Q3 2020 Moog Inc Earnings Call
HM.
[music].
Good day.
Welcome to the milk stuff like that that's why Twentytwenty earnings confidence caused.
This conference is being stuck with it at this time I would like to talk a confidence over to endorse. Please go ahead Bob.
Good morning, before again, 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 the differ materially from such statement a description of these risks.
Uncertainties and other factor is contained in our news release of July 24, 2020 are most recently filed form 8-K filed on July 24, 2020 and in certain of our other public filings would be up you see.
We've provided some financial schedules to help our lives that are better follow along with the prepared remarks.
As if you can do not already have a document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot mode Dot Com John.
Thanks Ryan.
Morning.
As for joining us.
Morning, We report on the third quarter, if it was going crazy and provide some insights or the remainder of the year.
Overall, it was a good quarter against the backdrop very challenging environments.
Results as a tremendous credit to the dedication to the although employees around the globe.
We believe our results today should we didn't show reassure all investors around our two key messages.
First short term strength from our diversity in seconds long term value from our fundamentals.
As we look forward Oh priorities remain unchanged first and foremost is the health and safety of our employees and their families and seconds to continue to meet the needs of our customers, thereby secure the financial well being of the comedy.
As usual I'll start with the headlines.
Force this was the covert quarter, perhaps the first of several.
We came into the quarter, believing or defense space, the medical businesses would be strong.
Industrial would be pressured.
Commercial aircraft would be hard to fish.
Looking back the corporate unfolded pretty much as expected.
Second our underlying operations performed extremely well under very difficult circumstances.
Like the precipitous drop in sales adjusted net earnings of $30 million, an adjusted earnings per share of 93 cents remain very respectable.
In addition, free cash flow $90 million was one of our best quarters ever.
Third we incurred various various charges associated with recycling our business.
Valuing assets as a result of course.
We booked a total of almost $60 million in charges, including severance write downs asset impairments.
Over 90% of discharges noncash.
What are the very positive note our activities to curtail spending an improved cash flow resulted in lower leverage that improve liquidity at the end of Q3 relative to Q2.
And finally, given our healthy financial position, where reinstating a dividend this quarter, a 25 cents per share.
In summary, Q3 was a very tough quarter will be managed through it well and delivered strong results.
All our facilities continue to operate the majority of our staff transition to working from home.
Our diversity across markets or actions to reduce expenses and improved cash flow out of the commitment of our employees means that today. We are more financially secure we were three months ago.
Now, let me move to the details starting with a third quarter results.
Sales in the quarter of 658 million were 11% lower than last year the results.
The decline in our commercial aircraft business and weaker industrial markets.
Taking a look at the P. it out a gross margin was down on the lower sales and inefficiencies, resulting from our new work practices.
Our dollar spend an R&D and SGN they were lower as cost containment initiatives were swiftly adopted.
Interest expense was markedly lower and we had a very low adjusted tax rate.
We incurred 58 million in charges associated with the sudden change in business conditions.
Excluding these charges adjusted net income was $30 million down 34% from last year as adjusted earnings per share of 93 cents were down 29% from last year.
That's good 20 outlook.
As we entered the fourth quarter, the macroeconomic environment seems more predictable that it was 90 days ago.
Coming to except our changed reality, but that new normal still include significant let's start.
Therefore, we would be we believe it will be inappropriate to provide detailed guidance for our fourth quarter.
However, we can offer the following color auto sales outlook.
We believe our fourth quarter will look somewhat similar to our third with us renewing strength in our defense space and medical markets.
Further weakness in industrial and little or no improvements in our commercial book of business.
That was the segments I'd remind our listeners that we've provided they three page supplementing data package posted on our webcast sites.
Suggest you follow this didn't part of with the test.
Beginning with aircrafts.
Sales in the third quarter of 249 million were 26% lowered the last year as a result of the pandemic.
For the positive site literally military sales were up in the quarter.
We saw nice growth on the F 35 program, that's why does it our portfolio of funded development work.
Partially offsetting these increases was a decrease in foreign military sales, which were particularly strong last year.
In the military aftermarket we had a bloke Walker.
Strong backlog across the portfolio coming into the quarter benefited from transferring some about production staff from commercial programs over some military jobs.
On the commercial side of the house, we thought the full drugs that cool has had on the airline industry.
Sales to our OEM customers were down over 60%.
We saw some dramatic decreases across the portfolio.
The overall decrease was larger than we had expected the combination of declining production rates at the Oems, but also their actions to reduce their inventory levels.
In the aftermarket sales were down almost 50% is.
This was slightly better than what do you expect it it sounds like days it.
We benefited from a healthy backlog coming into the quarter and also from Novartis of strength of our freight customers.
Aircraft margins adjusted operating margins in the quarter, a 4.5% or primarily the result of the significant change in commercial volumes.
In addition, we suffered some lots of efficiency in our production facilities. There was also precautions taken to protect our employees health.
During the quarter, we took action is up commercial operations across the globe and occurred caught a 55 million.
This includes severance costs asset impairments and various other write offs all attributable to the structural decline in our commercial business.
Aircraft. This can 20.
The situation at our two major markets is more stable today than it was 90 days ago, we still find ourselves dealing with uncertainty.
The military side of our businesses remain strong.
Just a date this will continue into the fourth quarter, our factories continue to operators and our customers continue to need products.
On the commercial side of the business the situation remains volatile.
The Oems have announced new production schedules for their major programs and we have adjusted our staffing to align with their future long term demands.
However in the short term, we continue to struggle with significant demand volatility.
Customers reduce their inventory and preserve cash.
This de stocking was a significant factor in our third quarter, but it's likely to continue to somebody extends through this coming quarter.
In the commercial aftermarket is increasing Cobra cases around the world over the last month.
Leading the recovery in face operations, we might have expected.
Our business is predominantly a wide body airplanes.
The dearth of international flights does not go allowed for a meaningful recovery anytime soon.
Overall, the continued volatility it makes it difficult to predict what would happen in this coming quarter.
At the moment, our assumption is that our military business would remain strong well will come down a little from Q3 on markedly lower aftermarket sales.
We anticipate that our commercial OEM sales would it be slightly higher has de stocking actions a base and we're hopeful that the commercial aftermarket may tick up slightly.
Turning now to space <unk> defense sales in the quarter of 184 million or 6% higher than last year.
After last quarter. The gold is all coming into space markers with sales up 33% over last year.
We continue to see nice growth in our hypersonic development activity as well as well as strength across our portfolio of products, including avionics and mechanisms.
Also at higher sales on various NASA problems with activity on both the Orion Kubiak goes and the space launch system up from last year.
Defense sales were 7% lower than last year, primarily the result of lower activity across various this I programs.
As a slip bring products on a range of fight vehicles will also down from a year ago.
Sales into vehicle applications, where I was in line with last year by the naval and security sales were slightly higher.
Defense space and defense margins adjusted margins in the quarter was caused by 3% down from a very strong 13.9% a year ago.
Last year, we had a particularly favorable mix, where this year, we experienced some inefficiencies as the results of our changed a lot practices.
Based on defense systems 20.
So far the impact of cool with auto space <unk> defense business had been kilowatt music.
Changes to our production facilities have kept our employee safe and healthy and our engineering crews have been able to advance our development jobs like walking from old.
As we looked at the fourth quarter. We believe this relative stability will continue on the fourth quarter should be somewhat similar to ours within the normal quarterly fluctuations in this business.
Turning now to industrial systems.
Sales in the third quarter of 224 million were down 3% from last year.
However, adjusting for Forex and the sales of our T. acquisition organic sales were down about 6%.
Similar to last quarter, you know the topline numbers there were significant shifts in the mix between our major markets.
Sales into energy markets were up slightly on the acquired sales from GE, but down organically.
The continued downward pressure on oil prices is undermining investments in exploration, suggesting a recovery in our to our energy markets is automatically in the near term.
He hasn't industrial automation applications were down 17%.
Capital investment was already flowing pretty cool, but at the global economy starts to cool.
Impact of the pandemic that serve to both acceleration this drop in capital spending and exacerbated impacts on our industrial automation business.
There was into simulation and test applications were also down in the quarter in particular, our flight simulation business has softened as demand for pilot training has dropped.
And finish in a more positive door sales into our medical markets, where we have in the quarter.
Sales of components used in breathing ace or higher uncertain demand and sales of our medical pubs continued to grow it's important to cope with requirements.
And just sort of systems margins.
Adjusted margins in the quarter were 9%.
Continued shift of our mix away from our industrial automation business, it's having a negative impact on our margins. In addition to sales from our GFT acquisition are at relatively low margin due to first year acquisition accounting effects.
[noise] industrial systems fiscal 20.
Accurately forecasting our industrial business continues to be that because as we look to next quarter. We believe the underlying macroeconomic trends, we continue to pressure our business.
Sales into the energy industrial automation and simulation and test markets will continue to experience downward pressure while sales in the medical applications should remain healthy.
Shifting shifting from the macro to the Michael bookings through the third quarter or marginally below our billings signifying a declining outlook.
Taken altogether, we anticipate that sales in Q4 will be slightly lower than Q3.
[noise] summary comments.
At the time of our last earnings call. We were heading into storm. We had told the Q3 would be the idea of the storm the cold at quarter end Q4 would be the transition back to a new much more normal business environments.
That is clearly not the case as it can we find ourselves planning for several more covert quarters to call.
During Q3, we took dramatic action to reduce our spending and besides our business.
These actions paid up today, our balance sheet is stronger than last quarter, both in terms of leverage and liquidity.
As a results were reinstating, our dividends and selectively starting to reinvest in our business.
In the present environments, we believe our shareholders. Our best served by activities, which preserve value today and create value tomorrow, we are committed to maintaining the right balance between our short term financial strength and the long term investments required to grow our business.
Let me pass it to Jennifer will provide more color on our cash flow and houses.
Thank you John good morning, everyone.
Kevin incredibly strong cash flow partner can be achieved these results during a time filled with uncertainty and pressures in some of our end market.
Ensuring that we maintained our financial house during the crisis, we implemented companywide initiative focused on kind of cash conservation and liquidity. These actions directly contributed to our strong cash performance.
Free cash flow in a third quarter $90 million up from $15 million in the first quarter and $12 million in the second quarter.
Free cash flow conversion adjusted for charges associated with the pandemic, but nearly 301st time.
The $90 million a free cash flow for Q3 compares with the decrease in or not that $92 million.
During the third quarter, we did not repurchase any shares are paid a quarterly dividend.
However, based on our strong cash performance after just one quarter after spending it we reinstated the dividend at 25 cents per share.
Net working capital, excluding cash and back and the percentages town at the end of Q3 was 28.5% compared with 29.6% a quarter ago.
<unk> decreased largely reflects real soft collection as well increase threec as the U.S. GAAP.
Congrats payment rank onyx to kind of contract.
Customer advances also contributed to the improvement.
Offsetting these sources of cash generation, where continued and expected build up in inventory and a reduction in campbell associated with lower signs.
Capital expenditures in the third quarter for $17 million down from a $27 million quarterly run rate in the first half a year.
We actively managed and prioritized our spend focusing on compliance and business critical projects.
Depreciation and amortization totaled $22 million continuing at levels from our first and I can corridors.
Our leverage ratio, which is not that divided by EBITDA decreased 2.4 times to come to point time a quarter ago.
The decrease in our leverage ratio like driven by a strong kasper format.
Our effective tax rate excluding charges associated with a pandemic was 6.8% in third quarter compared to 23.1 person in the same period a year ago.
The lower maintenance years third quarter, primarily reflects an increase in foreign tax credit utilization associated with our fiscal year 19 tax return filing and a low earnings before income taxes me [noise].
Cash contribution to our global retirement plan totaled $12 million in the quarter compared to $9 million in third quarter 2019.
Global retirement planning and third quarter was $21 million up from $18 million <unk> third quarter of 2019.
Our largest defined benefit plan in the U.S. includes new entrance for more than a decade. We fully funded this plan in 2018 at which time, we shifted our investment strategy to de risk the portfolio.
Accordingly, it's largely insulated from the recent market turbulence and we continue to be fully funded the funded status also has remained stable for international pension plan.
At quarter end or not that with $883 million inclusive of $106 million to cash.
The major components of our got were $500 million senior note.
$404 million borrowing on our U.S. revolving credit facility.
$82 million outstanding on our securitization facility.
We have $654 million, an unused borrowing capacity I know you asked revolving credit facility.
Our ability to draw on the unused balance is limited by or leverage covenant, which is a maximum of 4.0 time on in that that base that.
Based on our leverage we could have incurred an additional $620 million attack and to the end of our third quarter.
We are confident in our existing facilities provide us with adequate liquidity to successfully navigate through these uncertain time.
[noise], we made significant adjustments to our major capital deployment activities in the third quarter, we had partner M&A pursuit had no share repurchases and in our dividend and delayed certain capital expenditures.
We also took measures to smaller incoming inventory in line with expected demand and took advantage of payment deferral.
In addition to these cash release measures. We've also managed expenses to mitigate the impacts were operating margin.
Over the past quarter, we've gotten more clarity around customer demand, we've re size the business and end market in which are facing significant and sustained reductions in demand most notably in commercial aircraft.
As a result, we recorded $58 million of charges associated with Colgate 19 pandemic.
We incurred $5 million and severance charges to $54 million this noncash charges.
The non cash charges include at 34 million dollar impairment of long life assets of which $9 million, there's a provisional charge on property that we're still in process on valuing.
And a $19 million breakdown of inventory.
Despite the increased level clarity, we are still facing rent and considerable uncertainties remain our immediate financial focus will continue to revolve around cash preservation and cost management, while opportunistically resuming in Boston and measured and balance way.
We will adjust our spending to 50 evolving.
We move into the fourth player and beyond.
We are committed to ensuring that we had adequate liquidity. During this crisis protecting the long term health of the company and emerging financially strong ready to capitalize on opportunities like the situation right [noise].
With that we'll turn it back John for any questions you may have thanks, Jennifer.
And these are we wouldn't be we'd be happy to take any questions now that come in these.
Thank you Sir if he would like to ask a question. Please take note bypass think side when I know telephone keypad. If he had just because speakerphone. Please make sodium assumption is turned off till I guess thinking that that each other pitman.
Just had one to ask a question.
Well take the first question from Robert Spingarn from Credit Suisse.
Please go ahead you get good morning, everybody wondering about John you said and Jennifer echoed. This that you may have a little bit better visibility on commercial not much but can you talk to us about month by month trends, both OE and aftermarket so going through the quarter just for.
Reported and then maybe what you've seen into July here.
Let me do the OE side of the business. So that sold the <unk> the two big players Boeing and Airbus Obviously, our two major customers. They came out over the course of the quarter with new rates on a go forward basis I think the as the numbers was Airbus is going to go from 10, a month on the 350 down to six a month.
At Boeing was going to go from 14 of the seven to 10, and then kind of through the middle of next year, and then I think dropped to about seven a month and so we we size our business without kind of long term demand in perspective, thats will be side as far as kind of adjustment that they were.
Great. Thanks.
I think the thing that happened, though this quarter as I mentioned at the called was they also engaged in a significant amount of inventory rebalancing or de stocking or however, you like to call. It and so you know if I if I give you those numbers at 14 to 10 of the it's seven and tend to take some <unk> 350, you might say well that's a that's a 34.
Sense dropped, 35%, maybe drop and production rates and yet although he business was down 60% in the quarter and that's affects the destocking. So we saw it just a significant a much much larger drop than we would've anticipated from the production rate adjustments at the always the major airline amount of the Airframers, we're making we think that's probably likely to come.
I knew it as we go into the fourth quarter, it's very hard drops actually know exactly what that's what it looks like because it's like what happens is we have itll be have orders from our OEM customers and then they just push the orders we I wish our we don't have orders and they all do on a short timeframe. They give us a long term forecast what the order on the road to beat our time period and the orders that you expect.
Literally gold turned off and so I'd say the quarter was or the OE side, we're faced with that relate to that kind of the volatility that was.
You know today, we look like were pretty good and then tomorrow, we get a push out that pushes things out by the year. Our you know we're expecting orders every two weeks for for a new Shipsets and then suddenly for a period or two you actually don't get them. So it was volatiles, but the number whether it was down 60% of that I'd say that was pretty.
Pretty fixed across the quarter you know we reported about this quarter looks like as we end up the year. So I don't want to get ahead of that you were just a couple of weeks into the quarter, but but I think we're anticipating that that kind of de stocking would continue and so the downside to that is where you know we saw is what weve recites for their long term production needs and we're not research.
Using for the short term that might be a quarter or to where the whether it's just much less demand until we still end up carrying a little bit of extra cost that we don't in theory need, but we will need to get all in September October November whenever that comes back.
Now of Arc further just just quick I clarify you said 14 to 10 on the eight seven.
And that would be 30%. The Destocking takes you down I know you're not the 60% is not necessarily specifically the eight seven how do we then factor in the continued decline later to seven months.
Yeah, so easily we've adjusted our staffing too.
Probably you know so that's not I was at the present thing that's projected to be in July of next year and so we want to make sure that we thought the sapping to make sure that we can keep our maintain that 10, a month through that period of time. So that's you know that's 12 months away and with attrition and some other natural things I think we'd be able to adjust its always.
Easy you know if you know that in 12 months high and there's going to be a 30% cousin to me that's something that you can adjust it it's the precipitous fall off that what's so difficult to you know that required such difficult actions. So so we we don't we're staffed to make sure that we can meet their needs. They are 10, a month of course, Rob doesn't necessarily all the probably the day to day exactly 10, a month from.
So there's a little bit of fluctuation there. There's also a little bit of timing advance on it and again, they're holding certain amount of inventory or feeling comfortable that were size to me. There for the next 12 months of then we'll make sure that were properly sized after that.
Okay, and then on the aftermarket [noise].
Yeah, the aftermarket pretty much was down 50% and I'd say it was fairly constant as we went through the quarter and that right now I think it's pretty much in that same in that same ZIP code. We monitor you know relative returns. We guess, there's you know there's a couple of that understood that they're not returns. We guess and then there's this fares that we felt and them and so were.
Monitoring those on a weekly basis and right now those it dropped to about half that kind of probably better that if you look at things off that you might say are down 75 or 80%.
But as I mentioned, we had a reasonably good backlog coming into the quarter and they use afraid folks have up and I think even if you parking airplanes or some other maintenance that you need to make sure you're doing if you're bringing them back on the flight controls and so we're anticipating that you know I wouldn't say to you a quarter ago, we were hoping that the fourth quarter, we better on the first would be better again, I know I'm not.
Sure that I have any grounds to say that so we're thinking maybe the fourth would be similar to the third maybe this isn't good as an uptick but hard to predict at this stage.
Okay, and then just on the defense margins were killed the decline that we saw does this reflect cobot disruption.
Is it is it development is it mix and did did these come back is as cobot improves I know, it's a modest to go on I think.
So I think when you say defense I think there because the only margin that I think we provided the space and defense margin. So as you know defense over half the board of aircraft as a defense I was glad to see if the fed yeah.
If you look at the margins year to date actually there was actually flat with last year there in that kind of high Twog Telesat in 12 days. That's all I think it's just a it's a reflection of a site shifts in mix. We got we got it margins move up and down a very strong book of business on funded development and there is there's no doubt there some inefficiencies associated with a goal that activities that will go.
That's probably pushed out a little bit, but but it's within the normal and all and called noise in that business or does it say year to date margins are holding pretty strong pretty a stable with last year.
Okay, and then just lastly for Jennifer on cash flow.
You mentioned the strains in the quarter, our receivables sounded like they played a big role there how do we think about is there any reversal from a working capital standpoint, because I imagine some of your receivables benefit was not just collections, but you know lower new business and so how do we think about that going forward and what is your capex for Q4.
So art. It's so yeah, we definitely had a very strong corridor from a working capital standpoint on strong collection I certainly led the pack. We also had cost or mnner advances that were really strong as well in both of those areas we will see.
That's strange I reversed as we go into the next quarter.
However, we're still projecting to be cash flow positive into our fourth quarter on it will be moderating off the high level on the strength that we thought in Q3.
We're going to continue to monitor the situation as we as we go on on a very regular basis and that'll be our guide for the spending.
Patterns that we wind up shooting and that goes for our capital expenditures as well.
As I mentioned earlier, we held back on our capital expenditures, Jason I'm very critical and necessary activities in the third corridor, we will selectively look to start reinvesting in some areas. So that me increased a little back on and again, it's going to be the guide a power businesses perform.
Coming on as to how quickly we are able to do that.
Okay. Thank you both.
Thanks, Rob Thanks.
Thank you and now we take our next question from Ken had back from Canaccord.
Please go ahead.
Hi, Good morning, John agenda from Ken.
Hey, John I, just wanted to first start off C. D restructuring charges you trucks in the quarter I know, obviously visibilities a challenge, but did you feel like you've you've effectively captured most of what you're gonna have to do what I know most of these are obviously an aircraft controls, but or should we expect further adjustments you're maybe in the fourth quarter.
Turning to 21.
So we're hopeful that we've captured everything agenda for dimension in her tax that we have there was more provisional on our or filings today and that's because one of the ER. The pieces evaluation of the business and we're still going through the bio elements of that before we filed the cues others, maybe at a bar.
There's another adjustment on that over the next week or so and then as we look into the next quarter, we're where we believe that we passed the commercial we sized now having said that some of our customers are still looking at potentially adjusting their lease so at the customers what are the safety on some of the big pulled.
The Athree 50 of the it's evident that rate that we gave you a quarter, though without adjusting it again, perhaps that might precipitates something but by and large we think we've done everything we need to do in the commercial side.
The industrial side, there's still a lot of volatility there. We described you know the energy business.
Oil is not looking particularly strong so that they continue to weaken our industrial automation business, maybe because it's so we made continued to have what I'd call. It small adjustments in some of our facilities around the world there was a little bit of restructuring in our industrial business. This quarter. Some of that May continue into next quarter, but you know, we're not anticipating a big number again in the fourth quarter.
Into next year like we saw in the third quarter. So I think it'll be at the margin.
The adjustments here and there to try and reflects more locally conditions.
Okay, and as I think about the the actions you've taken from a cost standpoint, how do we think about those in terms of just sort of running still to stay in place versus how much can actually contribute to sort of margin improvement as we start to think about coming off the trough and and 21 and beyond.
Yeah, I think the way I would describe as is the adjustments that we've made.
All other things being equal our commercial businesses held up well, let me do the commercial OE side and so the commercial OE side of it is down this quarter by 60% on a run rate basis at the you know that March the.
Items that they always are predicting a year out it should be down 50% on.
On a volume basis somebody was pretty 90, a back in 2019 and so our adjustments are designed to when you get to that stability that you recover the margins that we would have had prior to try G. As to what's happened with cold. It. So you get to margins or equivalent to what did you had production rates that were much higher back into energy.
Underlying margin improvements across the aircraft business is tied to the overall operational improvement program that we've described and that's continuing but of course and of course, the last quarter that it's taken a somewhat of a back cease to liquidity issues and average issue. So that's why we will see fundamental margin improvements, but I'd say is they actions that we've taken.
With one day production rates stabilize to get it back to margins pretty cool. It and then the underlying set of activities that we've got to improve margins would continue in parallel.
Okay. That's helpful.
And if I could just finally within space and defense. The defense sales were were if I remember well just down slightly maybe mid single digits. There was there anything in particular driving that or or anything that may be just slipped to the right. I know you called out maybe timing around some of the foreign military sales, but anything else you'd call out within defense, that's non arrow related.
A little in some of the decided programs were a little bit lower but nothing nothing of of significance. I think it was you know over the last year, we've seen significant growth in that business, some but as you've had some pretty high Tom.
So nothing nothing unusual nothing that we were were concerned about at this stage, we still have good strong hypersonics activity both at the state aside from the fed inside and there was just some nor <unk> lower rates other component shipments. So I I don't think if it stays does any trends if it wouldn't continue for a few quarters I think we might want to discuss a little bit.
More but for the moment I'd call. It you know all the noise and that business has been very strong until it's perhaps just coming off a little bit the peak.
Great all right well, thanks for the color I'll pass it back there.
Thank you.
Thank you once again, ladies and gentlemen ask a question. Please press star one and know what they couldn't next question from Michael Kim only from Suntrust.
Please go ahead, Hey, Hey, good morning, guys. Thanks for taking my questions here, John just on Baby just quickly for some more clarification be the charges that you took in the aircraft control segment. I think it was you know almost $19 million of inventory write down could you maybe a elaborate you know what's the.
Specific you know just just more details there any specific programs and then even the the write down of the the asset impairment what that was tied to.
So I I put some thoughts and I and my Jennifer to perhaps add additional color. So the both the inventory and the and the asset impairments are looking at the future size of the business and the future volumes in the business and taking a little bit inventory and the assets that you have an revaluating the.
Valuing them on that basis, and so but part of our you know part of the inventory and processes that we have of course is as inventory age as you start to take some obsolescence charges on the inventory and given the reduction in demand inventory is going to age. It's happened is half what it was if you 50 is half what it was image.
He is just going to agents that up to that this process until you get some inventory write down through that and the assets. We have machines, we have lots of test equipment, its and stuff, where we had assumptions around the utilization of that over the coming years and again, if the business has dropped to half the value of those assets is is reduced accordingly.
Yeah, I jennifers or anything else you'd asked us maybe just a little color color on those on me on the inventory side as the on take arched or review for for charges. There. We'd look at various things that can include our design changes that can happen in a certain amount of time before.
Wondering if that inventory and customers have different requirements as far as some of the agent or the inventory that we're using on there.
Well those are some of the things that get into our calculation. When there is a delayed and or a shift out and requirements from the customer demand standpoint.
And on behalf.
Yeah and on the long life assets, we certainly are looking at.
Recoverability everything it really follow the accounting rules that we need to take into consideration from Recoverability standpoint that we do that we look at the future cash flows out of these businesses over a certain amount of time, that's for sky by the literature to make the determination.
And on those charges.
Got it and then maybe just going in with keeping the inventory and Mike and shortly after market trends. Obviously, you guys were a little bit more wide body exposed. We're seeing you know certainly some of the older legacy wide bodies, you know just totally get scrapped, but we're also seeing dramatically reduced flying hours again with the internet.
You know a travel restrictions still in place you know how are you guys thinking about.
No sort of inventory obsolescence tied to some of those those older planes you know even if there's parting out using serviceable does that does that keep your aftermarket you know maybe tamped down even more until into we really see a big recovery in international travel and more utilization on those larger platforms.
Both Mike Mike I mean, we hope that you know so we did or aftermarket is down 50% this quarter.
I am I think most of US are hoping that after that you know that this quarter was that an eight or in terms of flight operations and if anything you know flights have been there are some more flights happening, though not a lot more about a little bit more the freight business has continued until where were feeling like the 50% that if we did in Q3, we think that's sustainable.
Into Q4.
Yes.
And part of that as we've already assumes I mean, all of those owns triples happens for seven Threeeighty is I mean, they're already pretty much parts and so weve you know that's already baked into what we're thinking at so we believe we've captured this but but it's a you know what's a somewhat of an unpredictable time right now, but we're watching it week to week and the third quarter played out was likely thought I'd have to.
Hey.
90 days ago, I would've said and that we had this conversation internally you know multiple ties with our aftermarket fills in the commercial sites I had been doing that why wouldn't we'd be down 80% 70, 580% that seems like nobody's like airplanes.
But they they went through a detailed by detailed with each of their customer line, but let customers a lot in Milan and then they were pretty confident we'd be down maybe 50% to 60% of then yes. We would I was just about 50%. That's all at that same process that we're looking at US as we go into the fourth quarter and right now, we're feeling pretty comfortable that it should be somewhat similar to this ours.
But but hopefully not significantly worse, I think phase up into fourth quarter or at least at the moment, but they are a little bit better than the third quarter. So so that's what we're thinking.
Got it and then just the last one can you just given an update on on where you are with Max I know you don't have with a significant amount of content, but I think you know last call. You were talking about you know kind of keep in that or you know that production line, you know a little bit warmer.
You know and you had some safety stock there you expect them to drop off but you know where do you think that does that really drop off significantly now in the coming months.
Well, it's you know it's being down significantly over the last several quarters I I think as we look into the fourth quarter. It's immaterial, let me put it that way the sales on the Max are immaterial in the fourth quarter, probably this is so.
Okay got it I'll jump a I'll jump back to Q. Thanks, guys.
Right.
Thank you and I would think couldn't next question from high Fun Kumar from Cowen. Please go ahead Barney guide, yes. Good morning, guys. So start with the Green Eyeshade question you know the individual got the comments you made on commercial.
Excuse me on aircraft that up to 281 million.
40 to 49, so differences there too, but the other ones were pretty much spot on how come the difference.
Okay, you're gonna have to do those numbers for me again, because I didn't catch all of those well if we do the bottoms up you know what you gave us where commercial Oh, we was where military was it looks like it adds up to 280 million and yet you reported to 49 cents or.
Is there is a part of this the inventory as a run so you're saying the too but it's too late in the 280 number kite weirton West where do you get into 280 number.
From adding about individually.
Individual comments you made about ER.
No no commercial and military.
And I apologize I I, you're talking about the comments that we made last quarter or other comments that I mean, just now.
Comments you made just now.
Hey, this is a little I didn't know if if if this doesn't ring a bell, let's let's deal with.
All right. So now you have matched up if I could it.
Yeah, you talked about you know sales to be better in the fourth quarter.
When you made those comments about the individual.
Items, where are you talking relative to the third.
Yes.
Okay, and then specifically on industrial.
Kind of surprised that.
That's true.
Sure look a little worse and basically given that there are no no no textron for example, and simulation close to flat.
You know and energy.
I mean the numbers.
Last downturn, yeah totally snatched what kind of risk is.
Those three businesses because you said nothing.
Comment was expected industrial little weaker.
You know.
Dallas that 10%. This just no any color you could.
Right.
Okay. I tell you just your voice is very fit into that so I think I heard it all but let me try to answer it and if I missed something maybe you could repeat it I think your question is so you might have expected a more precipitous drop in our industrial markets.
The automation side on the energy side and on the simulation and test I think you mentioned the textron folks getting out of some of the simulation business.
Yeah, I mean, it so the industrial automation is down 17% from a year ago.
That business as as we kinda described in the past typically it you know it nicely consumer and then it takes more time, but its but it's a kind of slowed I get into a reduction we were all that ready anticipating a reduction coming into the quarter, but most of our most of our customers continued to pay product. So at 17% reduction it's pretty large.
Isn't likely to continue to weaken I think that's what we're feeling at our book to Bill was slightly below one as I mentioned, but not us it's not dramatic it's not a precipitous drop in terms of the book to Bill So coming into the quarter. You know we had a reasonable backlog we had a reasonable book to bill in the quarter at north of 90% and so that's really where we saw.
Got to do that that's the best a predictor about the next quarter looks like you know beyond that how long it will continue to soften versus when we might see a recovery is all of its hard to predict I think it will continue to soften far 234 baby four quarters, yet to come before we started to see a a recovery.
[music].
And that's that's the industrial automation to simulation and test theory that Oh, you know we had anticipated to public courses both simulation might be a an upper this quarter with additional training for the Max but that's down the big guys see items Flightsafety they'll continue to be reasonably predictable and that beyond the true business that you.
No that was not a big player plus the assumption is that you know the other guys pick up whatever they might have done. So the fact that one of the smaller players like that hasn't affected the market and given the fact that we have pretty much at the vast majority of the market. It doesn't affect our volumes to a large extent to just reallocate some across somebody other customers. So that's down and we.
Yeah, We don't think that's going to get better I'm in the next quarter or too.
Then do you have the energy business, we had a little bit of acquired sales and I'd say the energy business, just isn't going to get any better I mean, it's being down for quite awhile and you're right. We got plans.
Well, it's a long time ago now, it's only 14 15, but at that time, we had an energy business. If I wrote it all together in terms of exploration itself was in the 80 to 100 billion dollar range it drops to authority.
As we are here today, we're in that $30 million to $40 million, we'd be we're in the mid thirty's until it never republics I've, even to always kind of catch back up into the 60 $70 about range, we started to see little bit the recovery, but nothing significant until we're still very close to what I'd call. It the low points of the class that we had back in 15 and 16 and that's why.
I don't think it'll get better, but we're feeling like it's got some level of stability associated with it.
Very helpful and then.
Going to be up to the balance sheet.
Any opportunity.
Sorry.
Yes, let somebody else is there any opportunities you know destock your own them towards.
In the fourth quarter.
Yes.
Yes, known as as we're looking at inventory that actually does present and I can you tell me I mentioned before they're kinda receivables and customer advances that that were strong that that will have some pressure into next quarter.
Well see some opportunities in inventory, so and as we've worked through this past quarter, we have had success and slowing or incoming inventory down and that happened over the corridor. So earlier on as you might imagine there there's a lag into her weight in front clarity from our customers.
As far as demand goes and then there's a further lag when we push it through our supply chain. So throughout the quarter. We did see some improvement in flowing to build of inventory that should start to turn and as we look into the next couple of corridors and that'll push on some of the pressure into the receivables as we're able to.
Some of that inventory.
Yeah. There was there was a big refocus on most of the they the purchasing supply chain folks on to try to push inventory out, but what happened tide is that as fast as we were trying to push it out with our customers demand from our customer are that our suppliers. The nine from our customers was dropping even faster and so our pfos were.
Chasing it you know what it what they were running over the hill and I just couldn't buy the fast enough and so what about a continue with that but I think you know it may take another quarter or two before we actually turned out a tight our incoming receipts were down fairly significantly in the third relative to the run rate of the first half, but not sufficiently down just take to get ahead of the lowered them out of the customer side.
And we have to be a little bit carefully because you know we got a lot of supply or some of them are somewhat smaller suppliers and we wanted to make sure that were honoring contracts and we're working with our suppliers. So that all the long term they continue to be part or as far as until we want to it's not just a matter I tell them piece all deliver a we won't probably won't pay you its something that you have to work with it so we're working.
Very hard because a lot of effort going into us, but it's trying to get at its word I thought that were not to head up they drop in demand, yes that would probably take another quarter or too.
Terrific and the last one operation 2.0 aircraft sector, where are you in that.
I Love the way I would describe Italians, it's taken a pause over the last quarter because the focus was on liquidity. So for instance, a big part of that efforts is to work more with our supply chain improve our supply chain process as we talked about that a year ago. When we had some quality issues with suppliers and the last quarter.
In focus on rescheduled to try and conserve cash and so the underlying.
Process improvements that we've been working on day essentially took it back seat to get everybody trying to we we scheduled deliveries. So that we can conserve cash and make sure not we're not building excessive amounts of inventory.
We stabilize which is I think all we describe them because our focus will gradually shift back to those underlying structural improvements that we had been engaged in and so I would say, we've we've taken a pause for a quarter RBC stalled in terms of our ability to move forward Ulta with lot of people working from home and as we get into the fourth.
The first we're starting to fire that up again, but it's going to be at a slower pace than we thought so all in all will probably missed one to two quarters in terms of the improvement that we would have anticipated had we not at this school that issue.
Thank you very much.
Thank you.
Thanks.
[noise] in each other for the questions in the Q.
<unk>.
Lisa.
Well take the next question at this time.
Hello.
Mr. Herbert Mr. How about your line is open. Please go ahead.
Yeah, Hi.
John just one quick follow up you've obviously talked about and we've got the build rates for Boeing and Airbus as you look at your wide body portfolio, where do you see still the most incremental maybe further downside risk and are there any beyond what Boeing and Airbus I've talked about another or any particular programs, but the your notably worried about.
Oh, I think you know I think I thought at the moment everybody is worried about the whole commercial side of the business.
Let me do I mean, just walked through the program. So the eight seven I think.
He has said we dropped from 40 into 10 to seven I told us that we could do 10 for the next 12 months I'm not sure you know, whether that's all going to pay as I could imagine that that might come under some pressure just given the additional corporate chase is around the world and perhaps the lack of you know a resurgence in international.
Flying that that could take another I don't six to 12 months before we ought to get back on international airplanes, I could see that that perhaps that would pressure it's happened volumes.
Mm 350, they're already dropping to six maybe that's I don't know again, maybe they see a incremental drop down eight a three seven we're not planning for a lot. It's not a big program, it'll but that would come back, but that's probably into next year based on everything you know I read in central can do that even more insights and we do so and that'd be.
And that there was you know those are by far the biggest roles for us.
They are the ones that are really driving a book of business. We've got some triples haven't solved maybe there's a little bit of extra suppose athletic the triples had an excellent like it may be delayed a little less but those those are the big programs for us we don't have much much of anyway, but nothing that's on the three agent so that was already done.
So I think I think it's more a kind of a macro worried that I think we would all share which is our the white body production rates going to sustain even at the lower levels at the Oems are no predicting how long would it take for international flights to come back and really start to see the utilization pick up on those.
Great. Thank you John.
Yeah, you're welcome God.
Thank you.
And now that they couldn't next question from Ron Epstein from Bank of America.
Hey, good morning, Ron.
Hey, guys good morning.
Oh.
In in the crisis or were in our the pandemic situation.
How has it gone with the always right I mean, there was.
There was partnering for success, one and then partnering for success too.
Has there been any back off of that in terms of helping suppliers out through the major disruptions that we've gone through.
And how is the message and then from.
The overages down to you in terms of rates and like you just highlighted the the probable and reasonable risk to zero seven at seven numbers, probably being a bit lower than what we thought or maybe what Boeing communicated has there been any communication on those fronts.
That's all it so let me be really clear I I I said possible I think I Didnt say probables on and that's just part that's based on what I read into headlight newspapers, you know that folks in your business you publish in terms of international flights. So there is no insight behind that as.
It's a purely one man's opinion enough such as such as up 30 dubious Valuated suggests there, but I think there as you know there's always some it's got a oh the airplanes gonna come back. So it's that's not a reflection of anything that we have got from our customers. It's just when I asked the question you know do you see downside risk does it answer is yes.
I'd say the communication with the Oems has been a you know what their first by Oems again, there's only two major players like the owners nuances to the way they communicate but I think both have been going through of course, an incredibly difficult time themselves over the last quarter's and from our perspective, because the commercial business I mean, as we looked at the third quarter.
Under 20% of our business.
The very strong defense space Medical business. It's you know this is not a life or death business follows community the drop in rates.
A negative impact on us for material margins and but even if that's our aircraft as this was still a an adjusted basis at a positive operating margin, we're generating cash and so we're not in the you know that type of critical situation that I think sell those the other suppliers to the major Oems, maybe and because they're so there's still dominated by commercial and I I mean.
The thing that that's where the Boeing and Airbus as I said more their time when they assess the risks to the supply chain there probably looking at which companies are really at risk and they're probably spending more time working with them and changed the way they do business with them for us its a nice it's a big part of our business, but it's not a like for that part of our business and so I would say the the relationship with the OEM.
This has been you know a lot of communication a lot of working together, so not fundamentally different in terms of providing additional funding or anything like that.
And then maybe this is a follow on to that when you.
Given the resilience that you've seen because of the the diversity of the portfolio over the businesses that you have.
Longer term do you see any.
Tweak to your strategy to diversify even more right. We just haven't I guess, you know clearly having about diversity that it really has been a blessing.
So when you start to selectively invest and stuff, but because it said that you'll start doing at some point are the new areas you want to go into your space looks like it's doing you know just fantastic for you I'm as or more to do in space, particularly with you know the.
Emerging and quickly growing commercial space markets I mean, how are you thinking about that.
Yeah, I think actually run interestingly enough, we've always been Diversifies and actually I think if you go back through decades, and you look at how much you know why do much more business was aerospace how much was going to space defense and industrial it actually has always been somewhat similar at the one area of course that we did get into.
Which was a significant diversification, but it's over a decade ago was the medical business and now it's doing ways, but of course, you know as you know we had our challenges and for many many years. We were the question. What's the why are we in that business. Both from the analyst community, but also ourselves if you're asking ourselves. So so I think we've always been diversified but I I. This is this I think it's really important.
First of the fight across markets, we are incredibly focused and our technologies until we take our technologies, which is high and high performance motion fluid control systems, and we will take them to any customer that actually needs that type of capability and what happens is as we find new customers essentially those customers kind of turning to.
The market because they've got similar needs, but we provide to downhole exploration is actuators that are not the same but somewhat similar to the actuator technical military vehicles on the industrial equipment as to some extent. It's the same technology that goes on flight controls with airplanes. So we are incredibly focused on.
Our technology and so if you said when you diversify other the technology that you're in I'd say no. That's what we do.
You know there's add on pieces and you broaden your with your product for 40 overtime, but we are focused there does that if there is new opportunities emerge in markets that are need you know that need bass, then we will find a way into those markets through working with customers and then maybe at some stage we call. It a market I know the it looks like weve diversified farther well, but it's not a strategy to.
Well, let's look at and new markets and lets jump into that so so I I think were nicely diversified as it is I like diversification.
I've always liked it I think right now of course, it's nice for the market, sometimes the market lets see not to diversify the Martin's how do we can to diversify far you just you'd be a fuel play, but if you're running a business diversification is really helpful. And we continue to remain diversifies and if the right opportunities come up because they fit with what we do have the capabilities, we have we jump into them.
But but it has to fit with who we are what we do we are you know just jump into a new markets I don't think would be very quickly I suppose.
Great. Thanks.
Thank you.
Thank you and everything go next question from Michael Kim only from Suntrust.
Please go ahead.
Hey, Thanks for taking a follow up guys.
Do you happen Jennifer John do you have the the bookings by a segment at a quarter end.
No we don't provide that Michael so it will provide a total backlog.
Well, we don't we don't provide detailed.
Bookings by segments.
Total backlog of consolidated 12 month backlog at the end of the quarter was 1.7 billion, which was unchanged from year ago.
Got it got it alright, thanks, guys.
Thank you you have no further questions at this time.
And he said thank you very much of these job. Thank you to all of you first thing we hope that you all remain healthy and safe and that your family's do as well.
And it's been a.
So much was quarter I think for everybody all of us until hopefully in 90 days time I think the next quarter is probably going to be challenging for everybody as well as I have to 90 days' time, we lost feel like Theres more lies at the end of its one of those and we wish you all well let me try thank you very much.
This concludes today's call. Thank you for your participation you may now disconnect.