MOG.A (MOG.A) Q4 2016 Earnings Report, Transcript and Summary

Please standby. Good day. And welcome to the Moog Fourth Quarter and Year-End Earnings Conference Call. Today’s conference is being recorded. And at this time, I’d like to turn the conference over to Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of November 4, 2016, our most recent Form 8-K filed on November 4, 2016, and in certain of our other public filings with the SEC. We have provided some financial schedules to help our listeners’ better follow along with the prepared comments. For those of you who do not already have a document, a copy of today’s financial presentation is available on our Investor Relations homepage and webcast page at www.moog.com. John?

Good morning. Thanks for joining us. This morning, we’ll reports on the fourth quarter fiscal ‘16 and reflect on our performance for the full year. We’ll also provide our initial guidance for fiscal ‘17. As usual, I’ll start with the headlines for the quarter. First, our operations came in strong this quarter with earnings per share of $0.92. This brings full year fiscal ‘16 earnings to $3.47, $0.12 ahead of our projection from 90 days ago. Second, we incurred a total of $0.24 of restructuring and impairment charges during the quarter versus our plan from 90 days ago of $0.12. Third, we had another good quarter for free cash flow to close out the year at a conversion ratio of 120%. Fourth, we’re integrating our Medical Devices segments into our Components segments and simplifying our reporting structure accordingly. And finally, we’re providing a first look at fiscal ‘17 today. Our segments are stable relative to fiscal ‘16 but we have some adverse mix shifts and a $0.15 higher tax burden. Therefore, we’re initiating guidance for fiscal ‘17 at $3.50, plus or minus $0.20. As we reflect back on fiscal ‘16, the following headlines stand out. First, it was another year of technical achievements from Moog products in many different applications. Examples include the successful first flight of the Embraer E2 Jets, the performance of the F-35 STOVL at the Farnborough Airshow, the entry of the Juno spacecraft into orbit around Jupiter and the successful beta test of our new wind products with lead customers. Second, it was a tough year in several of our markets, particularly Energy, Industrial and Defense. As in previous years, we responded with restructuring and portfolio pruning. Third, it was a year of heavy R&D spent, as we continue to invest for the long-term future of the company. Fourth, we won several new military aircraft development contracts, which will position us well for long-term growth. Fifth, we acquired a controlling interest in an additive manufacturing company, a technology we view as key to our future. Sixth, it was another good year of cash flow. We used about a quarter of our cash to repurchase shares. And finally, we completed the strategic review of our Medical Devices segments and based on the excellent performance over the last couple of years, decided to keep the business and integrate it into our Components group. Fiscal 2016 will go down as another challenging year for many of our markets, but also a year in which our operations responded to the challenges and delivered solid results. As always, it was the dedication and commitment of our 11,000-plus employees around the world that made this all happened and I’d like to thank them for their hard work. Now, let me provide some more details on the quarter. Sales in the quarter was $619 million or down 1% from last year. Sales were down marginally in Aircraft and Components, and up in Space and Defense and Industrial. Taking a look at the P&L, our gross margin was about flat. R&D was up $1 million. But SG&A expenses were down $5 million. We incurred $12 million of restructuring and impairment expense in the quarter spread across various segments. Interest expense was up slightly year-over-year. Our effective tax rate was 31.3%, down from last year’s unusually high rate of 33.3%. The overall result was net earnings of $33 million and earnings per share of $0.92. For the full year fiscal ‘16, sales were down 4% from the prior year. Weaker foreign currencies accounted for almost a quarter of the sales decline. Sales were down in Aircraft, Space and Defense, and Components, and about flat in Industrial. Our Components group was hardest hit with sales down 13% from the prior year. Full year company-wide operating margins were 9.9%. Operating margins exclusive of the restructuring were up in Aircraft, Space and Defense, and Industrial. Operating margins were down in Components as they struggled with the challenges across all their markets. Net earnings were down 4% while earnings per share were up 4% on a lower share count. Free cash flow for the year of $149 million was 120% of net earnings. The fourth year in a row, our free cash flow conversion exceeded 100%. Fiscal ‘17 outlook, for this coming year, we’re projecting sales up $2.44 billion, up 1%. The growth is all in commercial OEM sales as the A350 continues to ramp up. Sales in Space and Defense, and Components should be about flat with fiscal 2016, while Industrial sales would be down about 5%. We’re anticipating full year operating margins of 10.3% and earnings per share of $3.50 plus or minus $0.20. Cash flow next year is projected to be $130 million or about 100% of net income. Now to the segments, I’d remind our listeners that we 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 our Aircraft segment, sales in the fourth quarter of $265 million were down 4% from last year. On the military side, sales were down 13% from last year with lower volumes across most of the OEM portfolio, including F-18, F-15, V-22, Black Hawk and several foreign programs. Sales were also down in the military aftermarket as the C-5 refurbishment program has essentially ended. On the commercial side, higher sales to Boeing and Airbus more than compensated from lower business jet sales. The commercial aftermarket was up marginally from last year. Aircraft fiscal ’16, fiscal ‘16 was another challenging year for our Aircraft business, with full year sales down 2% from fiscal ‘15. As anticipated, we saw growth in our major new programs, the F-35 and A350, but these were more than offset by softness across the broader military OEM portfolio, the military aftermarket and in our business jet programs. In addition to the lower sales, a negative mix shift weighed on margins as we saw the signs in our legacy, military OEM programs, as well as in the military aftermarket. We also had lower commercial aftermarket sales and weakness in the business jet market. Aircraft fiscal ’17, we’re projecting fiscal ‘17 sales of $1.11 billion, an increase of $46 million over fiscal ‘16. The growth is all on the commercial side, driven by the A350 ramp-up. We’re forecasting the commercial aftermarket will be down next year on lower 787 initial provisioning. On the military side, we see growth of the F-35 program and a shift in sales from mature OEM programs to work on some new cost reimbursed development jobs. Aircraft margins, margins in the quarter of 10.3% were up 130 basis points from last year despite an adverse mix shift. Last year’s fourth quarter included about $3 million in restructuring charges as against just over $1 million of restructuring this quarter. R&D this quarter was up about $2 million from last year, but lower overhead expenses more than offset this increase. For the full year Aircraft margins of 9.3% were up modestly from fiscal ‘15. We incurred a total of $7 million of restructuring expense in fiscal ‘16, $4 million higher than fiscal ‘15. We also absorbed $16 million of higher R&D expense and experienced an adverse shift in our mix -- sales mix. Despite these margin headwinds, a combination of cost containment activities, lean improvements and the continued movements down the cost curve on the major commercial OEM programs resulted in comparable margins with fiscal ‘15. Looking to fiscal ‘17, we’re projecting Aircraft margins up slightly from fiscal ‘16. On the positive side, R&D will come down about $10 million relative to fiscal ‘16 and we continue to see improvements on our new commercial OEM programs as we move down the learning curve on the 787 and the A350. These positive effects are being negated by the shift in the mix of military programs with cost curve development jobs replacing some nicely profitable foreign military programs. We’re also seeing lower sales in our mature commercial programs, in particular, the 777, as well as lower initial provisioning in the aftermarket. Looking beyond fiscal ‘17, R&D will continue to [inaudible] (9:51) as a percentage of sales and the new commercial programs will continue to improve. We’re also optimistic that our military book of business will strengthen as foreign programs recover and U.S. defense spending moves beyond the era of sequestration. Taken altogether, we should see margins expand over a multiyear period. Turning now to Space and Defense, sales in the fourth quarter of $97 million were up 5% from last year. Sales on the Space side of the business were up and stronger sales of our satellite propulsion products. Defense sales were down slightly in the quarter due to lower sales on various military vehicle programs. Full year fiscal 2016 sales for Space and Defense were 4% down from last year. Space sales were lower across most satellites and launch programs. This reflects the cycle in our space market, which we’ve described before. Defense sales were also slightly lower this year as sales for missiles into European military customer weakens, compensated somewhat by higher U.S. military vehicle sales. Space and Defense fiscal ’17, for fiscal ‘17, we’re forecasting sales in line with fiscal ‘16. Sales will be about the same in both the space and the defense markets. Slightly higher satellite component sales will compensate for slightly lower NASA sales, but on the Defense side, higher military vehicle sales will compensate for marginally lower missile sales. Space and Defense margins, margins in the quarter of 6.2% included two unusual items. First, we’ve increased our product reserves by $3 million for an engineering issue on some of our satellite engines. Second, we took a $5 million non-cash impairment charge on our additive manufacturing acquisition. Over the last year, we’ve learnt enormous amounts about how to make additive parts and production and are more convinced than ever of the long-term potential for the technology. However, we also learned that the anticipated sales ramp-up in this business will not materialize as quickly as we originally thought and are therefore taking a write-down on the goodwill. Full year fiscal ‘16 margins of 11.3% are up nicely from last year on improved operating performance, lower restructuring costs and the absence of the accounting correction in fiscal ‘15. For fiscal ‘17, we’re forecasting margins of 13.2%. Turning now to Industrial Systems, sales in the quarter of $131 million were 2% higher than last year. The increase was mostly due to slightly stronger foreign currencies relative to the U.S. dollar. Sales were up in energy, about flat in simulation and test, but down in our industrial automation markets. For the full year fiscal ‘16, sales of $515 million were down marginally from last year. Sales were up in energy and stronger wind sales into China were also up in simulation and test, reflecting increased activity at our key customers. Sales to industrial automation customers were down and better performing steel production and in the aftermarkets. Our general industrial automation markets continue to move sideways, awaiting a structural recovery in the global capital investment cycle. Industrial Systems in fiscal ’17, we’re projecting a 5% sales decline in fiscal ‘17 to $490 million. Sales into the energy market will be lower the result of lower wind sales in Brazil as a consequence of the GE takeover of Alstom. Sales to non-renewable energy customers will also be lower on the assumption that oil prices remain depressed. Sales to industrial automation customers will be marginally lower based on the softness we’ve seen in bookings over the last few quarters. Finally, sales of simulation systems will be slightly lower after a strong year in fiscal ‘16. Unfortunately, there continues to be little positive news on the microeconomic front, which might suggest a structural improvement in our Industrial business any time soon. Therefore, fiscal ‘17 will be another year of cost containment, focused on lean and continue the investments in longer term organic growth opportunities. Industrial Systems margin, margins in a quarter of 7.7% included $4 million of restructuring expenses. As in prior years, we’ve continue to respond to the challenges across our Industrial markets with cost reduction activities. Margins for the full year of 9.4% were up from last year despite a negative shift in the mix. For fiscal ‘17, we’re forecasting margins of 10%. Now to the Components Group, as I mentioned in my opening remarks, we’re integrating our Medical Devices segment into our Components Group going forward. My comments in this section under Components Group relates to this combined segment. Components Q4, the steady recovery in sales from the low point in Q1 fiscal 2016 continued to this quarter. However, as in previous quarter this year, the comparison with last year continued unfavorable. Sales in the quarter of $125 million were down 1% from last year. Sales into our Aerospace and Defense and Medical markets were about flat with last year, but we continue to see softness in the General Industrial markets which includes our sales for oil and gas exploration products. For the full year fiscal ‘16, sales of $467 million were 13% lower than last year. It’s been a very tough year for our Components Group unlike any other we’ve seen since we acquired this business back in ‘2003. Sales were down across every major market we serve. Sales into the Aerospace and Defense markets were down in almost every category with the Guardian program being one of the few bright spots. Sales of our energy customers were down 50% in fiscal ‘16 following on from a 26% decline the year before. Finally, sales of motors to our customer for sleep apnea equipment were also down 50% from fiscal ‘15 as they change consumer models and that is a second source of supply. Components fiscal ’17, we’re protecting sales next year of $477 million, up from combined sales of $467 million in fiscal ‘16. Within our Components Group we’re creating a new medical category for reporting purposes, where we’re combining our Medical Devices sales with sales of other components into various medical applications. All of the sales increase next year in our Components Group is in this new medical category driven by increased part sales. Sales will be about flat in our A&D portfolio but we anticipate some further deterioration in our energy markets, compensated by slightly higher sales into our industrial markets. Components margins, margins in the quarter were strong at 14.3%, continuing their sequential improvements throughout fiscal 2016. Higher sales and a favorable mix helped the margins in this quarter. For full year ‘16, margins of 10.7% were very respectable in the very weak first half. For fiscal ‘17, we’re forecasting margins of 10.4%. As we fold our Medical Devices segment into Components, I’d like to recognize a tremendous improvement the leadership of that Medical Devices segment has achieved over the last three years with operating margins increasing from 3.1% in fiscal ‘14 to 8.7% in fiscal ‘15 up to 11.5% in fiscal ‘16. It’s a great turnaround story and we look forward to further success in the coming years as part of Components Group. Now, let me provide some summary guidance. As we look to fiscal ‘17, we’re optimistic that our Aircraft, Industrial and Components businesses are starting to turn the corner to multi-year performance improvement. Our new commercial aircraft programs are coming down the cost curves, R&D is starting to weigh and new military development programs bode well for the future. Our Industrial business is now introducing new products in the wind and general automation markets. And after a year of restructuring, our Components Group should start the slow recovery from the oil shock of the past couple of years. Despite our optimism for the coming years, we’re starting out fiscal ‘17 with a cautious view of our markets. We’re assuming most of our markets will be fairly stable with the only real growth coming from our A350 program. We’re also assuming a negative shift in the mix of programs in both our military and commercial aircraft businesses as production rates on legacy programs such as the F-18, 777 and business jets slow and new programs such as the F-35 and A350 ramp up. Our aircraft R&D will abate somewhat, but will still remain relatively high on our A350 and E2 programs. We’ll also have a higher tax rate than fiscal ‘16. We continue to look for topline growth by remaining close to our key customers and our internal focus remains cost containment, portfolio refinement and then investments in lean and innovation. Let me finish my comment as I did last year 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 remains the cornerstone of our company, led by the strength in our military aircraft business. Defense spending is in a cyclical drop, but we believe, as global conflicts continue we are ideally positioned to benefit from a recovery. Over the last year, the F-35 program has gained momentum and we’ve won several development jobs with our new platforms, which bodes well for the longer term. We’ve seen some of our legacy U.S. program slow and we’ve been subject to sales volatility on foreign military programs. On the other hand, our missile business remains very strong and we’re seeing our ground vehicle business improve. Defense is a long-term play and we remain focused on building a portfolio of platforms, which will provide returns for decades to come. Our Industrial markets, broadly follow the pace of global investment and capital goods. As that cycle has stagnated over the last few years, we’ve restructured our business while investing in new products and technologies. Our areas of focus are next-generation miniature hydraulics and very large brushless motors for use in a variety of specialized industrial applications. Our commercial aircraft sales grew modestly in fiscal ‘16 and are poised to accelerate again for fiscal ‘17. Our primary focus is operational, as we look to close out several large development jobs and continue our progress down the cost curve of the new production programs. Fiscal ‘16 was a year of steady progress, despite the elevated R&D spend. In fiscal ‘17 we’ll see further progress and as the following years unfolds, we’ll have the compounding benefits of reducing costs, lower R&D expenses and a growing aftermarket. The Energy markets remained very challenging. But our strategy is unchanged from a year ago. In the oil and gas business our focus remains on cost reduction by looking for selective growth opportunities. In the wind business, we’re investing in new product suite to build our market position. We believe we’ll start to see the impact of these new products by the end of fiscal ‘17. In our Space business fiscal ‘16 was a very good year, despite slowing sales. We benefited from restructuring activities in the prior year and the focus on our most profitable product lines. We continue to invest in new technologies such as [inaudible] (21:01) and position ourselves for the ground base strategic deterrent program. This program to replace the Minuteman missiles has the potential to be $100 million plus annual business for Moog and their full production is probably close to a decade away. Finally, our Medical Devices segment performed particularly well in fiscal 2016 and we believe will improve further in fiscal 2017 as part of the Components segment. In summary, we continue to enjoy strong positions in a diversified portfolio of businesses. Like many companies, we’re faced with a slow growth environment. We’ve responded to this environment with restructuring activities, ongoing portfolio adjustments and continued investments for the long-term. Despite the market challenges, our fundamental strategy has not changed. We solve our customers’ tough problems and applications for performance really matters. We focus our 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 system supplier for our major customers. Long-term growth will continue to be a combination of organic and acquired. Our internal initiatives to deliver on our goals are talent developments, lean and innovation. And finally, we’re focused on deploying our capital to maximize shareholder returns over the long-term. Looking to fiscal ‘17, we anticipate sales of $2.44 billion, an earnings per share of $3.50 plus or minus $0.20. Similar to previous years, we anticipate a slow start to the year with earnings per share on the first quarter of between $0.70 and $0.80. Now, let me pass you to Don, who’ll provide some color on our cash flow and balance sheet.

Thank you, John, and good morning, everyone. We finished the year with a solid $30 million of free cash flow on the fourth quarter, resulting in $149 million of free cash flow for the full fiscal year. Our conversion ratio for the year was a respectable 120%, these following strong results, averaging more than 150% conversion over the previous three years. So, we’ve had a good run. During the fourth quarter of this year, we were not in the market repurchasing any of our stock. With respect to our leverage, we’re within our comfort zone of 2.2 times or at 2.2 times, particularly as we look for acquisitive growth. We haven’t had much to report regarding M&A in recent quarters, but we continue to look for strategic targets. The $149 million of free cash flow for the year compares with the decrease in our net debt of $79 million. The difference relates primarily to the cash use to repurchase company stock earlier in the year, as well as the December 2015 acquisition of 70% of Linear Mold. For the year we bought back $850,000 shares under our share repurchase program at an average price of $46. We currently have 3.4 million shares remaining under our existing board authorizations through share repurchases. Our projections for 2017 do not include the impact of any future share buyback activity. Net working capital excluding cash impact as the percentage of sales was up for the year to 29.3% compare to 28.2% a year ago and slightly lower sales. Unfortunate timing of certain cash received and disbursements during last years’ fourth quarter contributed in part to the increase year-over-year. Notwithstanding this year’s slight uptick, we’ve seen a rather steady decline in this working capital metric since we peak at almost 38% of sales in 2009. We continue focus on improvements to managing our balance sheet in order to bring our investment in working capital down. We’re forecasting free cash flow for 2017 to be $130 million, reflecting the cash conversion ratio of just over 100%. Capital expenditures in the quarter were $25 million and that includes $9 million of expenditures for the purchase of two facilities that had been released. Depreciation and amortization totaled $24 million for the fourth quarter. For all of 2016, CapEx was $67 million while depreciation and amortization was $99 million. For 2017, we’re forecasting CapEx of $80 million, which is a level more consistent with our typical run rate. G&A in 2017 will be about $96 million. Cash contributions to our global retirement plans totaled only $7 million in the quarter, resulting in $95 million of contributions for the full year. This compares with $76 million for all of fiscal 2015 and for ‘17, we’re planning to make contributions in our global retirement plans totaling $91 million. Global retirement plan expense in ‘16 was $65 million compared to $61 million in ‘15 and in 2017, our expense for retirement plans is projected to be flat at $65 million. Moving on to our tax rate, our effective tax rate in the fourth quarter was 31.3% compared with last year’s 33.3%. Make sure I said that right, 31% -- 31.3% in the fourth quarter of ‘16 compared with last year’s fourth quarter of 33.3%, so down 200 basis points. Last year’s rate included an unfavorable mix of taxable earnings relative to the full year’s previously forecasted results and for all of 2016, the effective tax rate came in at 28.5% versus 28.3% in 2015. Moving ahead to ‘17, we’re forecasting an effective tax rate of 31.5%, higher compared with ‘16 due to lower R&D credits associated with the timing of when the U.S. law changed in late 2015, which is our fourth quarter of ‘16 and from the 2016 favorable impact of lower copper rates in the U.K. and that had an impact on the deferred tax liability that won’t repeat again in 2017. Moving to cash and liquidity, we were able to bring back $91 million of offshore cash to the U.S. late in the fourth quarter with no net tax impact. We used as repatriation of cash to pay down the outstandings on our revolver. And we remain hopeful like other global U.S. companies that after the presidential election, our political leaders will provide us with another incentive to return rest of our $300 million of offshore cash back to the States. Our leverage ratio, net debt divided by EBITDA decreased to 2.2 times compared with 2.4 times a year ago. Net debt as a percentage of total cap was 41.0% down from 43.5% last year. At quarter end, we had $480 million of the available unused borrowing capacity on our $1.1 billion revolver that terms out in 2021. So, with that, I’d like to turn it back to John for any questions you may have. John?

Adam, you can open up the lines and take some questions.

Thank you. [Operator Instructions] We’ll take our first question from Cai von Rumohr from Cowen and Company. Please go ahead.

Yes. Thanks so much. Could you please review the $7 million of restructuring just so I understand it, $4 million is in Industrial, $1 million is in Aircraft and where is the rest of it?

There’s about $2 million of it -- good morning, Cai.

Yeah.

There’s about $2 million of it in corporate. There’s about $2 million in corporate. That takes you to the $7 million.

Got it. Okay. And then walk me through, so you have this $2.2 million minority interest credit. That would suggest that Linear Mold basically lost some $6.5 million to $7 million. So, did it have an operating loss of about $2 million in addition to the $4.8 million goodwill impairment?

Yes. It did.

Okay. And then, going forward, what are you doing to kind of contain the loss of this business? What are you projecting for fiscal ‘17?

Well, it’s a small acquisition, Cai, but the losses that we suffered in the year that we just went through, we are looking at how we spoke through the business to make sure that we don’t continue to do that. Part of it, of course, was more of an investment in additive manufacturing than we had anticipated. We learned a lot about the production side of additive manufacturing that we didn’t understand before and to be honest, we thought the acquisition did and they didn’t understand it either. A simple example I’ll give you is it turns out that you have to qualify each part on each machine that machines are not the same. So we’ve learned a ton through that and so that’s been part of that significant operating loss or investments as they might call it in that learning. So, as we look out into ‘17, the focus is on making sure that we’ve structured that business so that we are not losing money on it and that’s what we’re actually working our way through at the moment. Part of it is there’s been a significant opportunity for sales ramp up and as you watch that opportunity push to the rise, you’re trying to pick the right time to decide, okay, I don’t need to restructure and assume that that sales ramp up isn’t going to happen or do I continue for another couple of quarters in anticipation of that sales ramp up. So I got the costs ahead of the sales ramp up. We’re working our way through that. But the intention is to make sure we don’t lose the same -- make the same investments in ‘17 that we made in ‘16.

Got it. And then, turning to military aircraft, F-35, you’ve only projected its volume up $5 million to $95 million. How come not more? And you cited it among the negative mix factors. I thought that production should be solidly profitable and then increasing so as you move through?

I’ll put two answers to that question. One is the sales ramp of Cai. There’s two elements, there’s the volume and of course, as you move down the pricing, move down production curve there’s a pricing adjustment as well. So you got to put the two of those together and then you have to put them in the context of where we are in out of 8, 9, 10 versus we are locking would be. So it’s not, in any way, out of nine with what our customer is doing or what our customer is projecting. It’s a timing issue, a pricing issue and a volume issue and you put them altogether, then that’s the number that you’ll end up, coming up with, plus into mixture, the mix of A, Bs and Cs. So, that’s answer to that, why is it not up more? And the other, oh, yes, in terms of, yes, so it is a -- we’re far enough down to profitable program. But, if I compare with some of the much, much, much more mature programs V-22, F-18, F-15 far our military stuff, it’s an -- which is where we’re seeing the loss of business, then it’s not as profitable as the stuff that we have much further down the learning curve.

Okay. Thank you. And just one, last one, the F-35, I mean did you get caught in the crosshairs of the unilateral imposition of the [inaudible] (32:36) on Lockheed Martin?

No. We had, I -- we had already negotiated with Lockheed on Airbus 9 and 10. I think they did that with their suppliers in advanced since when they went to the government.

Thank you very much.

Thanks, Cai.

[Operator Instructions] We’ll take our next question from Robert Spingarn from Credit Suisse. Please go ahead.

Hey. Good morning.

Good morning, Rob.

Following the answer to F-35 but more across the business, I was going to ask you, with the success of the A-350, you’re flattish pretty much elsewhere, how much of that is volume versus price?

Let me if I understand your question, Rob. Are you talking within aircraft or talking within military aircraft, are you talking…

It was a broad based question, John. But I guess you’re right, we should narrow it a little bit, but what I’m generally getting at is, as you said on F-35, as you get into higher production numbers in a lot of businesses, certainly thrown on the aircraft side, pricing comes down, plus we also this supply chain pressure that we see from the commercial OEMs. And so, I’m wondering if and some of these flattish line items that we see for example on your slide two of the supplemental data where the FY‘17 sales are flat. Do we have some situations here where volumes are up but pricing is down or the reverse?

It’s a not simple answer. So, let me because it’s not uniform. So, typically what will happen is, so for instance B22 volumes are down, Blackhawk volumes are down, F-18 volumes are down. Typically though as you move down in volume, typically you’ll get a little bit of a price adjustments upwards in Military programs just because lower volumes you kind of absorb more costs. So, ironically, typically pricing goes up as volume comes down on standard military program, but not enough, say, obviously not enough to compensate and to keep the topline. There is, as I mentioned in the text, part of what you’re seeing is military OEM, there is about $25 million in 2017 of additional cost plus development work that you could assume as kind of a breakeven because it’s great, it’s R&D that’s paid for it’s not going to be margin contributing and that’s replacing drop lower sales on a variety of foreign programs that we’ve enjoyed sales on -- they go through cycles, examples of the G50. So, you have that shipped out, so that the margin impact, it’s a lower volume on some foreign programs and it’s margin impact because its production foreign jobs versus cash flow developments work. So -- and on the commercial side, pricing is not adjusting on the major new programs. The pricing is -- at the moment is stable on the major new programs, so you’re seeing volumes increase and what happens then is you start to come down the cost properly in the new one like the A350. 87 still is coming down the cost curve, but obviously that’s further on in terms of its production rate. So, I don’t have -- and then business jets are just down a bit. There’s volume drop in the business jets. Typically, there, again, pricing will not change significantly. So I don’t know if that helps, Rob. So it’s a mixed bag of all of the above.

Okay. Well, let’s look at Boeing OEM for a minute here. So that’s flat. And just focusing on volumes, is that simply some of the effect of 787 obviously matured in ‘12 and then -- have you baked any continued downside on 777 into that number or is that a following year event? How do we think about the moving pieces in Boeing and of course, with the MAX for the 737 rising?

Yeah. So our numbers have the 87, up about 10 and the other Boeing, down about 10. That’s -- 87 production rates and it’s 777 on the downside. So it’s pretty much that rate. A little bit, $10 million of 87, $10 million net of 777 and the rest of the book more or less stable.

Should Boeing cut 777 further down to, let’s say, 3.5 a month for fiscal 2018? Would you see any effect of that? Is there any sensitivity in your guidance to something like that at the tail end of year ‘17?

It would have to be pretty dramatic and it would -- I mean, because we do long-term contracting on it, Rob, because it’s cost based inputs, because of the long cycle in terms of the production rates, it’s not as if you’d suddenly see in one quarter this dramatic drop off. But having said that, if Boeing drops down to 40 or 50 a year, then it will have an impact and it’s probably more in ‘18, of course, is where you’d see feature. But if they drop it sooner rather than later then maybe in the backend of ‘17 we would also see an impact from it.

Okay. All right. That’s very helpful.

We try -- yeah, and we try not to get ahead of what our customers do partially because your whole supply chain is built around the forecast that they provide us with. So, we try to make sure that we’re working through that.

Okay. And then just switching to the commercial aftermarket, you’ve got that coming down next year. I think you’ve talked about it a little bit earlier. But is -- again, is that largely provisioning or you just see continued weakness on spares?

It’s 87 provisioning, I guess, essentially the shift.

And so how do you feel about spares? We’ve talked about this in the past. Do you feel like that’s picking up a little bit with the capacity growth?

Let me just check, Rob. I’m thinking when you say spares where that’s synonymous with what we would call initial provisioning. Is that fair?

No. I mean, replacement parts, ongoing spare activity, not provisioning but just a normal wear and tear spares.

Yeah. Unfortunately, Rob, our stuff never wears out. So there’s repairs but there’s not -- there’s initial provisioning because airlines put some stuff into stock in order to allow them to turn stuff around, but our actuation outlives the airplane. So what happens is we’ve got...

You have this provisioning -- or how about the repair side?

Yeah. So, the repair side is holding fairly steady. As I say, it’s the initial provisioning that on the 87, which is natural. It was very high for the first few years and then it starts to slow down as the fleets -- the folks who buy into the airplane, they buy the initial provisioning before they get the first one, but they probably buy enough for the fleets of 10 or 15 aircrafts that they have and then that slows. So, that’s the change. It’s about an $8 million change in our totally commercial aftermarket than we’re estimating for fiscal ‘17 from ‘16 and essentially it’s about $8 million of lower 787 IP is what we anticipate.

And is there any offset there from 350?

Not much. That may be conservative. I don’t know. We’re anticipating the 350 will be up marginally, but not much less than $1 million. So, maybe that’s a little bit conservative. And we think that the 87 initial provisioning was particularly heavy, given some of the additional operational challenges there were with the airplane and the V8 and the 350, we’re just not anticipating that. Maybe we get a nice surprise. But, right now, we’re not anticipating real growth on that provisioning for the 350 next year.

Okay.

If you know, in 2014, there was not in ‘15. It was about $7 million but, last year, it was about $11 million and we think it’ll be about the same in ‘17.

Okay. And then, you talked to this a little bit earlier, but could we just review the R&D profile over the next few years as it starts to lighten up?

Yeah. I -- what I said, we would see R&D in ‘17. We’re projecting R&D coming down in the Aircraft business by $10 million. For the corporation in total, it will come down about $7 million and that’s because there’s a little bit of a pickup in some of the other businesses, just nothing out of the ordinary, just a small little bit of a pickup. And then, what we said over the years and I will stick with this, because I don’t want to project ‘18 and ‘19 prematurely. But Aircraft in that 5% of sales range is what we think is a long-term sustainable level. And, right now, in 2017, it’s in that kind of 7%, 7.5% -- a little bit more than 7.5%. So there’s still a good 250 basis points to 300 basis points of R&D abatement that we should see over the following years.

Okay. And then, last question, thank you for that, is -- and I might have missed it if you said it, but SG&A for next year?

I’m going to talk to my friend Don here to see if we can get…

Our SG&A in our model, we’re going to make sure we’re talking apples to apples here. So, SG&A and our model is going to turn out to be about another $115 million or so and that’s exclusive of some corporate expenses. So we’ll do that offline, Rob, just so we’re not giving you a bad number. But we’re about flat. Our modeling says our SG&A with corporate expenses is going to be up $5 million to $10 million on a $350 million number or something like that.

Okay. All right.

Yeah.

And I actually, one more as I think, there’s no buyback contemplated in the guidance, right?

No. We never project buyback in our guidance, Rob.

Right. Just wanted to make sure.

Yeah.

Okay. Thank you.

Very welcome.

[Operator Instructions] And there appear to be no more questions at this time.

Thank you very much, indeed. Thank you, Evan. Thank you to our listeners. We look forward to reporting to you on the first quarter of fiscal ‘17 in about 90 days’ time. Thank you.

And that does conclude today’s presentation. Thank you for your participation. You may disconnect.