Thank you for standing by. Welcome to the Woodward Third Quarter Fiscal 2013 Earnings Call. At this time I would like to inform you that this call is being recorded for rebroadcast [Operator Instructions] Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; and Mr. Bob Weber, Vice Chairman, Chief Financial Officer and Treasurer. I would now like to turn the call over to Mr. Weber. Please begin.

Thank you, operator. We would like to welcome all of you to Woodward's third quarter fiscal year 2013 earnings call. In a minute, I'll cover the financial highlights of our third quarter, then Tom will comment on our strategies and markets. I will then comment on today's earnings release and, at the end of our presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. As noted in today's earnings release, we have included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available through July 30, 2013. The phone number for the audio replay is on the press release announcing this call and will be repeated by the operator at the end of the call. In addition, a replay of this call will be accessible on our website for 14 days. Before we begin, I would like to summarize our cautionary statement, as shown on Slide 3. In the course of this call, when we present information and answer questions, any statements we make, other than actual results or business facts, may contain forward-looking statements. Such statements involve risks and uncertainties, and actual results may differ materially from those we currently anticipate. Factors that might cause a material difference include, but are not limited to, future sales, earnings, business performance and economic conditions that would impact demand in the Aerospace and Energy markets. We caution investors not to place undue reliance on these forward-looking statements as predictive of future results. In addition, the company disclaims any obligation to update the forward-looking statements made herein. For more information on risks and uncertainties facing Woodward, we encourage you to consult the earnings release…

Thank you, Bob, and welcome to those joining us today. Let me first address our renewable power business. The on again-off again production tax credit in the U.S., slowness in the offshore wind market and a tough solar market have destabilized the renewables industry. This instability has put substantial financial stress on those in the industry, including some of our customers. We now estimate that our renewable power business will see a decline from 2012 of approximately $100 million in revenue or about 50% across all market segments. The speed and size of this sales decline was too fast and too much to absorb through our normal operating activities. As a result, we have made a decision to align our wind business with this current environment which, among other things, means that we will no longer pursue expanding our wind business in China. Additionally, our acquisition of IDS, although focused on obtaining technology for our wind turbine converters, also included a small solar inverter business. Solar market activity has been -- has also been subjected to significant uncertainty and downward pressure. We have made the decision to cease all further investment in our solar business. We believe 2013 to be the bottom of the trough for the wind industry and that these decisions, although difficult, will position our wind turbine converter business for future profitable growth. With that said, I would like to keep this in perspective. Although our renewable power business sales this year are expected to be about 5% of total Woodward sales, we are the largest independent wind converter provider in the world. We will continue to support our existing customers and strategically pursue future opportunities with wind turbine manufacturers. Turning to the operating performance of the other 95% of the company. Both our Aerospace and Energy…

Thank you, Tom. This quarter was marked by improved profitability in the majority of our businesses, offset by the specific charges and an operating loss related to our renewable power business. Improved profitability in challenging economic times is a key focal point of our overall strategy. Our Aerospace segment sales for the third quarter of 2013 were favorably impacted by a strong military aftermarket sales. Organic sales increased 11% in the third quarter of 2013 compared to the prior year. Total Aerospace earnings as a percent of segment sales were 14% this quarter compared to 10% from the same quarter 1 year ago. Segment earnings this quarter reflected the improved operating performance in our motion control business as well as a rebound from the system issues incurred in last year's third quarter. Earnings were positively impacted by the higher sales volumes and lower investments in research and development in the quarter. We continue to anticipate ongoing variability in research and development as programs continue. Aerospace organic segment earnings as a percent of organic sales were approximately 16% this quarter and year-to-date. The Duarte business was slightly accretive to earnings this quarter. In our Energy segment, we saw sales decrease in renewable power systems of approximately $35 million in the quarter and approximately $80 million year-to-date compared to the same periods in the prior year. Energy earnings as a percent of segment sales were 6% this quarter after the specific charges related to the renewable power business. As Tom mentioned earlier, the renewable power industry is extremely challenging. As a result of the rapidly declining sales and resulting deterioration in operating performance, we have recorded specific charges totaling $15.7 million to appropriately align the business through the revaluation of its assets and liabilities, including workforce management actions. Our renewable power business…

[Operator Instructions] Our first question is from Julia Stewart of Credit Suisse. Julie Yates - Crédit Suisse AG, Research Division: On the guidance, I believe in the past, you've generally tightened to 1 single point instead of a range with the third quarter. So with only 1 quarter left, what gets us -- what's the variability in the range?

We've kind of done all of the above. We've had point solutions and we've had ranges and so on, so nothing intended by our choice this time. The variability will largely be related to sales, so the revenue projection. So there's still been an incredible amount of uncertainty. We've talked about seeing some things that have shown positive signs and some of them materialized and some of them haven't. So it's really a revenue focus. Julie Yates - Crédit Suisse AG, Research Division: Okay. And then just a second question on the underlying margins in Energy were clearly very good on mix. What should we expect in the fourth quarter, and then how do we think about where margins will trend next year after the realignment?

Yes, they did improve substantially for the business, excluding the renewable power business. We believe renewable power will continue to be tough next year. So at this point, very difficult to -- and we'll talk more in November. But the markets that we see, some have been showing some nice increases, some have been showing no increase from their very depressed levels. So at this point, too early to talk much about 2014, but renewables will continue to be tough.

Our next question is from Pete Skibitski of Drexel Hamilton.

So just a broad thought on renewables margin to follow-up. We shouldn't factor in necessarily a 0 margin rate for renewables as part of Energy, but safe to say, it should be below the balance of the Energy segment going forward for a while until volumes, I guess, maybe meaningfully improve?

I think that's correct. We have volumes, we have to complete the restructuring activities that we are undertaking. We believe the Energy business without renewables, you could see as -- we think that the average rate for this year will continue through this year and improve. But we'll have headwind as we roll into '14 from renewables, though we will be trying to move quickly to improve upon that, but it does take time for some of these businesses to get restructured.

Okay. And you're basically -- I guess you're sort of seeing weakness in the rest of Energy as well from a volume standpoint except for kind of natural gas infrastructure. Is that fair?

Yes. Where you'd look -- I'm sure you've seen some of our customers' announcements over the last 10 days. The natural -- compressed natural gas has been strong. Some of the pipeline work, if you want to say, in the oil and gas side has been strong, some of the power generation is down. You see mining has really taken a huge hit, chips are down. So we have some things up, some down. Overall, as we said, the sales were basically flat, excluding renewables, it was flat year-over-year. We see some signs of order improvement but we think going into '14, it will still be challenging. We'll continue to work on margin enhancements, so to next year.

Our next question is from Tyler Hojo of Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: I'm just kind of curious, in regards to the restructuring initiatives that are being implemented within the renewables business, what's the right way to think about where this business is currently sized to be breakeven from a revenue standpoint? I guess, we're looking at about $100 million business today.

Yes. I would say on a sales basis, we'd want to see more in the above $120 million in sales. We're going to work on that breakeven point, but I'd think it would need to be there. You could see, as we were anticipating the sales -- we knew there was a bubble in 2012 and we were kind of calling that out at $40 million, $50 million bubble. Obviously, at $100 million reduction, not in our forecast or plans that we would see that much headwind. So it went below breakeven. You could see we're losing money. We've tried to provide some highlights in the -- if you look at some of the pro forma charges that we put out on the presentation. So once we get the point, we'd get back -- start moving towards breakeven and profitability. And we're going to continue to work on improving those numbers. Tyler Hojo - Sidoti & Company, LLC: Okay. And I think you mentioned in the prepared remarks, Tom, that you expected to see the wind inverter business recover next year. I'm assuming that you would expect to be north of $120 million. I mean, is that fair?

Well, right now, we're not going to -- Tyler, what we're seeing is we truly believe the trough -- bottom of the trough was in this third quarter, but we do see some of the orders filling in. It's not skyrocketing back, but we do see and believe we've hit the bottom of the trough and so we start to see orders picking up ever so slightly in the fourth quarter, moving into next year. But we'll provide more updates on that in the next conversation we have with you, or the next earnings call where we provide details of the forecast. But right now, it looks like some orders are filling in, but not at a rapid rate. Tyler Hojo - Sidoti & Company, LLC: Got it. Okay. And just 1 more for me, if I may, just to kind of follow on to Julie's question in regards to your guidance. It looks like you've taken down the high-end of your guidance by about $50 million. And if my notes are correct, at least, it looks like you're about $20 million more pessimistic in regards to your wind inverter outlook. So where's the other $30 million coming from, just from a market standpoint?

Yes. More on the remainder of the Energy business. We still see some of the heavy frame turbines. We were expecting some improvement there. Mining is really just tanked. We were thinking we'd start seeing some improvement in shipbuilding, we're hoping to start seeing that late '14 and into '15, but some things are a little slower than our original forecast. And with the renewable uncertainty, we did take the numbers down, as you've highlighted. Tyler Hojo - Sidoti & Company, LLC: Yes, okay, that make sense. And I take it, at some point, you're going to update your kind of long-term sales and operating margin goals. Is it safe to assume those are in flux right now?

Well, what you have -- and we will update, so if you come to our Investor Day in December, we will provide updates on all of that. There's an interesting dynamic happening. When we start looking at the aircraft market and the market share gains that we're, right now, in product development on, we can look out on that 2016, '17, '18 time frame and start to see with some confidence sales growth. And so we'll highlight that. The next, I'll say, 18 months or so, there's a lot more uncertainty, but we'll highlight that, too. So we have these wins coming in, we got these market share gains, so we know when they kick in. And so we think those are still solid, it's more just '13 and '14 that have been softer than our original outlook. Also some of the Energy projects, we've won a lot of bids, we've won a lot of market share on some of the new advanced diesels, some of the LNG applications, a whole lot of the turbines. A little bit like the aircraft side, we know those are in development, we know those are coming, and so we have some confidence in that. So it's kind of just near-term versus long-term, but to make the long story short, we'll update you in December.

Next question is from Peter Lisnic of Robert W. Baird. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: I guess just to continue on the Energy path, maybe a different way of asking this would be, that $17 million charge, I guess, part of it is actually taking cost out. What are the savings that you plan on realizing from those actions? And then should we expect any more costs as we look to the fourth quarter or early fiscal '14 on that front?

With respect to the charge itself and the impacts, obviously, we mentioned some workforce management, so that has a continuing impact as we go forward. Some of our sites will be affected in terms of the size of the workforce that is there and, in some cases, restructuring some of our sites. In some cases, for example, no further investment in solar, that's a big part of that and so the investments that have currently been going on related to solar business will cease. Our decision to focus on our European, North American customer base for wind will allow us to experience some savings with respect to the focus on China where the market just is -- the type of dynamics in the market in China really don't play to our strong suit, and so we've made the decision that that's just not a market for us. So at this point, too early to kind of call out the specific impacts. It will, as Tom, I think, mentioned, gain speed throughout the year. And not everything happens immediately and, as you know, in Europe, some of these things have some longer tails on them. So as we progress into the second half, you'll start to see and we'll be talking more about what the specific impacts can be on profitability. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right, fair on that one. And then just -- is it safe to say that you would also be avoiding some, perhaps, material capital expenditure costs as you kind of tighten the reins on solar and the wind business a bit.

Yes, there'll be a little bit with respect to that. Those aren't real capital-intensive, but there is capital tied to it, so it would bring down capital. It will bring down some of the SG&A cost, some of the R&D cost. So it's kind of spread across things. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. And then I just want to switch gears to Aero. If I look at the operating margin in that business, for the third quarter, it was actually down sequentially. The incremental, I guess, is stronger. But the absolute operating margin down versus the second quarter, even though revenue was up a bit. Was there something in the mix there? I'm a little bit surprised it would be down, especially when you had pretty strong aftermarket, both on the military and on the commercial side, with that margin being compressed a bit from the second quarter?

Yes, not substantially. I mean the aftermarket we mentioned was not as strong as anticipated in the quarter and we had a -- it's been kind of sluggish throughout the year. So other than that, it's really just normal quarterly variability. There's nothing specific going on that is kind of worthy of pointing out. So last year, we've mentioned the various issues in terms of the overall comp there. But this year, it's just normal quarterly variability and we will continue to have that. We've kind of called out that given the size of the programs, the variability in research and development will be larger than we've had in past periods. So depending upon prototype shipments, et cetera, in any given quarter, that number can vary more than it has in the past. So... Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: All right. And then you gave some good color commentary on end markets. I'm just wondering if, Tom, you could share any sort of anecdotes or color on the order book or inquiry book on the heavy frame, on the IGT side. Obviously, we've been waiting for that cycle, I think, to pick up. But just kind of current market status and what you're hearing from your customers would be helpful as always.

Yes. Basically, what we're looking at is, the order book has been a little soft. We're really looking at going into '14 with like flat from '13 to '14 and then picking up in '15. So that's kind of the way we're looking at it. So we don't expect much change in volume in '14. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay. And that's on new, and I would assume aftermarket is a plus or...

Aftermarket, they're still operating the machines. And aftermarket should continue to, I would say, pick up slightly. There's -- the more use, the better.

Our next question is from Sheila Kahyaoglu of Jefferies.

Just another quick follow-up on Energy margins. If you exclude the wind business, it appears that organic sales were flattish, yet margins reached -- were above 17%. And I think they peaked back in Q4 of '10 at 15.6%. So could you elaborate on the underlying strength there?

Yes. I think what you're starting to see -- if we went back, we've talked quite a bit about Energy margins, our target range. We said we were going to get to this 14% to 16%. You could see we're in that range if you exclude the renewables. We expect to be in that range with renewables in the future. So we've got a combination of positive mix -- a lot of work being done on productivity. Some of our newer applications are carrying better margins. We're also working to enhance our services. So it's a combination the like, and we believe we can hold these stronger margins. And you've heard us talk about that before and I think this gives you the picture that we're entering that range. We still see opportunity to improve. We just have to get the renewables back into that range as well and then we're closer to where we think the, if you want to call it, the entitlement level, is for that type of businesses.

Okay, that's helpful. And in terms of the Aerospace aftermarket, you mentioned commercial was up modestly. Can you quantify that and if you're seeing an inflection point in that business? And secondly, on the military aftermarket, what's your visibility there? And what's driving the strength over the last few quarters? Is it up tempo or training?

Yes. The commercial -- I'll start with commercial. Commercial aftermarket was up about 5% and -- so not bad, but we're still seeing some interesting dynamics in the commercial aftermarket. But we continue to believe that the amount of aircraft still -- the amount of aircraft that's being introduced, the revenue passenger miles, number going up and the like, that the commercial aftermarket will be healthy. We have seen some softness earlier in the year, and some of that we think has just been timing by operators of maintenance cycles and the like, and maybe some of the cannibalization of parts fleet. So -- but we think it should be on track to remain healthy going forward. The military side, we have a strong aftermarket, rotorcraft in particular. What we believe is you're seeing still the influx of maintaining a lot of the equipment that's coming out of the theater. We do believe that's going to start slowing down as we move forward. And we talked about strong -- we do think that will come down. We are going to start, as we move into '14 and beyond, we are going to start feeling some of the effects of the cutbacks in defense. So we do believe we'll start to feel some of that. So the good thing is we are very diversified in military, so we have a lot of applications and we get a lot of various revenue streams and so we get offsets. But for this year, very strong, will be slowing down as the rest of the industry is going into the next couple of years.

Your next question is from William Bremer of Maxim Group.

So let's first go into Aerospace, okay? Correct me if I'm wrong, second quarter, last quarter, excluding Duarte, we have operating margins approximately 17%, okay? This quarter, we're down to 14.3%. Why such a dramatic pullback here?

I really think, Bill, that, that's predominantly this variability we're talking about. There's nothing significant going on in the business. I can't think of anything in the second quarter. The first quarter saw some impacts related to purchase accounting, which we've had in the past, but second quarter, been nothing there, so...

Bill, I'm not sure -- let's go back. I'm not sure on your math, I think we're more like 16% organic.

Yes. Because I thought, in my comments, I said 16% year-to-date and quarter.

I think you have to look at your math. I think it's -- we're talking about like 1 point, and that fits into the variability with R&D and some other variabilities. But we feel real good about our Aerospace business. It's strong, improving our margins.

So we could have a snapback in this upcoming quarter, in the fourth quarter, given the fact that your guidance -- and correct me if I'm wrong, guidance, you're 2.05 to 2.10, those are GAAP figures, I just want to confirm that. And that includes the charges.

Yes, that's true. Yes.

So that's GAAP, so adjusted would then be -- okay.

Yes.

All right. So then, we could expect a sizable sequential increase in EPS from third to fourth quarter here to coincide into those figures.

Correct. The fourth quarter is forecasted to be a strong quarter.

All right. And the comments that we had last quarter regarding sizable -- looking at a lot of these larger ticketed items coming forward into the mix. Do you feel as though those are just delayed at this point again? Or what sort of occurred that all of a sudden, you're starting to see additional pushouts?

When you say large individual ticket item, you're just referring to some of the markets that we've been talking about, that we were seeing signs of recovery in?

Yes.

Yes. I would say this, there's continuing uncertainty. It's like every quarter, there's something there that has been kind of, I would say, causing everyone to withhold investment in large projects and you know how much that affects us, large infrastructure of almost any type. And so when you have this kind of uncertainty, you hold back. And you've seen that in the comments made by some of our customers as well. So it seems to be a general economic condition right now that a lot of what we would expect, even though some of the underlying indicators are fairly positive, is not materializing.

You've sort of called out flattish sort of volume and order books sort of like a little bit soft going into '14. Is that -- is it safe to conclude that the pricing, say in the last quarter or 2, is better than it was 1 year ago?

I don't know if I'd go there, Bill. I think pricing is holding, may be a better way, I would say.

What about if we broke that down into more of the, say, the Energy side excluding renewables, is pricing getting better there?

Margins are getting better. Pricing, that's how we -- you've heard us talk a lot, we put a lot of emphasis on productivity, a lot on our lean manufacturing initiatives. We have always, as we introduce new platforms and new products, we're working hard to ensure they come out with better margins. So there's a mix of things that go on. But we're subject to pressures in the industry, but we're not losing price but it's not really a market where you're gaining price either.

And then my last question regarding the restructuring on the renewables side, $15.7 million charge here. I'm assuming this is the bulk. But there was a former question, what should we be looking for in terms of the next few quarters in terms of charges to this rightsizing of this business?

Well, I'd say right now, to the best of our vision, we don't anticipate any more charges. And that's based on our belief that third quarter was the bottom of the trough. If something changes then we'll have to change our outlook. But right now, we believe we're at the bottom of the trough and that we've taken appropriate actions, so we don't anticipate any other special charges.

Can you sort of give us an idea of when this decision was made?

Over the last 3 weeks. I mean, it didn't come immediately in the last 3 weeks, we've been analyzing and doing a lot. But we took -- in the prepared remarks, we commented on it. But we really studied and looked at the opportunities in solar for where we stood and decided it was not a good use of our capital to further invest, so that was a decision that was very recent. We really took a hard look at the sales outlook. And really, we're seeing that no future opportunity for offshore wind looks positive that the near-term -- the numbers aren't, they're just not materializing for many reasons, from cost, environmental and electrical infrastructure and transmission lines. That -- we factored that down and that's a strong -- that's a healthy market for us. We play in this higher value, higher power, higher reliability area. We decided that the China wind market's not conducive to making profits and that we're not going to do that. So it's kind of a comprehensive look at everything in the renewables business and may be a more rigorous look at sales opportunities over the next few years. And the combination of all that, that was how we came up with the decision.

Our next question is from Michael Ciarmoli of KeyBanc Capital.

Maybe just to follow up a little bit on the margins in Aerospace. The military aftermarket, with the strength, are those revenues and margins currently accretive to this segment?

Yes. They're positive, I would say, on the aftermarket side. Yes.

So with the potential headwinds that you guys are seeing coming up, how should we think about the segment's margins trending forward into '14? I mean is it realistic to think that maybe softer military aftermarket, unsettled commercial aftermarket and just the ramping a week, can you get some decent margin expansion in that segment next year just on productivity and kind of continued efficiency measures?

Well, we do believe that margins will continue to improve. We do have quite a bit on productivity and can see some proven initiatives. It's just -- but you also see, and what we are beginning to see is we are making headway on the businesses that we acquired over the last few years, the 3 businesses. And each of them, we highlighted that we were going to expand the aftermarket. That is starting to happen, we're making progress. One of the early hurdles we highlighted was we had to improve operating performance and we needed to improve our logistics handling of spare parts and servicing. Those are now the -- operating turnaround times have improved to be competitive. The logistics are in place and we're starting to gain in the aftermarket in those. So in addition, we also believe that with all the new introductions of the likes of 787, it's taking a long time, but we're going to start seeing more initial provisioning-type sales, improvement on our motion control service business. And that combination, we think, is going to help us continue to grow margins.

Okay, fair enough. And then maybe just a little bit -- your business with Caterpillar, given kind of their thought process of -- I think it's $1 billion of inventory they want to de-stock. What are you guys seeing specifically there and kind of your expectations or visibility in the short-term regarding that big customer of yours?

Yes. Well, Caterpillar's a great customer of ours. And they've been hit with some tough issues, particularly in the mining and other parts of their business. Our sales reflect that. And when we talk about having really organically flat sales in some of the tough markets, I'd say, some of it's related to the same issues they have. And our sales into their network. But it's not just CAT, it's other customers that have the same issues. So we have some things up, some down. So as we're giving you this information, that's all reflected in our numbers over time.

Okay. And maybe just a last one from me, just piecing together kind of some the comments from this call. The order book for Energy, I guess, being flat, looking into '14, military becoming a headwind. I mean if I were just going to generalize the revenue growth for next year, 2/3 of the business, flattish, and you've got the commercial OEM aftermarket being sort of your growth engines. Is that kind of the right way or...

It's in the right direction. And then with our belief, this thing will start turning in '15. I think you're in the right direction.

[Operator Instructions] We have a follow-up from Mr. Pete Skibitski of Drexel Hamilton.

Yes. Tom, on the military OE softness you mentioned. Is that kind of across-the-board or is there 1 or 2 programs there that you're seeing kind of a falloff?

I would say it's more across-the-board. Right now, it was a little soft. We're anticipating being softer in '14. So we also have seen, like military vehicles, that's a little further down, but rotorcraft has been positive. And then the smart weapons programs that we do, those have been solid as well. So it's kind of a little bit on the vehicles, a little bit on fixed-wing type.

Okay, got it. Got it. And I guess last one for Bob. Bob, it looks like you used the revolver a little bit this quarter. Do you guys have any sense of a paydown schedule on the revolver or is that going just sort of remain flattish as you're spending on CapEx over the next couple of years or so? I just wonder how I should think about that.

Yes. We've called out significantly higher capital expenditures over the next couple of years, so there will probably be a little more use on the revolver than we've had in the past. But we've also generated an awful lot of cash that we've used to pay down, in some cases, early some of our term loans and stuff and so forth. So we will continue to do that as we repatriate cash from other parts of the world as well, pay down the U.S. debt and things like that. But there will be more use as we go through the year related to the capital expenditures, no doubt about it.

Okay. So you'd pay down your notes before you'd pay down the revolver, is that what you're saying?

Well, no. Most of our -- what's remaining is fixed rate and it's not really pre-payable. So we had pretty much paid off everything that is pre-payable without penalty and now it's only the revolver that is pre-payable without.

Mr. Gendron, there are no further questions at this time. I would now like to turn the conference back to you.

Okay. Thanks for joining us today and thanks for your questions. We look forward to following up at the end of our fiscal year and then I really do hope to see all of you in December where we'll roll out a lot more comprehensive outlook on the business. So thanks, again. Good night.