Moog Management Discusses Q4 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Moog Inc. (MOG.A)

Moog (NYSE:MOG.A)

Q4 2013 Earnings Call

November 01, 2013 10:00 am ET

Executives

Ann Marie Luhr

John R. Scannell - Chief Executive Officer, Director and Member of Executive Committee

Donald R. Fishback - Chief Financial Officer and Vice President

Analysts

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Steven Cahall - RBC Capital Markets, LLC, Research Division

Tyler Hojo - Sidoti & Company, LLC

Julie Yates - Crédit Suisse AG, Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Operator

Good day, and welcome to the Moog Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Investor Relations Manager, Ms. Ann Luhr. Please go ahead, ma'am.

Ann Marie Luhr

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 not [ph] subject to risks, uncertainties and other factors that could cause the 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 1, 2013, our most recent Form 8-K filed on November 1, 2013, 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 home page and webcast page at www.moog.com. John?

John R. Scannell

Good morning. Thanks for joining us. This morning, we'll report on the fourth quarter of fiscal '13 and reflect on our performance for the full year. We'll also reaffirm our guidance for fiscal '14. Let me start with the headlines for the quarter and the year before diving into the details.

First, the big news. In the fourth quarter, we took a $0.52 per share goodwill impairment charge in our Medical Devices segment. As part of our strategic review process, we've taken a fresh look at the future projections for the business, and we now believe that the fair value of the net assets is less than the carrying value. The result was a noncash charge of $24 million after-tax. Exclusive of the impairment charge, Q4 earnings of $0.86 per share were $0.09 below our target for the quarter. About half of the shortfall was an operational miss in our Space and Defense group and the other half was due to increased restructuring.

In the quarter, Space and Defense sales came up short, the recent acquisition struggled and profitability suffered. We reacted very quickly to this shortfall, incurring over $3 million of additional restructuring in September to adjust our cost basis for next year.

On a positive note, all of our other segments performed well in the quarter. In particular, our Industrial segment is seeing the benefits of their restructuring activities and our Medical segment is gaining traction with their sales efforts. Total restructuring in the quarter was $0.10 per share. Exclusive of restructuring, the underlying operations delivered $0.96 per share in the fourth quarter of fiscal '13, and this compares to $0.91 per share for the same quarter in fiscal '12. Cash was very strong in the quarter, with free cash flow coming in well over adjusted net earnings.

Now let me provide some thoughts on fiscal '13 in total. The year turned out to be quite different from what we had expected 12 months ago. In October 2012, we were projecting sales and earnings growth in fiscal '13, and our main concern at that time was the threat of softness in our industrial markets. Looking back in the year, the headlines are a collection of some good and some not so good news.

Here's the highlights. First, 3 of our operations came in ahead of plan. Margins in our Aircraft and Components segments were up from last year. And within our Medical segment, our underlying operating margins, exclusive of specials, were also up from our forecast last year. Commercial aircraft had a very strong year, Components enjoyed a nice mix of products and our Medical segment saw a year of sales growth without any regulatory setbacks.

Second, we had some nice program wins in the year. We won the primary flight control package on the next-generation E-Jets at Embraer. We believe this win, a first for us at Embraer, demonstrates our leading position in the flight controls business worldwide. We also won the HelpMeSee program, a 3-year development project of a training simulation for cataract surgery. HelpMeSee is an organization dedicated to curing cataract blindness worldwide by using advanced simulation systems from Moog to train thousands of eye surgeons.

Third, our industrial markets turned out softer than we had anticipated. The first half of the year was marked by disappointing sales and continuous restructuring. In the second half, our Industrial sales stabilized and our profitability improved as the restructuring benefits started to accrue. In addition to slimming down our operations, we took a hard look at the product portfolio and decided to exit some underperforming product lines.

Fourth, our Space and Defense business came up short of what we were anticipating. This was a combination of 2 of our recent space acquisitions underperforming, as well as some softness in our Defense businesses. We had anticipated this segment would have a very strong second half, and instead, the second half was marked by 2 disappointing quarters.

Fifth, our cash flow was a really positive story in fiscal '13. We finished the year with free cash flow of $158 million on net earnings of $120 million, 131% conversion ratio.

Sixth, we completed 2 acquisitions in the year, spending approximately $80 million. We acquired Broad Reach Engineering in the space market, and Aspen Motion Technologies in the Components Group. Both of these acquisitions are working out well so far.

Seventh, we announced the strategic review of our Medical Devices segment. After 7 years in this business, we decided to take a fundamental relook at whether or not this business is a long-term strategic fit for us. We're still in the midst of that process, but already we have divested one of our facilities in Q3 and taken a goodwill impairment charge in Q4. We would hope to report the conclusion of this review process in the next quarter or so.

Finally, we intensified our focus on bringing lean thinking to all our activities. As part of this process, we made a major decision in the fourth quarter to move the whole corporation to a single ERP solution over the next 5 to 6 years. Historically, we've run multiple systems in our different operations with all the inherent inefficiencies associated with that structure. After much internal review, we concluded that a single system would bring significant benefits in the long-term. This will be a significant investment and in the short-term, a slight headwind to earnings. However, as the implementation unfolds, we should see significant benefits in the out years.

Now let me move to the details, starting with the fourth quarter results for Q4 fiscal '13. Sales in the quarter of $676 million were up 7% from last year. We saw higher sales in every segment. About half of the growth came from acquisitions completed in the last 12 months. Taking a look at the P&L, our gross margin is down, driven by combination of mix and the result of the profitability challenges in our Space and Defense group. R&D was down slightly in the quarter, and total G&A expenses also came in lower as a percentage of sales. We incurred $7 million of restructuring expense in quarter, split between our Space and Defense and Industrial segments. We also had the goodwill impairment charge of $24 million after-tax.

This quarter, our effective tax rate was unusually low as a result of the impairment charge. The overall results was net earnings for the quarter of $16 million and earnings per share of $0.34. Excluding the restructuring and the impairment charge from the fourth quarter numbers, net earnings of $44 million and earnings per share of $0.96 would have been 5% higher than last year.

Fiscal '13. For the full year, sales were up 6%. 70% of that growth came from acquisitions. Aircraft sales were up on strong commercial demands, Space and Defense sales were up on acquisition growth, Industrial sales were down as our wind business struggled. Components sales were up on acquisition growth and finally, Medical sales were up on nice organic growth. Net earnings and earnings per share were down 21% from last year, driven by restructuring, asset write-offs and the goodwill impairment charge.

To compare the performance of our underlying operations, we need to add back $0.20 per share of restructuring, 15% -- $0.15 per share of asset write-downs and $0.52 per share of goodwill impairments to the fiscal '13 numbers. With these adjustments, our operations delivered $3.50 per share and free cash flow of $158 million in fiscal '13. This compares to $3.33 per share and free cash flow of $107 million in fiscal '12. So in fiscal '13, earnings from operations were up 5% and free cash flow was up 48%, a respectable performance despite the challenges in both our Industrial and Space and Defense segments.

Fiscal '14 outlook. We're affirming our earnings forecast for fiscal '14 in a range between $3.90 and $4.10 per share. We're projecting a small sales increase, but a significant improvement in profitability. Sales next year should be up in Components and Space and Defense, driven by additional sales from recent acquisitions. We're forecasting sales in Aircraft and Industrial about even with fiscal '13, while Medical sales will be slightly lower as a result of the divestiture of the Ethox Buffalo operation. Exclusive of restructuring and charges, operating margins in fiscal '13 were 11.1%. In fiscal '14, operating margins will be up to 12.4%, a 130-basis-point improvement over fiscal '13.

Now to the segments. I'd remind our listeners that we've provided a 3-page supplemental data package posted on our website, which provides all the detailed numbers for your model. We suggest you follow this in parallel with the text.

Starting with Aircraft, Q4. Q4 was another quarter of strong organic growth and healthy margins. Aircraft sales were up 9% in the quarter. The commercial side of the house continues to be the engine of growth with sales up 23% over the same quarter last year. We saw strong growth at our major OEMs, a combination of higher rates, the timing of orders and the ramp-up on new programs. The commercial aftermarket was down from last year but within the normal quarterly variability we see in that business.

The military business was down 2% in the quarter with slightly lower sales on the OEM side. Lower F-35 development work and lower V-22 sales contributed to the drop. Despite our continued sequestration worries, the military aftermarket was actually up from last year.

Aircraft fiscal '13. Fiscal '13 was a record year for our Aircraft business with sales topping $1 billion for the first time. Commercial sales were up 20% with the growth coming on the OEM side. Sales to Boeing and Airbus were both up nicely as order rates increased and new platforms runs off. Commercial aftermarket was down slightly in the year as some of our work on legacy platforms slowed. On the military side, sales were up 4% for the year with the growth coming in the military aftermarket. A nice contributor to the aftermarket this year was strong foreign military sales on the F-15 platform. The OEM segment was about flat with fiscal '12 with strength on the KC-46 tanker program compensating for weakness in our navigation aids business.

Aircraft fiscal '14. We're projecting sales in fiscal '14 in line with fiscal '13. Military sales will be down 6% on much reduced F-35 development work, lower V-22 production rates and a softer aftermarket. We think our military aftermarket will be down about 5% from fiscal '13. This projection includes our best guess on the effect of sequestration. On the Commercial side, we should see an 8% increase in sales as the 787 continues to ramp up and the A350 production starts in earnest. We think the commercial aftermarket will be up slightly next year as 787 initial provisioning slows.

Aircraft margins. Margins in the quarter were 12% and margins for the full year were also 12%. Margins expanded 110 basis points over fiscal '12 on higher sales and a continued focus on cost reductions. We're projecting margins in fiscal '14 of 13%. Next year, we'll have a less favorable product mix as the sales shift from military applications to commercial OEM sales. However, R&D should start to moderate slightly and our continued lean activities should help drive a nice uptick in margins over fiscal '13.

Turning now to Space and Defense. Sales in the fourth quarter were up 11% from last year's $104 million. Similar to the last couple of quarters, sales from our recent acquisitions contributed most of the growth. Organic sales x acquisitions were up 4% from last year. We saw a little growth in our legacy space market and had a nice pickup in our NASA business due to work on the soft [ph] capture system. This system is designed to help decommission the Hubble Space Telescope in years to come when it has reached its end of life. Defense and Security sales were down almost 10% in the quarter as program orders slipped to the right. Over the last year, we noticed repeated slowdown in the receipt of military orders relative to what we were expecting.

Space and Defense fiscal '13. Total sales in fiscal '13 of $396 million were 10% higher than last year. Acquisitions added nearly $60 million of sales to our space total, while the legacy space business dropped 6% on the softer commercial satellite market. We had no acquisitions in the Defense and Security markets in fiscal '13. Defense was up 5% for the year as activity on various programs slowed. Security was down 9% for the year, all because in fiscal '12, we had about $4 million of Driver Vision Enhancement work, and that program was down to $1 million in fiscal '13.

Space and Defense fiscal '14. Despite the challenges in fiscal '13, sales in fiscal '14 should be up in total. We're projecting a 9% increase of $433 million. In the space markets, the growth is primarily the result of a full year of the Broad Reach Engineering acquisition. In the Defense markets, we should see a nice pickup in missile defense, as well as stronger foreign military sales for ground vehicle systems. Security sales should be up slightly with additional sales coming from some recent new product introductions.

Over the last 2 years, we've strengthened our position in foreign markets in both the space and defense markets. The combined acquisitions of Bradford, an in-space propulsion, has given us 3 space facilities in Europe, previously we had not. In the Defense business, we strengthened our European operations and we're now focused on bringing our full range of U.S. Defense capabilities to potential foreign opportunities. We believe these actions position us strongly to benefit from increased foreign sales in the years to come.

Space and Defense margins. Margins in the quarter were a disappointing 2.6%. Exclusive of restructuring, margins were 6.9%. There are 2 elements to this shortfall. First, our space acquisitions of Bradford and ISP continued to fall short of what had planned. Last quarter, we had a big write-up on one program at Bradford. But this quarter, there was not any one particular program that came up short, rather a range of shortfalls across the entire portfolio. The lesson learned is that when buying small space companies, they often don't have the systems and controls in place that we have come to expect, and it is sometimes a lot more expensive than we expect both in terms of dollars and time to get them squared away.

Second, our Defense business fell short this quarter. Compared to our forecast of 90 days ago, Defense sales came in well below plan as anticipated orders pushed out to the right. Typically, defense sales are nicely profitable, but they also tend to carry a relatively high percentage of fixed cost. So that when sales come up short, profitability is disproportionately affected. In response to these challenges, we took swift action in the quarter. We incurred over $4 million in restructuring costs to resize the workforce to address the current sales levels and to meet our profitability goals for next year. As a result, we're keeping our margin forecast for fiscal '14 unchanged from 90 days ago at 10%.

Some of our recent space acquisitions have turned out to be more challenging than we had planned. However, in time, we'll get them squared away. And despite the short-term challenges, we believe our strategy in the space market of expanding our components footprint and moving into the systems business will pay off nicely over the long term.

Turning now to the Industrial Systems business. Sales in the fourth quarter of $153 million were up 2% from last year. The sales mix, however, was quite different from a year ago. Wind energy sales were down 31% compared to the fourth quarter of fiscal '12, but more or less in line with our forecast from 90 days ago. Industrial automation sales were up nicely in the quarter. While we view this positively, it's too early to tell if this signals a return to growth in that market just yet. Simulation and test was up strongly in the quarter also. Our customers in the flight simulation business continued to see strong demand for their products. The macro picture shifted slightly this quarter with our wind business stabilizing and our industrial automation markets, perhaps, starting to recover.

Industrial Systems fiscal '13. Full year sales of $592 million were 7% down on fiscal '12. The drop in wind energy sales of over $40 million made all the difference. Apart from wind, there was a slight shift in the mix with industrial automation down about $10 million, but simulation and test up a similar amount. We restructured our wind business during the year, consolidating our Asian operations in Shanghai.

On a more positive note, we introduced a new AC pitch control system this year, which offers performance benefits to our customers and better margins internally. With this new system, we won our first major order in South America with Alstom for 300 systems over the next 3 years.

Industrial Systems fiscal '14. Last quarter, we said that sales in fiscal '14 will be flat with our projections for fiscal '13. We projected sales of $585 million next year. The fourth quarter came in a little stronger than we had expected, but we are not yet adjusting our forecast for next year. Sales in the second half of fiscal '13 were up about 3% from the first half. While we view the stronger second half as a positive sign, there's a natural range of sales fluctuation from any one quarter to the next. Therefore, we think it's too early to tell if the second half improvement is simply a reflection of a market that is stabilized or a market that is starting to grow again. For the moment, we're taking the more conservative approach and assuming the next year, will be more or less the same as this year.

Industrial Systems margins. Margins in the quarter of 10.5% were very encouraging. Exclusive of about $3 million in restructuring, margins in the quarter were a healthy 12.3%. This is up over 400 basis points from the fourth quarter of fiscal '12 on similar sales. Continuing the comparison of margins x restructuring, we've seen a quarter-over-quarter improvement in margins throughout fiscal '13 from the low point of 6.1% in the first quarter. Margins for the year were 7.1% compared with 10% in fiscal '12. Exclusive of restructuring and the effect of an asset write-down in the third quarter, underlying operating margins in fiscal '13 were 8.7%. In fiscal '14, we're projecting margins of 12.2%. Fiscal '13 has been a year of considerable adjustments but we believe we've taken the necessary steps to make fiscal '14 a more successful year.

Turning now to the Components Group. Sales in the fourth quarter were up marginally from last year. Component sales into the Industrial markets were up almost 50%, driven by the recent acquisition of Aspen Motion Technologies. The energy and medical markets were about flat with last year, and sales on the A&D side of the house were down 6% in the quarter as we encountered some technical issues on a couple of Defense programs, which delayed shipments into next quarter.

Components fiscal '13. For the full year, sales were up 11% with all the growth coming in our non-A&D markets. Sales in energy were way up, a combination of organic growth in our offshore markets and the TriTech acquisition, which we completed at the end of fiscal '12. Industrial sales were also up as a result of the recent Aspen acquisition. Absent this acquisition, Industrial sales would actually have been down in fiscal '13, reflecting the softness in this market. Medical sales were up slightly for the year. In our A&D markets, sales were pretty much flat with last year. Fiscal '10 was the high point for sales into these markets. And over the following couple of years, we've seen a significant decline as various platform operators wound down. The sales leveled off in fiscal '13 and we're optimistic that they may actually tick up slightly next year.

Components fiscal '14. Our forecast for fiscal '14 is unchanged from 90 days ago. We're projecting a sales increase of 11% next year to $460 million. Components sales into the aerospace and defense markets will be marginally higher than fiscal '13, but sales in Industrial automation will be up nicely as we enjoy the benefits of a full year of the Aspen acquisition.

Components margins. Margins in the quarter were 15.4%. Full year fiscal '13 margins were 16.5%, above the average of the last few years. This year, we had a particularly nice mix of business and also had the benefit of an earn-out reversal in our first quarter on our Protokraft acquisition. This reversal contributed $2 million in operating profits and boosted full year margins by 50 basis points. For fiscal '14, we're projecting margins of 15% on a slightly less favorable mix of sales.

Finally, Medical. Q4 was another eventful for our Medical business. As I mentioned at the start of my remarks, we took a $24 million after-tax goodwill impairment charge this quarter. Setting this noncash charge aside, our Medical segment had strong sales and good profitability. The underlying performance of this business continues to improve nicely. Sales in the fourth quarter of $39 million were up 9% from last year. Last year's sales included about $3 million for the Ethox Buffalo operations that we sold. So on a same-store basis, sales were up 17%. We have nice growth in both our pump and set sales.

Medicals fiscal '13. For the year, sales were up 5% with growth across our 3 product categories. In the past, we've described the focus of this group on developing a culture of compliance. In other words, we wanted to become the model at the FDA for how a medical device company should operate. That strategy bore fruits in fiscal '13. We enjoyed a clean bill of health from a regulatory perspective and could focus our attention on sales growth.

Medical fiscal '14. Full year sales in fiscal '14 are projected to be $137 million, down $10 million from fiscal '13. The drop is a result of the sale of the Ethox Buffalo operations. We should see a mix shift with higher pump sales and lower set sales. Growth in pump sales will come as our sales efforts continue to gain traction. Set sales will be slightly lower due to a change in our contract with a large customer who is shifting from the sale of our Components to a royalty structure.

Medical margins. Margins in the quarter, exclusive of the goodwill charge, were 6.6%, up from 2.8% last year. Strong sales and the continued focus on cost containment contributed to the improved performance. Fiscal '13 full year margins adjusting for both the Ethox Buffalo sales and the goodwill charge were 6.4%, a 250-basis-point improvement over fiscal '12. For fiscal '14, we're projecting full year margins of 7.1%.

The summary guidance. With fiscal '13 behind us, we're looking forward to a much better fiscal '14. We're reiterating our guidance from 90 days ago for full year sales next year of $2.67 billion, a 2% increase over fiscal '13. Aircraft sales will be even with fiscal '13 as Commercial growth compensates for military softness. Components and Space sales will be higher on full year acquisition sales. Industrial sales will be about even with fiscal '13 and Medical sales will be down as result of the divestiture of the Ethox Buffalo facility. We're projecting earnings per share in the range of $3.90 to $4.10. At the mid-point of the range, net earnings will be $185 million, net margins will improve to a record 6.9% and adjusted earnings per share will be up 14% from fiscal '13. As usual, we think the year will start out slowly with earnings in the first 2 quarters in the $0.85 to $0.95 range. The second half should be better with 2 quarters over $1 a share.

Looking at the risks and opportunities for next year. Sequestration remains our major concern. Our leaders in Washington may reach a bargain which addresses this concern, but I don’t think we should hold our breath. On the opportunity side, we've seen a slight pickup in our industrial markets in the second half of '13, so perhaps that bodes well for the future. In addition, our Space business could have a better year than we are planning. As always, we try to provide a forecast which balances these pluses and minuses. In the past, it's been suggested that we hedge our forecast to come in better than planned. Fiscal '13 was one of those years when we got it wrong and we came in under forecast. We hope that in fiscal '14, we're back to getting it right. Now let me pass you to Don who will provide some color on our cash flow and balance sheet.

Donald R. Fishback

Thank you, John, and good morning, everyone. As John already mentioned, our free cash flow in the fourth quarter was strong at $61 million. Our net debt declined by $71 million to $552 million. The difference is explained by the proceeds associated with the sale of our Ethox Buffalo medical operations that came in during the fourth quarter, in addition to a couple of movements in currencies.

For the year, our free cash flow was $158 million compared to net earnings of $120 million, resulting in a conversion ratio of 131%. After adjusting net earnings for the significant noncash charges that we've described, the conversion ratio is still in excess of 100%.

Networking capital declined during our fourth quarter, largely due to higher customer advances and accounts payable and lower inventories, offset by some higher receivables. The increases in customer advances and receivables are the result of timing, mostly on a number of Commercial Aircraft programs. Our losses are [ph] balanced, declined by $1 million to $44 million.

Capital expenditures were $30 million in the quarter compared to $28 million of depreciation and amortization. Capital expenditures for the full fiscal year were $93 million, while D&A was $108 million. Our global defined-benefit pension plan expense for all of fiscal '13 was $51 million, while our cash contributions were $43 million.

Last quarter, we provided our first look at our forecasted free cash flow for fiscal '14. We're leaving that forecast at this time unchanged at $165 million or a cash conversion ratio that will be about 90%. We're forecasting $105 million of capital expenditures and $113 million of depreciation and amortization; both of those are unchanged from last quarter's forecast. We're currently forecasting our global defined-benefit pension plan expense for fiscal '14 at $36 million while our capital contributions will be $51 million. Compared to this past year, the pension plan expense in '14 will be down due to -- principally because of the higher discount rate assumptions.

Our total debt outstanding at the end of the year was $709 million and our cash balances were $157 million. Our year-end ratio of net debt to total cap was 26.4%, down from 32.1% last year. Our leverage ratio, which is net debt divided by adjusted EBITDA, was 1.56. Year end unused available capacity on our $900 million revolving credit facility was $482 million.

Interest expense. It was $27 million in 2013, and we're forecasting that to come down to $24 million in '14 as we called in our 6 1/4% debentures in January earlier this year. Our effective tax rate in the fourth quarter of '13 was an unusually low 14.8%. Before the tax effects of the goodwill impairment charge, the effective tax rate was a more normal 30.2%, up from last year's 20.8%. So the low rate in 2012 last year was due to a statutory tax decrease in the U.K. and the reduction of a valuation allowance associated with the European deferred tax asset. For all of fiscal '13, the effective tax rate was 27%, the same as last year.

Looking ahead to fiscal '14. We're leaving our effective tax rate unchanged at 31.7%. The 2014 rate is up from our 2013 rate for a number of reasons, including the effect of the goodwill impairment charge that we took this year, last year's large R&D tax credit benefit and because we're forecasting a less favorable mix of global taxable earnings.

It's been a tough finish to a challenging 2013. We made the appropriate restructuring decisions to respond to soft market conditions in our Industrial and Space and Defense businesses. We're working through the review process for Medical that will settle out in the coming quarter or 2. And we're committed to leaning out our core business processes, including moving to a new company-wide ERP system using SAP. We're taking these initiatives with a focus on achieving our long-term strategic growth and return goals, and we've now begun turning our attention -- full attention, to 2014. So thanks for listening. We'll now turn the call back over to our moderator and take any questions you may have. So, Margarita?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Cai Von Rumohr.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

So the Boeing sales look particularly strong. Was any there any recovery from the 787-9 R&D or things like that, nonrecurring things there?

John R. Scannell

No, there wasn't any real R&D issues in the quarter. It's more a combination, Cai, of ramping on 87, the underlying business and then the timing of orders. The way the business actually comes in and the absorption of inventory. That has a significant effect quarter-to-quarter on some of the actual sales.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay. And then in Space and Defense, you mentioned you had a number of issues. How is that one problem contract you had at Bradford? Is that one pretty much under control now?

We believe so. I mean, that was a big charge, that was a $5 million charge in the third quarter. There was no significant additional charge from that in the fourth quarter. And as I mentioned in the text, it wasn't any one particular program. It was a long litany of programs that after a more -- again, a detailed review, all turned out to be not quite as profitable as we had -- as they were on the books for. And I think one of the problems or one of the challenges in the Space business is when it turns out that your programs are less profitable, what you have to do is invest more resources to fix them, unlike in another business where you can say, well, let's take resources away. In the Space business, you got to put a lot more effort in to make sure you got the systems and the structures and the project management to actually get it done. So to some extent, it's a little bit of a double whammy. You find the problem, your EIC's going to be higher and then you end up putting even more expense in to make sure you fix it. But it's the type of business that when we commit -- or buy a company or we commit to a program, we've got to make sure we deliver the program. And over the long term, we will definitely get these businesses squared away. Unfortunately, these are issues that we would prefer hadn't happened, but we're working our way through them.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay. And then I was kind of interested that you made absolutely no changes to the guidance that you came out with in late July. If you would take a fresh look and say, this is an area that looks like it has maybe more opportunity, like Industrial, maybe comment on that. And then also, areas where you might have a little more risk like overall Military.

John R. Scannell

Yes. Well, and we did take a total relook at the business. And as you can imagine, there's hundreds of moving parts with all these different programs. But in the end, the major categories rolled up pretty much the same as what they were before. Now last quarter on the Industrial business, we said, our projection for fiscal '13 was $585 million, and we said, there was nothing in the macro picture that would make us think that it would be any better in fiscal '14. So we stuck with that flat forecast. We actually came in, in the quarter, the fourth quarter, a little bit better, so we finished the year about $593 million. But we're still staying with the $585 million next year. In the quarter, our Industrial automation business was up a little bit. That was kind of the nice plus up in the quarter. And that may be a sign of a positive development. Actually, almost all of the markets under that heading, plastics, metalforming, et cetera, they were almost all up a little bit. But it's real early to say that that's a trend. And again, if you read the macro headlines, there's nothing that would tell you that Europe is about to take off in a big way. It seems like the underlying structural problems in Europe are still there. So rather than get ahead of us, we said, we think there's still not enough evidence to suggest '14 is going to be better than '13 in Industrial, but maybe it could be. And on the Military side, we have looked over that. We've had -- we had some work on the F-15 Silent Eagle, that obviously kind of slowed down because of the decisions in Korea. So that was a little bit of a drop out there, but we think some of the helicopter stuff will be a little bit better than we had planned. And all in all, it kind of comes in pretty much at what we were thinking last year. And if you do look at the total for Military, we're up -- Military Aircraft is up about 6%. That's pretty much evenly split between the OEM and the aftermarkets. And could it be worse than that with sequestration? I mean, clearly, it could. But it's our best guess, Cai. And unfortunately, the customers -- our forecast of those [ph] up by having detailed discussions with our customers. The biggest risk, I think, is that they don’t know themselves. It's not so much that they're telling us something that's strong, it's just that they actually don’t know, and they can't project us. If you worry about the government shutdown again in January, February, how could that play out? Hard to say. I would say that the shutdown that happened a couple of weeks back did not have any material impact on us. The first week of that shutdown, they had actually sent home the Defense Contract Agency inspector folks and that started to have a bit of -- it would have had an impact if that kept going. But in the second week, they brought all those folks back.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

And helicopters is being up, that's a little surprising. I mean, United Technologies sort of took their plan for Sikorsky down for 2014. And Bell has had some execution issues. What part of the helicopter business was up, was this some slip from this year?

John R. Scannell

No, it's actually the V-22 stuff that we think is up a little bit from what we were forecasting 90 days ago. Now that still, it's down 20%, 25% from what we did in this year. So it's not that it's up from this year. [indiscernible] versus this quarter, we thought that's probably going to be a little bit better than we were. Maybe we were too pessimistic last quarter.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Last question. Does your fiscal '14 plan, John, include, assume any restructuring? And if so, where?

John R. Scannell

No, it doesn't assume any restructuring, Cai. Our assumption right now going into the year is that we have the restructuring essentially behind us. There probably be a little bit of a tail of a small amount here and there, but it's not going to be something that will probably even register. It will just be kind of a cleanup of some activities. Particularly in some of the areas like Europe that you've got some stragglers are -- we're doing a couple of facility moves and there'll be some expenses associated with the moves just to get that all behind us. But we're not anticipating it could be anything abnormal.

Operator

We'll take our next question from Robert Stallard.

Steven Cahall - RBC Capital Markets, LLC, Research Division

It's Steve Cahall on for Rob at RBC. Maybe just a -- first quick question on the aftermarket. It was down maybe more than some other peers in the quarter. Can you maybe give us a sense of what some of the underlying trends that you're seeing there, both sequentially, mix. And then also with your guide for FY '14, it looks like commercial aftermarket, this is in Aircraft Control, is down around 2%. So what gives you confidence about some of the improvement from where we were in the fourth quarter going into next year?

John R. Scannell

So I'm thinking your whole question is about the commercial aftermarket?

Steven Cahall - RBC Capital Markets, LLC, Research Division

That's right, yes.

John R. Scannell

First of all, our commercial aftermarket any one quarter to another varies by plus or minus 10% to 15%. So if you look back and if you did a quarterly plot of the Commercial aftermarket, it varies kind of 18%, 20%, 22%. Because that plus or minus 10% are a little bit more variation one quarter to the next. That's just a result of the way the orders and the actual product flows. So I would never take one quarter, multiply it by 4 and say that's a pattern. I think you really want to do a 4-quarter kind of run rate or a fiscal year of one year to the next as a kind of a guide. So that's the kind of the fourth quarter versus next year. Next year, if I -- so if look at this year versus the previous year, we were down about 3%. And that really is the result of 2 things. The 787 initial provisioning was marginally lower in '13 than '12, but the underlying business was also a bit softer. And that's because our aftermarket right now is more dominated by some of the older platforms, 57, 67. We have relatively little under 37. We've got work on the 777, but a lot of our 777 work is high lift stuff, which doesn't have as much aftermarket. So our portfolio in the aftermarket right now is just not great. Now that's going to change dramatically in the couple of years time as the 87, 350, 919 and the E-Jets come on board. But we have an aftermarket that I would say over the next couple of years we won't see much growth, if any, because it's a balance of older platforms and not being on some of the platforms that are really going gangbusters right now, the 320 or the 737. We have very little content on those. So we are anticipating a kind of a quasi-flat aftermarket for a couple of years until we start to see the real uptick as the 87, 350, et cetera, come online. And for next year, the drop from this year is all an initial provisioning adjustment. So the sales next year drop about $3.5 million, $4 million from this year, and that's all assuming that initial provisioning of the 87 next year will be down about $4 million, about that amount, from this year. So it says, the underlying business is flat, and initial provisioning will be up slightly.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay, that's very helpful. And then maybe just on the Medical Devices. It was mentioned that you're expecting to settle that transaction out in the next couple of quarters. Could you give us any feel of what the process is that you're going through, both with the revaluation? Was that the result of some of the bids you'd received, or are we now entering into the formal bid phase and maybe you just give us some of the key gates without any of the detailed stuff about the bidders, et cetera?

John R. Scannell

Yes. Well -- so we're in the midst of a review process. We have not decided yet whether or not we will or will not sell the business. That is clearly one of the potential outcomes. But it is not an asset that is held for sale, and that's important, it's not an asset that's held for sale. And therefore, the goodwill impairment is not a result of these are the bids that we have for it. The goodwill impairment process is, as you're aware, is something that you do in an annual basis. You do a range of discounted cash flows, you look at the carrying value versus the projected value, and I would say that, over the last year as we've gone through this review process, we have moderated, I'd say, our long-term outlook for the business. And the result is that the fair value or the carrying value was slightly higher than the fair value. Now, it was a very small difference. It turns out that the accounting requires -- the goodwill accounting

[Audio Gap]

value. If you take a macro view of what actually happened when we bought these businesses between '06 and '09. At the time, Medical Devices were -- was a very strong industry, very strong growth rate, very strong profitability. But the businesses that we've been in over the last 5 or 6 years, 2 things have happened. One, the FDA, and we've talked about this in the past, has made a much, much more difficult to introduce new products affecting the new product pipeline, and therefore the growth opportunities for a company like ours. And secondly, Obamacare, the Affordable Health Care Act, has introduced a sale tax on Medical Device products. If you put the 2 of those together and our projection as we went through that goodwill impairment testing this year versus our projection a couple of years ago, we had to moderate that. And that's what caused us to trip the goodwill impairments trigger. So -- it's not a reflection of the bids that we have or anything like that. It's more a reflection of the projections for the business based on the change in the macro picture. In terms of where we are in the process, we started the process about 3 months ago. Process like this from beginning to end typically will take 6 to 9 months. So we're in the middle of that process. I think that we would hope to come back to the market in the quarter or 2 with a conclusion, whatever that condition may be. And beyond that, I don't think it's appropriate to get into details of exactly where we are in the process.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. And maybe just a final housekeeping one. With your FY '14 sales guidance, can you say what percentage of that is already in the backlog, do you know that number?

John R. Scannell

Yes. Our backlog, I think, we reported at $1.3 billion and that's our 12-month backlog. So it's about 50%, which is kind of typical of how we would see it. But of course, that varies dramatically between short-term and long-term.

Operator

We'll take our next question from Tyler Hojo.

Tyler Hojo - Sidoti & Company, LLC

Just first question pertains to the partnering for success initiative at Boeing. Just kind of curious how you kind of think about that in context with some of your ambitions to kind of get the margins up within the Aircraft business.

John R. Scannell

I think that the partnering for success, the objective or the approach there is about working with the suppliers to find opportunities to reduce costs and to share those gains. And over the years, we've always had an active program with Boeing at identifying opportunities or taking costs out of our products. Of course, it's always a challenge, I think, on their side because they have a long list of potential opportunities, and it's is a question of taking the 80/20 rule and they would pick the ones that maybe have the most opportunity. But we would see partnering for success and in our discussions at Boeing as working together to look at where are opportunities for cost reductions, how quickly can we do those and how quickly can Boeing incorporate them into the airplane and then making sure that the cost savings are appropriately a portion in that. So we're in that process. We've been -- it's not new in that sense. I mean, that's not something new. I think perhaps the shift at Boeing is more that they are dedicating more resources to looking at those potentials for taking cost out of existing products as they wind down perhaps some of the R&D on the V-87. So they may be shifting some of the resources into that, kind of improving the cost fixture rather than, say, developing and getting the product out the door.

Tyler Hojo - Sidoti & Company, LLC

Got it. Would you say, with some of the increased kind of level of conversations, there has been kind of increased business opportunities that have come up or is that not necessarily the case?

John R. Scannell

That's always held out as one of the opportunities. And for our type of stuff, that's a really tough thing to do. And here's why. So we're not on the 737. We don't -- well, we got some small stuff. But let's just assume that Boeing said, boy, if you, Moog, could take the [indiscernible] on the 737, and reduce the cost we'd love you to sign on. Okay? Now the problem with is that unless it is a different design, we would compete with the incumbent in the aftermarket and that makes no sense for anybody because the aftermarket's where all the money is. So Boeing, in that particular case, would have to say, we're doing a different design which is no longer compatible with the previous design, so that you, Moog, have the opportunity to recover your cost in the aftermarket, and that makes no sense from Boeing's perspective. So that kind of -- it's not as if our products and our competitors' products can be easily changed out and because the money is in the aftermarket, you cannot have a situation where you're going to compete with somebody else in the aftermarket because that destroys the business model. So it's more, I would say for our stuff, it might be opportunities on future platforms, rather than here's a takeaway opportunity, and I think that's the same for our competitors as well. It's really hard to displace somebody given the business model, the huge upfront cost, kind of the OEM space where it's not particularly profitable and then the aftermarket where it's very profitable but that's the recovery period. You can't be competing with somebody in the aftermarket because it makes sense for nobody. Does that help?

Tyler Hojo - Sidoti & Company, LLC

Yes, it does. It does. Thanks for that additional color. And then maybe just one more for me. You mentioned the rollout of a new ERP system. And I think in your prepared remarks, you mentioned that you did expect to somewhat of earnings headwind next fiscal year from that. I was wondering if you knew enough to potentially quantify that?

John R. Scannell

I don't know that I want to quantify that specifically because there's 2 elements to a headwind if you do a system like this. One is the actual dollar cost that you spend on the software, the consultants, et cetera, to start it up. And the other is the cost just associated with folks in the operating groups that end up getting [indiscernible] onto a project like this and there's probably some -- if you did all, so the headwinds would really be more on the kind of the actual out-of-pocket expenses, which for the first couple of years can be fairly significant. Having said that, we announced this in the fourth quarter, we haven't changed our guidance for next year, in the $3.90 to $4.10 range. So we think that we can absorb that cost through the other operational

[Audio Gap]

But it's not something that we'd like to quantify because we get into quantifying it quarter-on-quarter then, and I think it will only cause confusion in the market.

Operator

We'll take our next question from Julie Yates.

Julie Yates - Crédit Suisse AG, Research Division

John, a few questions on 787. What rate are you shipping at today? How is your profitability trending? And then, will you need to make any investment to accommodate the recent production ramp to '12 and then ultimately to '14?

John R. Scannell

So, in the year, Julie, that we just completed, we shipped, in dollar terms, about $84 million, $85 million. We have about $1 million of content. So that's a very rough way of saying, it's probably about 85 ship sets, give or take. Now, you got to understand, Boeing does not order ship set by ship set. They order -- we've got hundreds and hundreds of parts, and they order all of the parts individually. So we couldn't physically calculate exactly how many ship sets because it would be 100 ship sets of one part and 72 ship sets of a different part. So it's not -- so the number I've given you is kind of a round number. But I would say is, we're fully in line with Boeing's production plan. We're not, in any way, behind. So the easiest thing to do is say we're shipping kind of in line with them, but with the 6-month lead time ahead of them. So that's kind of -- you could call it 84, 85 systems in fiscal '13, and next year, we're looking at about 100 systems. Keep in mind, of course, Boeing already has quite a few of them on their tarmac. So for them to ship, say, 120 next year doesn't require them to get 120 systems for us because we've been shipping for the last 4, 5 years. So that's kind of the shipping rates, and as I say, it's keeping up with Boeing. And I think their interest in going to 12 and 14 ship sets a month would require some additional capital investment on our part. But not a huge number that it would be a dramatic shift in our capital expenditures one year to the next. In our case, we don't have very large pieces like an autoclave or something that you buy one autoclave and it can do 5 a month, and then the next autoclave can get you to 10 and then you need to make a huge investment to get to 11 because it's another large piece of capital equipment. Ours is cutting equipment, it's various machinery and it's assembly and test stuff, and it's linear with increase in order. So we can go 10 to 11 and there's an investment in capital, and then 11 to 12, with the same investment, et cetera. And there will be plenty of time to ramp up that capacity as we go forward. So we're not anticipating that, that will be a major additional investment. There will be some investment, but it will be part of, I'd say, the normal capital expenditure cycle. Your third question was profitability, I think. Was it? I can't remember. How did you phrase your profitability question?

Julie Yates - Crédit Suisse AG, Research Division

Just how is the profitability trending? Is it below average? And then how are you -- how is that improving as you're coming down the learning curve, as that production increases?

John R. Scannell

Yes. So Julie, we don't give out profitability, obviously, by platform. And it is getting better as we make more.

Julie Yates - Crédit Suisse AG, Research Division

Okay. And then next on the Military aftermarket. It looks like it held in a little bit better than other peer reports we've seen this earnings season. Why do you think that is? And then I realize the visibility is very limited here, but what do you expect over the next 2 to 3 quarters and how confident are you in your forecast for '14?

John R. Scannell

Well, how confident are we? At the end of my text, I said I think in the past, folks on the outside have thought, "Well, these guys hedge and they always do better." And I think we've demonstrated in '14 that maybe we don't always hedge as much as we think. In terms of the forecast for next year, we're as confident as we were in the forecast of this -- for this year in the Military aftermarket. This year, we actually did better, I think, than we had forecasted, came in very strong. Next year, we've toned it down from $230 million this year to south of $220 million so we're talking about taking a 5%, 6% haircut next year. This is the one area, Julie, that it could just dry up and we could see that drop off. But we are at the depots [ph]. Our folks are working with depots [ph]. We do work for the depots [ph]. There's a lot of -- there's some foreign military stuff. That was actually one of the real nice ones. We get some F-15 work in this particular year. That was part of why it did better. So it's really hard to say. I mean, we do the best effort we possibly can of forecasting it. 5% to 6% down next year, seems like that's a reasonable number in terms of the overall reduction in spending, but could that be less, I think it could. I wish I had a crystal ball on it. This is the one that we watch quarter-on-quarter, month-on-month. I'd like to say, F-35 production rate or V-22 production rate, that's pretty steady. You got multi-year contracts. We don't have multi-year contracts in the Military aftermarket. So your best -- I would recommend to you the best way to judge it is look at what these guys forecasted over the last 4 or 5 years and how did they actually do. I'd assume that we're using the same process, but the macro environment has changed and therefore how much do we -- how good is the process? It's as good as we can do it right now, and we'll adjust it as we go through the quarters. I wish I could give you a better answer, but that's as good as we can do.

Operator

We'll take our next question from J. B. Groh.

J. B. Groh - D.A. Davidson & Co., Research Division

Couple of questions. Obviously, the balance sheet's in good shape, and you've got some available capital and the cash flow is very good. Can you talk about, and looking at your supplemental information, obviously you don't have a number in there for 2014 acquisitions, but I presume that you're still active in the market and maybe you could address kind of what you're looking at and how you see valuations trending and those sorts of things.

John R. Scannell

Yes, we are still looking for acquisitions. Although I would say we're probably a little bit more cautious than we've been in the past. And given the story I just told about some of our Space acquisitions, and our Wind acquisition and the fact we're doing in Medical -- a review of our Medical business, I think if I were in your shoes, I would welcome that caution. Now that's not to say -- we've done some very, very nice acquisitions, I would say. There is a [indiscernible] acquisition, most of the components acquisitions that we've done have performed very nicely. So it's not a black-and-white picture. But I think we're trying to be a little bit cautious and make sure that our processes are as good as they can possibly be. But we are still in the market; we're still looking for acquisitions. I think right now, if I do -- if I work down through the businesses, on the commercial side, property prices are very high. And I think it's real hard to justify the prices and our friends at TransDigm, if they want to buy a business, they're willing to pay a very high number and I think that's not something we're going to try and bid against. There's nothing that's that strategic that we feel like that will be worthwhile doing. Defense is actually pretty slow. There just doesn't seem to be a lot of properties that are of particular interest to us. Industrial, last year has really been a year of trying to consolidate a lot of the stuff that we already had. So we've probably been distracted with the in-house activities and therefore, there's not been a lot in the pipeline there. Space, we've done a bunch of them. I think we want to spend the next year or 2 bedding down what we've got rather than expanding much beyond that. And Medical we're not -- obviously, Medical we're not doing any acquisitions at the moment anyway. So it's a little bit of a mixed bag. I think it's generally a slower environment in Defense. It's an expensive environment in Commercial. And in Industrial, we've got distracted, but we're still in the market and use of proceeds in terms of use of free cash, acquisitions are one of those areas that we will still consider seriously.

J. B. Groh - D.A. Davidson & Co., Research Division

Okay, good. And maybe you could talk about what you sort of see as the opportunity set on 777X?

John R. Scannell

Well, I think it's a bit early yet to say that. We know about the 777X, but there has not been a lot of activity yet between us and Boeing. I think they are very early on in the process. And I guess the opportunity, if it's an all new wing would be to have a new set of flight controls. And if that were the case, then it will be an opportunity as big as a 350 or an 87. Whether or not they will elect to do that, how much they have changed the configuration, we don't yet know. So I think that will be probably over the next 6 to 9 to 12 months before we'll have a clearer picture on that, and how that process will run and then whether or not we could be successful in this.

J. B. Groh - D.A. Davidson & Co., Research Division

Can you remind me again what the A350 content is? If you guys have said that, I cannot recall.

John R. Scannell

It's similar to an 87. It's about $1 million in content.

Operator

And we'll go next to Kristine Liwag.

Kristine T. Liwag - BofA Merrill Lynch, Research Division

So I guess just a follow-up on M&A. You mentioned the valuation in Commercial aerospace and your M&A history in the Q&A section. And some traditionally A&D companies are expanding into oil and gas. Can you talk about your appetite for maybe expanding into M&A -- expanding through M&A into adjacent industries?

John R. Scannell

I can. I think we have the advantage that we have been in the Industrial businesses for about the last 50 years. So the nice thing diversification offers in a situation like this is that we're not trying to take Military or Commercial engineers and try to put them into the oil and gas business that they have no experience of. We actually have quite a significant business in oil and gas, it's $100 million -- north of $100 million between our offshore, what we call Energy business, Marine business in the Components Group and a downhole business that we have in the Industrial business. And we have business in the oil and gas turbine businesses, as well as obviously, the Wind business. So we have -- our energy portfolio, if I put them all together, is probably somewhere between $200 million and $300 million of business already. And that -- those actually present opportunity. There are a variety of initiatives that we're working within that sector. It turns out in that business that if you manage to come up with something that the big guys want, because they're all big guys whether it's the Schlumbergers, or it's the exploration Schlumbergers, Halliburtons, then it has very large potential. On the other hand, it's a very demanding set of applications, and it takes a while before anything matures. But we do see that as a potential growth for us. And if you listened to my presentations, when I talk about, our focus is when performance really matters, that's one of those environments where performance really matters in the sense of it's a very tough environment. You don't want stuff to fail. You don't want to have to pull something out of the ground because you're going to shut down the well for a day or 2 or more. And that kind of fits with our approach, our approach is to bring technologies and solve problems for customers and then in difficult applications. And that's the fit for us. So this is not a question of, okay, let's try to diversify away from A&D. This is just, let's try to build on what we already have and continue to grow it.

Operator

It appears we have no further questions at this time.

John R. Scannell

Thank you very much, Margarita, and thank you, everybody for listening and we look forward to speaking again in 3 months' time. Thank you.

Operator

That does conclude today's conference. We appreciate your participation. You may now disconnect.

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