Moog Management Discusses Q1 2014 Results - Earnings Call Transcript

Jan.24.14 | About: Moog Inc. (MOG.A)

Moog (NYSE:MOG.A)

Q1 2014 Earnings Call

January 24, 2014 10:00 am ET

Executives

Ann Marie Luhr

John R. Scannell - Chairman and Chief Executive Officer

Donald R. Fishback - Chief Financial Officer and Vice President

Analysts

Julie Yates Stewart - Crédit Suisse AG, Research Division

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

Tyler Hojo - Sidoti & Company, LLC

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Operator

Good day, and welcome to the Moog First Quarter 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.

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 subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of January 24, 2014, our most recent Form 8-K filed on January 24, 2014, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at www.moog.com. John?

John R. Scannell

Good morning. Thanks, Ann. Thanks for joining us. This morning, we'll report on the first quarter of fiscal '14 and update our guidance for the full year. Our first quarter was a slow start to the year, and we had a couple of unusual items which depressed our bottom line earnings number.

Let me start with the headlines for the quarter, update our thinking for the year and then guidance of the segments.

Headlines. Our operations delivered $0.88 per share in the first quarter. This was close to the mid-level of our guidance range. Sales were a little soft and R&D was relatively high. In the quarter, we redeemed our 7.25% high-yield bond and incurred an associated cost of $0.12 per share. This cost will come back to us over the next 3 quarters in the form of lower interest payments. In our Industrial segments, we wrote down a technology investment in an external company which resulted in a $0.06 per share noncash charge. Taken altogether, the EPS in the quarter was $0.70 per share. Free cash flow on the quarter was very strong, at $48 million.

Looking to the full year, we're moderating our forecast based on our experience in the first quarter. There are 3 major adjustments. First, we're increasing our forecast for R&D investments in our Aircraft Group by $10 million. This increased number is based on the expanded workload to get our equipments from the A350 qualified in a hurry, as well as an accelerated development schedule for the E-Jets for Embraer. Second, over the last 90 days, we refined our cost estimate for our SAP business system implementation. When we announced this initiative 90 days ago, we had a preliminary cost estimate for fiscal '14 based on the first cut project plan. We now have a detailed breakdown of the expense in fiscal '14, and we believe it will be about $7 million higher than our first estimates. Our original plan anticipated that more of the costs will be capitalized this year. Finally, we're seeing some sales softness in 3 of our markets: Defense, Space and Industrial. As a result, we're reducing our sales forecast for the full year by $45 million. We're very focused on minimizing the impact of the sales reduction at the bottom line through a series of cost reduction activities. As a result, the $45 million sales reduction will only reduce our margins by about $7 million. Taken altogether, we're now forecasting earnings per share of $3.65 for fiscal '14. We're disappointed to report a change in our earnings outlook for the year. However, we believe the additional investment in Aircraft R&D and in SAP will provide benefits for our investors in years to come.

In the short term, while sales and earnings are a little softer, we continue to generate strong cash flow. We find ourselves in a slow growth, slow acquisition environment. And in the present environment, we believe returning excess cash to our shareholders will create the most value in the short term. Therefore, we're announcing today a $4 million share buyback program which we plan to execute over the coming 12 months or so.

Now let me move to the details, starting with the first quarter results. I would remind our listeners that we have provided a 3-page supplemental handout which details all the numbers.

Q1 fiscal '14. Sales in the quarter of $643 million were up 4% from last year. Sales were up in our Aircraft, Space and Defense and Component segment, but were slightly lower in our Industrial Systems and Medical Devices segments.

Taking a look at the P&L, our gross margin is in line with last year. R&D is up, driven by our Aircraft segment, but total operating expenses are lower as we benefited from the restructuring activities in fiscal '13. Other expenses are up due to the call premium on our high-yield bonds and the investment write-down in our Industrial business. Lower interest expense and slightly higher effective tax rates resulted in net earnings of $32 million and earnings per share of $0.70. Adjusting for the impact of the bond call and the investment write-down, earnings per share of $0.88 were 17% higher than last year.

Fiscal '14 outlook. We're moderating our sales forecast for the year by $45 million. There's no sales change in either Aircraft or Medical. Space and Defense sales would be $13 million lower as our NASA business moderates and the Military vehicle business slows. Industrial System sales will be $10 million lower as a result of reduced flight simulation sales. Important[ph] sales will be down $22 million, primarily driven by reduced Military vehicle activity and a softer outlook for the Industrial automation market. The lower sales outlook has a $0.10 per share negative impact on earnings. Higher R&D has a $0.15 per share negative impact on -- and our increased investment in SAP has an additional $0.10 per share negative impact. Taken all together, we're moderating our forecast for EPS from a range of $3.90 to $4.10 per share, down to $3.65 per share. This new EPS forecast is exclusive of any benefits from our share buyback program.

Now let me move to the segments, starting with Aircraft. Sales in Aircraft in the first quarter were up 5% from last year to $265 million. This total is in line with the quarterly run rate in fiscal '13. The familiar pattern continues. Strong organic growth on the commercial side, compensating for slower Defense sales. Commercial sales were up 25% in the quarter, with strength in both the OEM and aftermarket segments. Sales to Boeing and Airbus continued strong, driven by the 787 ramp and the initial production units on the A350. The commercial aftermarket was also strong as a result of higher 787 initial provisioning.

In the Military market, sales were down 8% from last year. F-35 production was up slightly in the quarter, but the development contract was down almost $6 million from last year. Helicopter sales were down as the V-22 production rates moderate. Other Military OEM programs showed an uptick, driven by increased activity on the KC-46 tanker program. The Military aftermarket was down as fewer units were returned for repair.

Aircraft fiscal '14. We're keeping our sales forecast for the year unchanged from 90 days ago. However, we're adjusting the mix between Commercial and Military to reflect the experience of the first quarter. We're moderating our Military aftermarket forecast by $10 million. We speculated in the past with the Military aftermarkets maybe where we will notice the impact of sequestration and lower Defense spending. By one quarter, it doesn't make a pattern, we think it prudent to moderate our Military aftermarket forecast for the year by about 5% from our previous forecast. On a positive note, we believe the strength we saw at both Boeing and Airbus in the first quarter will continue for the rest of the fiscal year. We're, therefore, increasing our forecast for commercial OEM by $10 million.

Aircraft margins. Margins in the quarter were 12%, slightly below last year's 12.3%. R&D was up 170 basis points over last year. The spend on the A350 continues to run ahead of what we had planned given the amount of what's required in the final phases of qualification. The Embraer E-Jet program also started to ramp up this quarter. When we adjust for the higher R&D loads, we see that the operations continue to perform well despite the adverse mix in -- shift in the mix from Military sales or from OEM and aftermarket to commercial OEM sales. We're moderating our margin forecast for the full year to 12.1%. Higher R&D is the driver. We think our Aircraft R&D spend in total will now be $10 million higher than our forecast from 90 days ago, about 100 basis points. We believe the slowing in the A350 expenditure will not materialize as soon as we had planned and, in parallel, we're planning to accelerate our E-Jets activity to ensure we stay ahead of the program schedule.

Turning now to Space and Defense. Sales in the first quarter were up 15% to $100 million, most of the growth was the result of an acquisition completed in the last 12 months. Organic growth of the segment was 5% in the quarter. In the Space market, sales growth of 21% can be attributed to the Broad Reach Engineering acquisition. Excluding Broad Reach, Space sales were flat for fiscal '13. We saw some shift in the mix between various programs and of those with increased activity on the soft capture system for NASA, a system for docking with the International Space Station. At the end of fiscal '13, we consolidated the management and reporting of our security markets into our defense market. Going forward, we combined these 2 markets for outside reporting. In the quarter, sales in this combined market were up 8% from last year. We had a pick up in sales on military vehicles in Europe, as well as higher sales in the security market.

Space and Defense fiscal '14. First quarter was a slow start for the year in Space and Defense. And as a result, we think it's prudent to moderate our full year forecast. For the full year, we are lowering our forecast by $13 million to $420 million. We think space launch sales and, in particular, sales to NASA, would be lower than we had forecasted. And the sales in military vehicles will also be softer than planned. On a positive note, we booked several large orders in the first quarter and our revised forecast has seen stronger sales in the second half of the year.

Space and Defense margins. Margins in the quarter were a disappointing 7.9%. We continued to struggle with the recent space acquisitions where the results continue to fall short of expectations. This quarter, we incurred another $2 million charge on various programs for the cost estimates to complete, increased again. There is a lot of time and energy going into getting this right. As I said, last quarter, the difficulty with space program is that when they run into trouble, it's not possible to cut cost and improve profitability. Actually the opposite occurs. We have to invest significantly more cost to get them fixed. We struggled on space programs before and we worked our way through these difficulties, as unpleasant as they may be. Given the soft margin performance in the first quarter, combined with the reduced sales outlook, we're moderating our margin forecast for the year to 9.1%.

Turning now to Industrial Systems. Sales in the first quarter of $144 million was 3% lower than last year. Sales were down marginally in each of our 3 major markets: energy, industrial automation, and test and simulation. The good news is that our incoming order rate is solid and that our profitability has improved significantly from the same quarter last year. Sales in the energy market were mixed with soft wind sales in China, compensated by stronger oil and gas exploration sales. In industrial automation, sales in most markets were flat with last year, with lower sales into steel mills strike the total down by 2%. In the simulation and test markets, our automotive test sales into Asia were up nicely from last year, but our flight simulation sales were down as a couple of large customers adjusted their inventory level.

Industrial Systems fiscal '14. We're moderating our full year forecast by $10 million to align us with the run rate of the first quarter. Relative to our forecast of 90 days ago, the reduction is all in our simulation and test markets. Our customers in the flight simulation business are revising their outlook slightly and adjusting their inventory levels after a very strong growth in fiscal '13.

Industrial Systems margins. Margins in the quarter of 8.5% includes the effects of a noncash write-down on the technology investments. Exclusive of this write-down, operating margin in the quarter of 11.3% were up over 500 basis points from last year despite the slightly lower sales. The restructuring activities we conducted throughout fiscal '13 are showing through on the bottom line.

Let me provide a little more color on the investment write-down. Over the last few years, we've identified the market opportunity for very large, permanent magnet motors. These are motors of 3 feet or more in diameter which are capable of replacing hydraulic systems in a range of heavy-duty automation applications. The underlying driver of the shift in industrial application is the push to improve efficiency. We know how much fuel efficiency drives the aerospace markets, while there's a similar trend, albeit less dramatic, in the industrial markets. 10 years ago, we led this shift from hydraulic to electric in the flight simulation business. Today, we see the opportunity to do the same in a wide range of industrial applications. Large motors are the key to this opportunity. Over the last 2 years, we've invested internally in developing large motor technology, and in parallel, we've made small investment in 2 technology companies who we believe had some unique capability. 6 months ago, we wrote down the investment in one such company when it was sold to a third party. This quarter, we're writing down the investment in the second company which has run into cash flow problems and is ceasing operations. We're disappointed with the net result of our investments, but our association with both companies has supplemented our internal development activities which we continue apace.

For the full year fiscal '14, we're forecasting margins of 11.3%, up from fiscal '13 operating margins of 8.7%, excluding specials. Our new fiscal '14 forecast is down from our last forecast based on the slightly lower sales, as well as the $4 million investment write-down this quarter. This write-down is equivalent to 70 basis points of margin headwinds for the full year.

Turning now to our Components segment. Sales in the first quarter of $103 million were up 3% over last year. Our Aspen Industrial Motors acquisition, which we completed in March of 2013, contributed $9 million in sales in the quarter. Excluding acquisitions, organic sales were down 6% in the quarter. Sales in the Aerospace and Defense markets were about flat with last year, while vehicle sales were a little softer, but missile sales a little stronger. In the non-A&D market, sales at the energy sector were down as a major customer adjusted their inventory levels and we shipped fewer FPSO products. FPSOs are floating production and storage offloading ships using offshore oil production. We sell very large slippering used on these ships, with average selling prices well north of $1 million. The first quarter last year was an unusually strong quarter for FPSO shipments. We shipped 70% of the total FPSO sales for the year in that quarter. The first quarter of fiscal '14 was actually a very good quarter for FPSO sales, just down from the boom quarter last year.

In our other non-A&D markets, Medical and Industrial, the additional sales from the Aspen acquisition contributed over 100% of the growth, where the underlying market showing some softness.

Components fiscal '14. The first quarter was a slow start for the year for our Components Group. The military vehicles market continue to weaken, and our industrial markets are showing little sign of improvement. We're, therefore, reducing our sales forecast for the year by $22 million. This new forecast still assumes a modest pickup in the second half of the year, based on slightly higher foreign military sales, completion of some large projects in our energy sector and a small improvement in the industrial markets.

Components margin. Margins in the first quarter were 15.8%, in line with the long-term average for this business. For the year, we're moderating our margin forecast from 15% down to 14.7% based on the higher SAP business system project cost.

Medical. Medical Q1. This was a very strong margin quarter for our Medical segment. Sales in the quarter of $32 million were actually lower than last year. The difference in sales is due to the sale of the Ethox Buffalo facility which we completed in June of 2013. Organic sales were about flat with last year. And there's a slight shift in the mix with higher pump sales and lower set sales. Higher pump sales is a positive sign as set sales are determined in the long term by the population of pumps placed in the field. For fiscal '14, we're leaving our sales forecast unchanged from 90 days ago at $137 million. We're shifting the mix slightly to reflect the results of the first quarter.

Medical margins. Margins in the quarter were very healthy at 11.4%. This is the first time we've hit double-digit margins in this business in many years. The improvement is a result of improving mix and the continued focus on cost containment. For the year, we're keeping our margin forecast unchanged at 7.1%. Given the strong showing in the first quarter, this may be conservative.

Before I leave the Medical segment, let me give you a brief update on our strategic review process. Unfortunately, at this moment, there's not a lot I can report. Apart from reassuring our listeners that we are spending considerable effort on this review. Our Medical segment grew out of our acquisition campaign between 2006 and 2009. In that period, we acquired 5 small medical companies and gradually merged them together into our present segment. Given this history, we have a broad range of products and technologies which are used in diverse markets. This diversity has made our review process relatively complex and time consuming. Process continues and we would hope to provide our investors with more specific updates in the next quarter.

Let me finish with summary guidance. We're off to a slow start in fiscal '14. In our first quarter, we've seen our defense market weaken, and the outlook in our industrial market has not improved as we had hoped. Commercial Aircraft remains a bright spot, and our Medical business is doing well. But they don't make up for the softness in the other 2 markets. Therefore, we've moderated our sales forecast for the year by $45 million. We're now forecasting total fiscal '14 sales of $2.63 billion, up about 1% over fiscal '13. We're also lowering our earnings forecast for the year as a result of 3 factors: first, the lower sales will have a negative impact on our EPS forecast of $0.10 per share; second, higher R&D in our Aircraft Group will have a negative impact on EPS of $0.15 per share; and finally, higher cost on our SAP project will have a negative impact of $0.10 per share. The total cost of our SAP project this year will be about $0.20 per share, or equivalent to almost 60 basis points of margin headwinds in each of our segment. Taken altogether, we're now forecasting full year EPS of $3.65 per share. We believe the second quarter will be similar to the first for our operations. We will have about $0.10 of additional SAP cost. The net result should be Q2 EPS between $0.70 and $0.80 per share. The second half should be much stronger, with average EPS of $1.10 in each of the last 2 quarters.

On a positive note, we continue to generate strong cash flow. We plan to use that cash to enhance shareholder value through a $4 million share repurchase program over the next year or so. This equates to almost 9% of the shares outstanding. We estimate that the net benefit from this program in fiscal '14 will be about $0.05 per share. If this estimate materializes, the year will come in at $3.70 per share.

Before passing it over to Don, let me offer some macro thoughts on the general market situation. We're a company where long-term value is created through technology and product innovations applied to markets where performance really matters. Our focus is on long-term growth while ensuring we're using our balance sheet prudently to enhance returns to our shareholders. Today, we find ourselves in the slow growth, slow acquisition period. In time, that situation will change. And we're investing now to position ourselves to take advantage of that shift when it comes. Short term, we're focused on overhead reduction and improving our processes through the application of lean techniques. In parallel, we're investing in a state-of-the-art SAP business system to build a platform for future growth. In addition, we continue to spend on R&D to generate growth opportunities across all our markets. Today, Defense and Industrial face particular market challenges. In Defense, we're pursuing additional foreign military opportunity, as well as investing in new platform technologies outside our normal field of application. An example is small weapon platform -- a small platform weaponization. In Industrial, we're investing in next generation systems for our major markets, including wind energy and flight simulation. We're exploring new technologies which offer improved energy efficiency based on large permanent magnet motors. And we're creating new markets for our technologies in areas like medical simulation.

Let me finish by saying that we continue to look for acquisitions which will complement our organic growth strategy. We struggled with some of our recent acquisitions, and we've taken a step back to review our due diligence process and learn from our experiences. Moving forward, we believe acquisitions will continue to be a key element of our long-term growth. We'll evaluate them from strategic perspective, as well as the potential alternative use of capital perspective. Our decisions in each case will be based on the best option to enhance long-term shareholder value.

Now let me pass you to Don, who'll provide some color on our cash flow and balance sheet.

Donald R. Fishback

Thank you, John. Good morning, everyone. We had a strong free cash flow quarter of $48 million. This marks the fourth sequential quarter where our cash flow conversion ratio has been in excess of 100% of net earnings. Our net debt decreased by $33 million during the quarter to $519 million. The difference between free cash flow and the changing net debt outstanding is principally explained by the cost associated with the redemption of our high-yield debt that John talked about. Back in December, you'll remember we called in our $200 million of outstanding debentures that were otherwise scheduled to come due in 2018. With that transaction, we've had a call premium to retire that high-yield debt, which carried an interest coupon of 7.25%. We're now using our revolver -- revolving credit facility while we're paying less than 2%.

For the first quarter cost associated with the call, we're about $8 million pretax or about $0.12 per share. This Q1 cost will be offset by lower interest cost throughout the balance of the fiscal year, such that the impact of this financing transaction will have a negligible impact on FY '14's full year EPS results.

The most significant positive cash flow driver on the balance sheet in Q1 was the decline in accounts receivable. This was due to the timing of collections related to last quarter's invoicing. Inventories were relatively flat from 3 months ago, while accounts payable came down, reflecting a more normal level. Customer advances were flat quarter-over-quarter, at $147 million. And loss reserves declined by $5 million to $39 million.

Capital expenditures were $20 million, and depreciation and amortization totaled $27 million in the quarter. We're leaving our forecast for CapEx and depreciation and amortization for all of fiscal '14 unchanged at $105 million and $113 million, respectively. Cash contributions to our defined benefit pension plan totaled $12 million in our first quarter, in line with our projected contributions for all of fiscal '14 of $52 million.

The funded status of our principal domestic DB plan has improved in recent years, reflecting better asset performance and is increasing discount rate used to value the obligations and a consistent level of company-funded annual contributions. At the end of our most recent fiscal year, the obligations on our domestic DB plan were 82% funded compared to only 64% 12 months prior.

Our effective tax rate in the first quarter was 31.5%, up just slightly from last year's 30.5%. In total, our free cash flow outlook for the year remains unchanged since our last forecast at $165 million, now reflecting our projected cash conversion ratio of just under 100%.

Our financial ratios at the end of the quarter reflect the strengthening financial picture. Net debt as a percentage of total cap was just under 25%, down from 31% in last year's first quarter. Our leverage ratio is presently just under 1.5x. During calendar year 2013, we called in a total of $400 million of expensive high-yield debt and we replaced it with lower cost revolving credit. As a result, at quarter end, we had $300 million of unused borrowing capacity on our $900 million revolver that terms out in 2018. We also have an option to increase the size of our revolver by $200 million at current market rates associated with an accordion feature. This will increase the size of the revolver to $1.1 billion if we chose to take advantage of that option.

In summary, our financial ratios are very strong and we're generating strong free cash flow. Although M&A is slow, we're confident that we have ready access to capital in the event we need it, particularly if we were to pursue a substantive strategic acquisition opportunity. As John already mentioned, we're focused on total shareholder return and the appropriate deployment of capital. Accordingly, we announced today that our Board of Directors has authorized the purchase of up to 4 million Class A or Class B common load shares, or about 9% of our total shares outstanding. At this time, we intend to acquire these shares on the open market over the next year or so using the available capacity under our revolver. And as John has said, we estimate that our fiscal '14 EPS will benefit from that share buyback program by about $0.05 a share, above our updated fiscal '14 EPS guidance of $3.65.

So with that, I'll turn you back to Shannon, and then we'll take any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Julie Yates Stewart with Crédit Suisse.

Julie Yates Stewart - Crédit Suisse AG, Research Division

On the additional R&D in '14 that's resulting in the impact to guidance, is this really just a timing issue and pulling forward R&D expense that you originally thought would be in FY '15?

John R. Scannell

I think, it's partially a timing on -- so there's 2 drivers of it, Julie. One is the A350 and the other is the E-Jets. On the E-Jets, I would say it is a timing issue. It's accelerating cost into '14 that would have been -- that were planned for '15. On the 350, I couldn't say that. I would say it's just additional cost as we try to push through qualification of an awful lot of hardware. The 350 costs are still coming down from last year. So they're down from -- total cost last year on the 350 of about $45 million, so this year they'll be trending just north of $30 million. So they are actually coming down significantly and they drop off as we go through the year. But it's still up from what we forecast that it was going to do 90 days ago. So I'd like to say that was an acceleration. I don't think it is. I think it's just additional costs associated with getting it all completed.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And is that being driven by the performance that you guys had seen on the program? Or is it more driven by the schedule you're getting from Airbus?

John R. Scannell

I don't think I'd attribute it to either. I would say that, Julie, it seems that it always turns out that it costs more money to get a big program like this qualified, then you anticipate. The 350 has different technology. The 787 is a hydraulic 5,000 psi hydraulic and some electric actuation systems. That's the architecture. The 350 is hydraulic and what's called an electrical backup hydraulic system. That is a different technology. And the fact that the different technology means that you do an estimate based on past experience, based on the best you know. And then almost inevitably, it turns out that there's a little bit more to do than you had anticipated. And at a time like this was absolutely paramount is maintaining the schedule with our customers. So what we will do is we will just throttle the R&D to make sure we maintain schedule for our customer, and we're not any kind of a delay on the program. The alternative is you could say while the R&D is flat and you delay the program which, of course, doesn't make any sense. So it's just one of those things that -- and I'm an engineer, so I can say that engineers tend to be a little bit more optimistic than it always turns out to be.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay, understood. And then, do you have any color on the commercial aftermarket, excluding the boost that you saw from the 787 sales provisioning?

John R. Scannell

Yes. It turns out, if you take out the 787 initial provisioning, the actual -- the rest of it is down a little bit from last year. If you want to do quarter-to-quarter, it's down from about 24 to about 22. And I think I mentioned in the past on calls like this, our aftermarket fluctuates up and down 10%, 15%, one quarter to another. So I wouldn't read anything into that, apart from it's not an upward trend. The 787 initial provisioning was very strong in the quarter. It was over $7 million. And that's kind of what we were anticipating for the full year. But we haven't adjusted our forecast for the year up. And that's because the rest of it looks like it's a little bit softer than we were anticipating, so.

Operator

And we next go to Cai Von Rumohr with Cowen and Company.

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

Yes. So if A350 R&D is coming down from 45-ish to high 30s. How much the E2 -- I mean, it looks like your overall Aircraft R&D is up some $6 million. E2 spending must be very large. How big is that likely to be?

John R. Scannell

Let me correct you a little bit. It's mid-40s down to low 30s on the A350.

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

Right...

John R. Scannell

Not high 30s, which is what you said.

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

Okay, low 30s, low 30s.

John R. Scannell

Yes. So the Embraer jets, we're anticipating kind of mid-20 spend this year.

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

Okay. And then, given their schedule, that's going to be essentially the same next year or higher?

John R. Scannell

It's likely to be a high for the next couple of years. Yes.

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

Okay. And then the SAP, so the $0.20 equates to about $14 million by my math. How much was in the first quarter? How much is in the second? And in which divisions do we see this?

John R. Scannell

So in the first quarter, it was only $0.01 or $0.02, if I do cents. So you're right, that $0.20 is about $14 million. So -- but let me just do it in terms of cents. In the first quarter, it was $0.01 or $0.02. We think in the second quarter, it will actually be the heaviest quarter. It will be about $0.10 or so. And then the rest of the year, it's kind of $0.04, $0.05 for each of the back -- the last 2 quarters. And it is actually -- it's not in any of the divisions -- let me be careful. What we are in is the design phase where you do the overall design for all of the divisions across the whole corporation. So in a time like this, it's not that one group is picking up more or less than another group. It turns out that when we push -- that we have to push those costs back into the operating margin. So it affects the operating margin of all of the groups equally in this year. And it's about 60 basis points of margin headwinds in each of the groups this year. So -- but it's this central design process. And we move out in about -- at the end of next year and the following year, then you are into implementations in the different operating groups. And at that point, it will have a different expense profile by operating group.

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

Okay. And then -- I mean, does it stay at this huge level or does it go down? How should we think about it trending next year?

John R. Scannell

Yes. I think next year will be similar, and then we'll see it trend down significantly. And then, after that, kind of year 3, 4 and 5, you start to get into -- and seeing some benefits. And long term, we think the benefit is about $0.50 per share when it's all done.

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

Okay. And then, I'm a little confused by the share buyback. You've authorized $4 million. How much of that do you intend to buy? And how much is in the $3.65 and how much is not in the $3.65?

John R. Scannell

There's no -- there's nothing in the $3.65 from the share buyback, Cai. Our intent is to buy back all 4 million shares. If we do it in the open market purchases, we estimate it will take about 12 months or so. And the impact, if you do that on the average shares outstanding, the impact will be about $0.05 per share in fiscal '14, obviously it will be a lot more in fiscal '15. So it would be about $0.05 per share, so you therefore, go from $3.65 to $3.70.

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

Got it. And the last one, you mentioned $45 million down of sales, $0.10 impact. That $0.10 presumably includes the $0.06 of the Industrial write-off, which was not in your prior guidance, correct?

John R. Scannell

That is correct.

Operator

And we next go to Tyler Hojo with Sidoti.

Tyler Hojo - Sidoti & Company, LLC

Just a follow in on some of the R&D questions you've gotten. I'm just curious, when you put it all together, I mean, do you expect your fiscal 2014 R&D spend rate to be the peak?

John R. Scannell

Well, I think your question is, do we expect it to be the peak in the Aircraft business because I think the other business is all typically raw and that fairly flat percentage of sales that vary slightly between one and the other. But it's not significant, it doesn't vary a lot.

Tyler Hojo - Sidoti & Company, LLC

Yes, that's correct.

John R. Scannell

I think, 2014 is, in our Aircraft business, 2014, we're anticipating will be about similar to 2013, given that the E-Jets will continue to ramp in '15, and that the A350 will start to come down, but oftentimes with derivatives that doesn't come down as fast than you think. I could imagine that in '15, it might be similar. And then, assuming no other big program, it does start to come down significantly, I think, in '16 and '17, particularly as the A350 starts to roll out.

Tyler Hojo - Sidoti & Company, LLC

Okay. Okay, great. And then, I'm just curious, in light of kind of some of the reduced sales expectations in the markets that you all discussed, is there any restructuring expense now included in the guidance?

Donald R. Fishback

No. There's no specific restructuring expense call out in the guidance. Last year, we did about $15 million of restructuring. And then, this year, we will continue to focus on cost containments, managing staffing levels, et cetera. But at this point, we're not anticipating a significant restructuring in the business. So there is no restructuring included in the guidance at this time. Depending on how the year, of course, unfolds, that may change as we go forward. But at the moment, we're anticipating that the second half will be stronger than the first half. And particularly in the Space and Defense business, we need staffing in place now in order to be able to respond to increased program activity in the second half. And these are engineers, program management-type folks. It's not direct labor type folks. So we're carrying probably more staff now in the first 2 quarters where the sales are relatively softer than we -- than the average for the year. And we have those in place so that we can ramp up significantly in the second half. So if we didn't see that ramp up, then we might be facing a restructuring. But we don't want to not be able to meet our customer requirements and meet that sales pickup in the second half. So for that reason, we're probably carrying a little bit more staffing than we would need for the present run rate, but we anticipate that the run rates are going to accelerate.

Tyler Hojo - Sidoti & Company, LLC

Okay. I understood there. And maybe just lastly for me. I did notice that your backlog was up nicely on a sequential basis. Just curious if there was any particular product area that you would call out there? And maybe, just more broadly speaking, kind of what's your expectation in regards to backlog as we move through the rest of the fiscal year?

John R. Scannell

When you say backlog is up, are you doing backlog up sequentially quarter-over-quarter? Are you talking about year-over-year?

Tyler Hojo - Sidoti & Company, LLC

Quarter-over-quarter. 1 4 from 1 3, I think, it was.

John R. Scannell

Yes. So the big shift in the backlog quarter-over-quarter are in the Aircraft business and in the Space and Defense business. And that really has more to do with the timing of orders. It's not structurally different. It's the timing of orders because in both those businesses, in the Space business for instance, we booked some very large orders in the first quarter, which we have been expecting for a while. And they just kind of play out over the next 12 to 18 months. So you'd see that backlog kind of drop off over the next couple of quarters as we start to work those programs down. So I would use the sales guidance that we provided you as a much better indication of what we think will happen rather than the guidance, particularly given that it's in the long-term contracting areas, the big program areas. And it's really more a timing of orders.

Donald R. Fishback

Tyler, this is Don. I just want to add a point of clarification to that. The backlog that we disclosed is the 12-month backlog. It's not our total backlog. And I think you understand that.

Operator

And we next go to Ron Epstein with Bank of America.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

So, John, a question for you. I was an engineer, too. If you know that engineers are going to be overly optimistic, why are you caught in that some trap again and again and again and again? Why? I mean...

John R. Scannell

That's a really good question. And this is -- so we ask ourselves as the engineers on that, so do we learn from the previous experience and we try to adjust as we go forward? And I think engineers do. And they try to do better the next time around. And they try to make the best estimate they possibly can. I wish I could give you simple answer to that. Maybe the nature of the beast -- we could be -- we try to be conservative as best we possibly can. And then it turns out that it's a surprise on the downside, I would say, in terms of the expense of engineering. Now sometimes you have nice surprise in the upsides that markets grow more or cost come in lower. If you know the answer to that, Ron, as the engineer, we'd be happy to do it. But we try -- we work very hard to get the estimates as best as we possibly can. They're based on the roll up from the folks who know the details. We do kind of a quick back of the envelope check at the corporate to say, does that make sense? That's what it's based on the folks that are doing the detailed project work. And then, we trust that those folks are the folks that know better what the future is, taking into account all of the history that they have themselves with what's overrun in the past.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, okay. And then, on the E-Jets, you mentioned that it's accelerating quicker than maybe you guys originally had planned. Why is that? I mean, is the program moving forward quicker? Or what shifted around in the program?

John R. Scannell

Not in the program. I would say what we decided, Ron, is that we believe that we need to accelerate our activities to make sure that we keep ahead of the schedule. So I wouldn't -- the program hasn't changed. I think as we've got in this, the feeling is we need to spend more earlier to make sure that we don't find ourselves spending a lot more later when you get behind which, of course, is the other reason that cost go up significantly, and then if you start to slip based on -- relative to the schedule of the customer.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, okay. And that program, in particular, I mean, is that all new stuff for Moog, or are there systems on that you can take from previous developments and do some form of derivative on?

John R. Scannell

Yes. Well, this -- every aircraft for the flight control system is -- you learn from the previous one and you do something different, so it's not -- even Ares 1 isn't a technology challenge. It's not particularly differentiated technology. It's pretty standard hydraulic technology. Having said that, the challenge is also associated with the envelope and the performance and the making sure it meets exactly the requirements of that particular job. So it's not a technical challenge in that there's new technology that's unproven. But inevitably, the cost driver is the fact that each airplane program is different. I don’t know if that answers your question but, unfortunately, you cannot pick up an actuator from the previous one and basically just either shrink it or grow it, and say we'd plug this one in. It always takes more effort than that. It's not like the electronic side, I would say. Electronics is probably easier to do than that.

Operator

[Operator Instructions] And we next go to Michael Ciarmoli with KeyBanc.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Just to stay on this theme of R&D within Aircraft. I mean, you guys had talked about, and I think we've been sort of been looking forward to maybe some of these R&D holiday and margins moving back to a mid-teens level or so, or just at least grinding higher. Help me understand. I mean, it sounds like the E-Jets here, but then, SAP is going to move into the implementation phase. And I think we've all seen SAP before. So that might be a bit of a headwind. But even after A350, shouldn't we be thinking about -- I mean, we've got the different variants for the 87, you still have the COMAC. I'm sure the 777X by the '16, '17 time frame is going to ramp up. I mean, are we in sort of a perpetual elevated R&D state?

John R. Scannell

No. I don't think so. Let me give you a couple of thoughts, Michael. Let me first of all do the -- Aircraft margins have gone from 7.9% in 2009 to 12% last year, and we're forecasting just north of 12% this year. So we have seen 400-plus basis points of margin expansion over the last 5 to 6 years. That -- despite the fact that we -- you're right, R&D has remained elevated. R&D this year is going to run at about 8% to 9% of Aircraft R&D. So if you do x R&D, margins in the Aircraft business are 20%, north of 20%. So it's a very healthy underlying business. What has happened is, when we talked about R&D, we also talk about the program that we have, 87, then we went to 350, then we went E-Jets. And each one of those decisions is based on is this decision the long-term right thing to do for the company. The rule down the R&D has been -- assumes that while we won't win another program. And part of the strategy has to be, so is the program a good financial bet in its own right; and secondly, how much do I want to keep, or how much of the team do I want to keep in place so that I can continue to stay in this long term. Long term, that's over the next, I would say, 3, 4, 5 years. I believe, the Aircraft R&D should come down to about 5% of sales on average. That doesn't mean that there won't be ups and downs. So you mentioned the 777X, we do not have -- the 777X hasn't come out for our type of stuff. For bids yet, we do not have a position on the 777X. And if we were not to be on the 777X, then we will see the R&D rollout. The C919 is not a particularly big one. A350 will start to come down. We saw that on the 87. You do have some derivatives so you continue for -- it's a tail on, but it's significantly below the peak level. And the E-Jets were pretty high for the next 2 or 3 years, and then that will all roll up. So we will start to see that roll up, probably not in '15, '16, definitely '17 and '18, if we were to book a major new program on something like a 777.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

So you think, I mean, this segment used to run 15%, 16%, 17% margins. Do you think it's still possible to get back up to those levels if their R&D trends down to 5%?

John R. Scannell

Absolutely. I mean, if you do the margins on this segment x R&D, you'll find that they've always been at the very high-teens and early 20s. And I would say that the segment is, at the moment, as I say if they do margin x R&D are north of 20% in the time frame where the Military business is coming down, and is being replaced with commercial OEM business, which is not the most profitable early on in the cycle. And we haven't seen the commercial aftermarkets pick up and that will pick up as the 873 grows and you get out of the warranty period. So long term, this will be, I believe, a very profitable business. And it will be able to sustain an R&D level of 5%, which will allow it to continue to grow. We still find ourselves in that period where we keep -- we decide we will take the next program because we think it's the right long-term investment for our shareholders. But that keeps us in this elevated position. So that's the way it's unfolding. And let's say, if we don't put our -- if don't have a position on the 777X, we will see in the next 2 to 3 years that we start to see that roll out.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Right. Got you. Okay, that's helpful. And then maybe, Don, just a couple of housekeeping. What are you guys expecting for full year interest expense in corporate this year?

Donald R. Fishback

Interest, right now, we're forecasting that coming down from our last forecast. Now we're forecasting it at about $16 million, that's because of the bond call. And corporate expense depends on how you define it. The way we define it, from our last forecast, we had it in there at about $28 million. We're still right around there, about $27 million.

Operator

It appears, at this time, we have no further questions in queue. I would like to turn the conference back to today's speakers for any closing or additional remarks.

John R. Scannell

Thank you, all, for listening. And we look forward to updating you again in 90 days time. Thank you. Thanks, Shannon.

Operator

Thank you. And that does conclude today's conference. We do thank you for your participation. Have a great rest of your day.

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