interested in pumps, private equity folks were interested in the cash generating sensors and handpieces product line and there was little interest in the small Life Sciences business. After the sale process terminated, we set about restructuring the portfolio and improving the profitability. We've now completed this process. We've sold the Life Sciences product line, and we've moved the sensors and handpieces product line over to our Components Group. We're now left with a pure pumps business, which is both profitable and growing. Our next step is to test the market interest in this pump business. In recent discussions with our investment bankers, we determined that there are still some actions we need to take to make sure we maximize the potential price we can get for the business. These include some further process improvements, as well as a review of our channel partners. We believe it will take us another quarter or two to get these sorted out at which point we'll be ready to test the market for this asset. We'll keep our listeners informed as events unfold. Summary Guidance. We've closed out a challenging fiscal '15 and are looking forward to an improving fiscal '16. We're forecasting full year sales next year of $2.57 billion, up 2% from fiscal '15. We anticipate most of our markets will be more or less flat with fiscal '15, but we'll see a large increase in sales on the A350 program as airplane deliveries ramp up. We'll have the benefit of the restructuring actions we've taken this year, which will compensate for a continued negative shift in our overall sales mix. We're forecasting earnings per share of $4, an increase of 19% over fiscal '15, on a lower share count and the absence of special charges. Our forecast does not include any projection for future acquisitions or further share buyback activity. Our capital allocation strategy remains unchanged. We continue to look for acquisitions, which meet both our strategic and financial goals. We evaluate each opportunity in light of the alternative uses of capital, invest to grow or return capital to shareholders. During fiscal '15 our process did not turn up any compelling acquisition opportunities and therefore we deployed our excess cash to return value to our shareholders through our share buyback program. Looking to fiscal '16, we'll continue to look for adjacent acquisition opportunities and follow our disciplined capital allocation process to ensure we're making the best possible decisions to drive long-term value for the company. Let me finish my comments by looking at our business through the lens of the end markets we serve. Those markets are Defense, Industrial, Commercial, Energy, Space and Medical. Defense is the bedrock for the company. There are early signs that Defense spending is starting to recover as global conflicts continue and the potentially catastrophic impact of sequestration becomes evident. While some of our legacy programs are declining, the F-35 is growing and we're well positioned on the tanker program. Our ground vehicle business is recovering and our missile business remains very strong. We're actively pursuing new programs including Long-Range Strike and are working closely with the depots to expand our scope of supply in the aftermarket. Defense is a long-term play, and we remain focused on building a portfolio of platforms which will provide returns for decades to come. In our industrial markets, our success is based on innovative new products, which deliver enhanced value in our customers' applications. In slow economic periods, we believe it is important to continue that investment. Our areas of focus today include next-generation hydraulic solutions for use in autonomous systems and very large brushless motors for use in a variety of specialized industrial applications. Our commercial aircraft business does not face a growth challenge like some of our other businesses. In this market, we've invested for over a decade to win enviable positions on all the major new platforms. Our growth is assured, and our challenge is internal as we work to complete the development programs and reduce our production costs. We still have a year or two to go to turn the corner in this business, but over the following years, we'll see the benefits of reducing costs, lower R&D expenses and a growing aftermarket. Our strategy in the energy market is two-fold. In the oil & gas business, we're reducing costs, while still looking for growth opportunities during this period of depressed returns. Oil is a limited commodity, and a recovery in the price is inevitable. In the wind business, we're investing in new product technology to rebuild our market position. We believe this wind market has the potential to be a $200 million-plus market for Moog towards the end of this decade. In our Space business, we're going through a consolidation of our facilities and product lines, which we'll continue for the next year. We're also looking to the longer-term, as we invest in new technologies, such as green propellant, and capture early contracts on the Ground Based Strategic Deterrent program. This program to refurbish the Minuteman missiles has the potential to be a $100 million-plus annual business for Moog, although full production is probably 10 years in the future. Finally, sales into medical markets remain healthy. We continue to find new opportunities to sell our components into medical OEMs. And in our pump business, we're investing in next generation IV and Enteral pumps, which we believe, will grow our share and create value for the long term, whoever the eventual owner of this business might be. In summary, our underlying portfolio of businesses remains strong. Like many companies, for the last few years, we faced a slow-growth environment and significant mix shifts. We've responded to these challenges with restructuring activities and on-going portfolio adjustments. Through this period our strategy has not changed. We solve our customers' toughest problems in applications where performance really matters. We focus on niche markets where we seek to be the dominant supplier. Our growth comes from expanding our range of high-performance components while also increasing our scope to become a systems supplier to our major customers. Growth will continue to be a combination of organic and acquired. Our internal initiatives to deliver on our goals are talent development, lean and innovation. Finally, we're focused on deploying our capital to maximize shareholder returns over the long-term. Looking to fiscal '16, we'll continue to wrestle with many of the same headwinds we saw in fiscal '15. Our forecast is unchanged from 90 days ago. And similar to previous years, we anticipate a slow start to the year with earnings per share in the first quarter of between $0.70 and $0.80. Now let me pass you to Don who will provide some color on our cash flow and balance sheet.

Thank you, John, and good morning. An impressive $105 million of free cash flow in our fourth quarter culminated in free cash flow for all of 2015 of $254 million or a conversion ratio of a 192%. This follows strong results of more than 130% conversion in each of the prior two years. The $254 million of free cash flow compares with an increase in our net debt of $123 million. The difference relates primarily to $344 million of cash used to repurchase company stock throughout the year. We are seeing some measurable progress managing down our net working capital to about 28% of sales at the end of 2015 compared with over 33% of sales just two years ago. And we believe there is room for further working capital improvements. The fortunate timing of certain cash receipts and disbursements during our fourth quarter did contribute, in part, to the strong 2015 free cash flow performance. And as a result, we do expect to get off to a rather slow start with free cash flow, as we begin our new fiscal year. For the full year 2016, we're affirming our previous free cash flow forecast of $150 million, reflecting a free cash flow conversion ratio of just over 100%. Under our share repurchase program, we bought back 4.8 million shares at an average per share price of about $70 during 2015. Since January 2014 when we initiated our buyback strategy, we've repurchased 8.8 million shares under the outstanding 13 million share repurchase authorization from the Board. Our projections for 2016 do not include the impact of any further share buyback activity, which will be influenced by any M&A opportunities that we might pursue. With respect to M&A, we've had nothing to report in the last 10 quarters. However, as John noted, we continue to look for strategic opportunities. We consider M&A an important complement to our organic growth objectives and we remain active. In the meantime, our shareholders have benefitted from us buying back our shares, financed in part by our strong free cash flow. Capital expenditures in the quarter were $23 million and depreciation and amortization totaled $25 million. For all of 2015, CapEx was $81 million, while D&A was $104 million. For 2016, we're leaving our CapEx forecast at $90 million. D&A in 2016 will be about $107 million. Cash contributions to our global retirement plans totaled only $7 million in the quarter resulting in $76 million of contributions for the full year. This compares with $99 million for all of fiscal 2014. For 2016, we're planning to make contributions into our global retirement plans totaling $95 million. Global retirement plan expense in 2015 was $61 million compared with $56 million in 2014. In 2016, our expense for retirement plans is projected to be $65 million, up largely because of the effects of updated mortality assumptions. Our effective tax rate in the fourth quarter was 33.3% compared with last year's 25.2%. The comparatively high rate resulted from an unfavorable mix of taxable earnings relative to our previously forecasted results. For all of 2015, the effective tax rate was 28.3% versus. 27.7% for all of the prior year and for 2016, we're forecasting an effective tax rate of 28.5%, unchanged from our forecast 90 days ago. Our financial ratios reflect the effects of our stock repurchase program. After using $344 million of cash in 2015 to buyback 4.8 million shares, our leverage ratio increased to 2.40x compared with 1.85x a year ago. Net debt as a percentage of total cap was 43.5%, up from 32.3% last year. At quarter-end, we had $359 million of available, unused borrowing capacity on our $1.1 billion revolver that terms out in 2019. In summary, we're looking forward to the days ahead when the headwinds that we've been describing for many quarters shift to tailwinds and our diversity that has served us so well for decades, once again emerges as a real positive. To recap, we've affirmed that 2016 will produce sales of $2.6 billion, a modest increase of 2% over 2015, and EPS will be $4 a share, up nicely from our just reported 2015 results. And lastly, free cash flow is again forecasted to be in excess of 100% conversion. With that, I'd like to turn you back to John for any questions that you may have.

[Operator Instructions] We'll go first to Cai von Rumohr.

John, could you give us a little more detail on the restructuring, how much it was by each of the sectors? I know you went through it quickly, in the fourth quarter and the year. And how much of that $0.13 increment in the fourth quarter was impairment versus restructuring?

The total in the fourth quarter, most of that was in aircraft and industrial in the fourth quarter, Cai. And as I mentioned in the text, about $3 million of was in aircraft and just over $5 million was in industrial. And then we had an impairment charge in our industrial business, which is far product line -- probably don't remember this. We bought a business I'm going to say, back in about 2007, which did sensing technologies for wind turbines. It was a compliments to our pitch control business, thought that was a real possibility that future wind turbines would actually have these sensor on the blade. We've been work in that business for the last seven or eight years. This quarter we determined there just really isn't a suitor to that and we took an impairment charge associated with that at just over a couple of million dollars, so that was ultimately the adjustment. So those are the big pieces about $3 million aircrafts, about $5 million industrial and then an impairment to just over $2 million, which was also connected to the industrial pieces of it.

And it looked like your R&D was a little bit higher than anticipated. Could you give us a breakdown kind of was it really a bit higher? If so why? And the breakdown between aircraft and by program?

Yes. I'm not going to go into all of that detail Cai, but the R&D was a little bit higher than a year ago. But what we said in the quarter operations came in after you put back into the restructuring and the higher tax rate operations came in close the plan. So I wouldn't say, it was significantly different than plan. The area of course, where the vast majority of our R&D is still being spent, two-thirds of it, is in the aircraft business and it remain high I would say there as we continue to walk away through the back end of the A350 program and we are getting into the what I call, the crucial area of the E-jet not, as we start to move there towards flight. So not unusual, not excited and that's R&D number being quarter-over-quarter depending on -- what really drives the changes in R&D, it's not a staffing, it's not that we're hiring in and firing staff on a quarterly basis. It has to do with the build of early systems for test aircraft and as you start to build out the unit that's typically have the R&D number fluctuate quarter-to-quarter. So it's not a staffing-related issues more associated with the material associate with R&D programs.

And the one last one, you mentioned commercial program performance seems to be getting a little bit better. Could you give us more color in terms of how you are doing better than the selling on the [indiscernible]?

Cai, the line is not great, and you definitely faded out toward the end of that. Let me see if I think what you asked is how are you doing on your commercial OEM programs returns and coming down the cost parts? That's correct?

Yes. That's it.

Yes. This quarter, I would say, we were on plan. So we had no surprise adjustments this quarter in terms of the cost of those programs being out of line with what we were anticipating. We continue to come down the cost curves quarter-after-quarter and as we said in the past, what tends cause us challenges in terms of margins in the aircraft businesses is when that cost -- but we don't need the cost fronts as we laid them out. So this quarter we came in with what we were expecting in the quarter. There is still a long way to go over the coming several years quarter-by-quarter to continue to get those costs down on the E7 and the A350, and of course, the E-jet. But this quarter we were pretty much on what we thought we would be for the quarter.

We'll go next to Michael Ciarmoli.

Obviously, big growth expected next year from the A350. How are you guys thinking about that program in terms of the product you're shipping versus -- Airbus looks, they might not even get to I guess 15 this year. Even next year, maybe the ramp goes a little bit slower. I mean is there any potential risk to that forecast plan? Do you see any potential for Airbus to potentially slow down your shipment rate into them?

I'm always very cautious of trying to second-guess Airbus or Boeing or Lockheed in terms of what they're saying their numbers are going to be and I'd always refer you to the source of that. So I think Airbus could be better answer in that. What I can say is that our staff typically leads the Airbus get deliveries by probably six to 12 months in terms of the cost that we incur in our shipment. So they've got to keep that in mind. And the other thing is even if it's slow down a little bit, that would be okay, because its very earlier stage and if we have a little bit more time as it ramps up. If the ramp up goes a little bit more slowly, it gives us a little bit more time to learn to get the supply chain fully matured and stuff. So from the sales perspective obviously, it would be a bit of downward from a margin perspective, not something that I would worry considerably about.

And then on the business jet market, could you give us any color there? Obviously, it expected to be down next year. I mean has it gotten materially worse for you guys? I mean obviously, Bombardier is having its own set of challenges, but has it gotten any worse? Has it sort of stabilized around bottom? Any additional color you guys might be able to provide on kind of the state of the business jet market?

Yes, so we haven't changed our forecast, Mike. So this year we did, I'm just rounding it, we did $50 million and next year we're forecasting to do $48 million. So I think we're kind of in the noise, when we get to that level. The Challenger business looks to be doing a little bit next year, but then we've got a lot of new Gulfstream work a variety of new Gulfstream programs. So they'll be adding a little bit. So I would say, its move in sideways, few years ago we have the [indiscernible] that's obviously gone. So in summary, Challenge are down a little bit Gulfstream up a little bit and it's total up 3% or 4% this year to next year. Moving sideways is the best way to describe it, but the portfolio has changing out a little bit.

And then just the last one, I'll jump back into the queue here. You guys talked about, I'm just trying to get a sense of what is embedded in the $4 of earnings from a buyback. It would assume that your share count goes down by about another 400,000 shares this year, so are you guys going to -- basically, is there a buyback embedded in that $4 or no?

No. What's embedded in the share count as of the end of fiscal year, so the assumption in those numbers and this is what we've done all along is we don't include in our forecasts numbers that assumption on the buyback or an assumption that we would acquire any businesses. We just assume essentially continue at whatever you finish out the fourth quarter at. So there is no assumption of additional buyback activity in '16.

Michael, just to be more specific, our assumed average shares outstanding or forecasting for next year and I modeled about $37 million.

That's down from $37.4 million, the most recent, you did, the quarter just closed.

That's right. Those are averages numbers during our quarter close to another $1 million in the fourth quarter. So you've got to factor all that in.

And it looks like we have no further questions in the queue. End of Q&A

Thank you very much indeed everybody. Look forward to catching up again in 90 days. Thank you.