ESL
#Again, <UNK>, similar to the response that <UNK> gave to <UNK>, we are expecting similar effect in Q4 that we had in Q3 relative to compliance.
We are moving into our second directed audit and moving into what hopefully is the final innings of the ball game on that one.
But that is going to continue into the first half ---+ the first fiscal half of next year.
And we do report in ---+ and I don't have a copy of the release here in front of me.
We do report in the dollars we expended in compliance in the third quarter ---+ in the earnings release and also in the Q.
Just to add to that, <UNK>, I think what you are trying to get to is of the stuff that we don't carve out, there still is activity going on in the businesses, especially as we are gearing up for the second audit.
And, again, we don't carve that out or try to.
So there is probably some incremental costs that are impacting our business units, especially as we get ready for the second audit, which kicks off ---+ we have an audit schedule that's been agreed to with the State Department.
It kicks off at the end of August.
It will go through probably December time frame as we work through the different pipes.
So we feel good about that.
We've also had some, I would say, things that we don't carve out in our accelerated integration targets as we close down the two facilities.
We are down to the expected headcounts.
We did most of those changes in the third quarter; now we are down to the levels that we anticipate.
And, again, as we had two factories going up and a lot of activity to get the first article inspections through a couple of our key customers, those activities were hitting gross margins in the specific businesses.
So those ---+ some of that flows through inventory.
We'll have to see some of that read off in the fourth quarter, but we feel good about the progress that we are making there.
There is a lower level of headcount.
We have built up the right levels in the new sites.
So, some of that should start to flow off in the fourth quarter into definitely some improvement in 2017.
Well, we are ---+ obviously income is a big part.
One of the reasons why cash flow is a little softer year to date is because of the significant capital expenditures that we've incurred relative to our norm.
We are anticipating that we're not going to see that level of CapEx in Q4.
So we've got higher income and we've got lower CapEx.
When looking at our working capital, because obviously that's another significant factor there, we are expecting obviously receivables are probably going to move up because of the higher sales that we are looking at.
But fundamentally, the sales that we are looking at in Q4 are not going to be that dramatically different than we've had in Q3.
So in our model, we are looking at some level of inventory reduction in Q4.
The combination of those factors is what leads us to believe that we are pretty comfortable with that cash flow forecast.
Well, I mean ---+ and frankly, <UNK>, you've nailed it.
Our expectations are that capital expenditures are going to come back to our more historic norms next year.
We certainly don't ---+ we certainly are not buying another building, and we are not renovating a building associated there.
And then we are looking for improvements as we move forward in operating performance.
One other I'll mention is, <UNK>, it's just with some of the product moves that we've had ---+ so, we moved the products from Duluth up to Everett.
We had some product moves ---+ obviously, we've talked a lot about NMC and the sensors move.
We did have to build up some buffer stock there to make sure that we did those moves.
NMC was another one where we built up some buffer stock, again, to kind of work through with our customers.
So we are not in ---+ we are anticipating bleeding those down, which I think were kind of a little bit one-offs.
Another small one that I did have some build-up was we've talked about this connector issue, that we had an opportunity to grow into new connector business because of a competitor that had some export issues.
And we built ahead on that.
And lastly, Racal, which is typically has that business model to position for some sales in the fourth quarter, working with our customer we anticipated an order.
We didn't have it yet, so we did do some build-ahead there.
I'm not saying we won't have those things next year, but those should probably be a little bit less next year.
We brought Scott Celli on board.
That was a normal retirement.
Jim Brandt is working overlapping with Scott.
But really excited about Scott coming on board.
In a very difficult environment in defense technologies, we have won a lot of business.
California has done better than expected this year.
Arkansas has had some challenges because they've won more new programs this year than they have won, I think, in five or six years.
So it's ramping up, having to set up mixed model sales, doing small-batch sizing.
So all of that has gone very well.
We had the incident in Arkansas, which was ---+ wasn't ---+ it was an engineering change that probably wasn't understood as well.
But that's being improved, and we are working through that.
So, feel good about that situation.
I think ---+ again, I think we're a little hung up on the compare with that one year.
We think it's going to be equal to or slightly up.
There's a number of things we are still chasing but overall, sequentially.
So it's ---+ we still think it's pretty solid ---+ it should be a solid quarter.
There are some things that we are still out pursuing, but feel good about the backlog that we have right now.
So, broadly, it looks pretty good.
I think maybe two or three things.
The ---+ some nice wins.
The Antonov program that we've gone out with, that was a nice win, a long-term contract.
And the thing I will highlight there is that was a relationship that our DAT folks had with Antonov, and they were able to pull along the CMC side.
As you know, we've talked about the sales lead at CMC is from DAT.
So, very excited about that opportunity, and saw some more of that type of activity at the airshow.
So that was really nice.
DAT had some nice sales increases.
So, again, their breadth of products ---+ we saw some nice increases there.
And lastly, EIT, the interface technologies group, again, had some good growth there.
So kind of broadly ---+ some nice broad-based improvements.
Mike, let me start with the defense platform.
You know, given the state we're at, we are still in flux.
And so I'll give you what I know, which is similar to what I said.
We've done a detailed evaluation of the site.
We've done a thorough investigation of the events leading up to the incident.
We've taken some corrective actions.
We have worked with the employee work force and, last week, reviewed all of our training and safety policies.
And this week, as we speak right now, we are in the process of restarting the facility.
So, there's a couple of things that have yet to be determined as we are working through this.
One is, when are we going to be back up to ramp speed, which is going to take us a little bit of time.
And then the second is, as I mentioned in my comments, we had just passed a number of first-article inspections on some new products.
And depending on how quickly we come back up, we may have to go through those first-article tests again.
So that's a long way of saying that we are being conservative.
We are factoring that in, and we are factoring a slow and steady start-up.
And, relative to our expectations, sales in that platform could be impacted by $15 million to $20 million.
Yes.
It's still in flux.
We obviously are on certain of those programs what we hear about a little bit earlier than maybe is out in the press, and are our working with current orders and work in process and working with the customer.
Those are ---+ you are right.
Those are big programs for us.
That is very important.
They are important customers.
We've made good investments.
You know, we think A400M ---+ it's timing ---+ a matter of time.
But they are relatively ---+ there are large programs, but our exposure to any one specific program is fairly small.
And so we think we are building that into our forecast as we look forward.
I think we've talked about this.
We do go through some upside/downside planning and are trying to be, again, a little more conservative in the way that we look and try to take into account fluctuations like this.
And I think we are trying to show that we are being a little bit more steady-state there.
Well, we are still working with the businesses to take a look at that, so it's a little premature.
But I feel ---+ I'm cautious because of those things.
But, again, our breadth is pretty diverse.
I feel very encouraged about the bookings that we are having in some of the diverse markets.
You know, it's ---+ I'm cautious about it.
We're not ready to show something, but I would ---+ I'm not going to see big giant double-digit gains next year.
I will say that.
But it's a little bit early for us to give a specific number.
Yes, <UNK>, we are right now ---+ as you would expect, we are right now working with our platforms and our segments and looking at our detailed planning for next year.
And there is ---+ as both you and Mike have clearly pointed out, there's a lot of uncertainty on some programs that we are deep into.
And we are developing and working on, with our engineering staff, developing programs that will begin kicking in a little bit later.
So, we are ---+ right now, it's early.
I am very pleased with how the unit is doing.
I think our senior team here, Michel Potvin and his sales team there, along with Al, we ---+ I have much more visibly onto what they are working on.
It is a long list of singles and doubles that they are working on.
So, again, we are not trying to go bank on any big one-time wins.
But the combination with DAT has been really good.
I will say that when we brief the Board on this, we do talk about, hey, this is working like we planned.
There are ---+ two or three or four pretty significant opportunities where CMC is getting their foot in the door and more wins.
And we are also seeing the same thing going the other way where we are able to pull through some DAT volumes.
So it's going well.
They've got a long list of things that they are working out.
We've just got to go make sure we execute on them.
But so far, some nice wins.
They had a long list of things for this year.
They've been successful on some.
They've lost out on some others.
So it's still early days.
Thank you.
And thanks to everyone for being on our call today.
I will note that <UNK> will be attending a couple of conferences on the East Coast next week.
So, if possible, it would be great to see you there.
In the meantime, if you have any questions about our third-quarter results, feel free to get in touch with me.
So thanks again, and have a great evening.
