Q4 2020 Moog Inc Earnings Call
These markets were essentially unaffected by the pandemic.
Medical market was very strong all year as demand for specialty equipments to how cold the patients Boyd our sales.
Our industrial markets slowed as we went through the year.
Although our geographical diversity of end customers helped alleviate the impact.
Finally, our commercial aircraft business was hit very hard with both OEM and aftermarket customers feeling the brunt of global travel restrictions.
Turning to most specific comments the fourth quarter was a good quarter overall compared to the same quarter a year ago, particularly given the operating conditions. This year.
Sales were up in our defense space and medical markets, but lower in industrial applications and down over 50% and our commercial aircraft market.
Adjusted margins of 8.3% and earnings per share of 81 cents respectively.
We had another outstanding quarter for free cash flow and we reinstated our dividend and bought back 600000 shares.
We incurred impairment and restructuring charges totaling totaling $15 million as we continue to align our operations with the demand predictions from our customers we.
We also completed and major transaction to de risk our DB pension plans in the U.S transferring happy assets and liabilities to an insurance carrier at a very favorable rates.
We incurred a noncash charge of $121 million.
Our $2.85 per share for this transaction.
Jennifer will describe this in more detail later on our call.
Looking back on the full year the following headline standout.
First it was a year of records divided into two halves.
The first half was characterized by record sales record net earnings and record earnings per share.
In the second half, we generated record free cash flow.
Our response to the pandemic dominated our third and fourth quarters as we shifted our attention from sales and earnings to leverage and liquidity.
Our intense focus on expense reduction and cash flow generation resulted in lower leverage at the end of the year than six months ago, when the pandemic hedged.
We incurred over $70 million and charges associated with restructuring impairments and asset write downs.
Second we refinanced our balance sheet in our first quarter, extending the term of our revolving credit facility and selling $500 million of high yield bonds at 4.25%.
At the time, we were just following our usual strategy of getting the money before we need to this issue.
In hindsight it was brilliant timing.
Third we followed our historical capital allocation policy.
We completed one acquisition early in the year and return excess capital to our shareholders through our dividend and buyback programs.
Paul as these activities during the third quarter as we assessed the situation bots as cash flow improved weve returns to a balanced capital allocation in the fourth quarter.
Over the course of the full year, we repurchased almost 3 million shares and between dividends and share repurchases, we returned over $240 million to our shareholders in fiscal 20.
Fourth as we've mentioned many times our diversity across end markets provided stability and continued strong operating performance throughout the year.
And finally, and most importantly, I believe you see the true strength of the company during times of diversity.
On that measure fiscal 20 was a record year for our company in every way.
The employees of the company across the Globe did an outstanding job managing through an unprecedented crisis.
It was definitely not the year, we plan for 12 months ago and to say it was a challenge would be an understatement. However, our long term strategy of diversity across end markets and financial Prudence served as well as.
As I do at this time each year I'd like to express my gratitude and thanks to the dedication and commitment of our 13000 employees around the world will meet all this happen.
Now, let me provide some more details on the quarter.
Q4 fiscal 20.
Sales in the quarter of 707 million or 8% lower than last year.
Sales were up in space and defense, but lower in aircraft and industrial taking.
Taking a look at the PML, our gross margin was down on lower sales and underutilized facilities.
R&D was down as our engineering teams moved to fund the development projects.
As Gionee expenses were also down on cost containment measures.
Interest expense was lower the net result of lower rates, but slightly higher slightly higher debt levels.
We incurred 6 million of restructuring in the quarter and incurred a noncash charge of over $120 million associated with Annuitizing half of our DB pension plan.
Our effective tax rate in the quarter of 21.8% resulted in GAAP earnings per share of minus $2.40.
Excluding the pension charge restructuring and asset impairment impacts adjusted earnings per share were positive 81 cents.
Fiscal 2000.
Full year sales of 2.88 billion were 1% lower than last year sales were way up in space and defense about flat and industrial systems and lower and aircraft similar.
Similar to the fourth quarter gross margin R&D SGN eight an interest expense were all door as a result of the change in operating conditions in the second half.
We incurred a total of $38 million of asset impairment charges $23 million in inventory write downs and $11 million in restructuring charges all in the second half.
Bind with the DB pension settlement charge. The net result was 28 cents per share for the full year excuse.
Excluding these onetime charges adjusted full year net earnings were $157 million and earnings per share were $4.81.
Fiscal 21 outlook.
As we look to fiscal 21, we're planning that coal with will be with us through the full year in.
In terms of our major markets, we believe defense and space will remain strong.
Also think our medical market will be strong for perhaps softened slightly from the surge of demand we saw in the initial stages of cold.
We're not anticipating any recovery in our industrial markets from the level in the second half 20.
Finally, we are hoping that the commercial OEM business was stable.
About significant shifts in us policy in terms of tax trades, our defense spending.
Thats the segments I'd remind our listeners that we provided a three page supplemental data package posted on our website, which provides all the detailed numbers for your models.
We suggest you follow this in parallel with the text.
Starting with aircraft Q4.
Sales in the quarter of 275 million were 19% lower than last year. It was a contracting story between military and commercial Miller.
Military sales were up over 20% in both the OEM and aftermarket is higher.
Higher sales on the F 35 to Lucky drove the OEM. These by strength across the entire portfolio platforms drove the aftermarket piece.
On the commercial side OEM sales to Boeing were up 50% and OEM sales to Airbus were up 70%.
On a slightly more positive mills are perhaps less negative knows sales into the commercial aftermarket were only down by 34% this quarter.
In the present environment, our usual comparisons with Q4 last year are not particularly relevance when I think of the comparisons with last quarter and perhaps more insightful comes.
Compared with our third quarter sales to commercial OEM customers in Q4 are up 6% I.
While sales to our commercial aftermarket customers were up over 30%.
It's definitely too early to tell if this is a trends, but perhaps they indicated that Q3 was a floor.
Aircraft fiscal 20.
Full year sales of $1.21 billion were down 7% from last year.
Similar to the quarter, it's a story of two very different markets.
It's also a story of two very different six month periods.
On the military side of the house sales were up 16% relative to last year.
We saw strength in every quarter in fiscal 20 with second half sales up 6% over the first half.
OEM sales were up on strong at 35 activity as well as higher funded developers aftermarket sales were up across the portfolio with the largest contributor being the F 35, as the active fleet grows.
Commercial sales were down over 30% from last year.
In the first six months of fiscal 20 commercial sales actually grew largely from the same period last year.
However, in the second six months as the global travel industry collapsed, our commercial field sales fell by almost 60% from the prior year the drop was across all OEM and aftermarket customers.
Aircraft margins.
Adjusted margins in the quarter up 2.7% include about 200 basis points of charges on fixed lights price development programs.
Demand from our commercial commercial customers remained volatile during the quarter as they re plan that production and continued destocking.
In the quarter, we incurred $4 million in restructuring charges as we continue to size our business, but the latest projected demand from our customers.
Adjusted margins for the year were 7.6%.
Adjusted margins dropped from close to 11% in the first half to only 3.6% in the second half.
We incurred a total of almost $60 million in restructuring asset impairments and various other write offs in the second half all attributable to the corporate impact on our commercial business.
On a more positive note we continue to see the shift from internal R&D to funded development work throughout the year.
For all of fiscal 20, R&D was down $10 million dollars relative to last year, while funded development was up over $20 million over the same period.
Aircraft fiscal 21.
We cannot predict what will happen over the coming 12 months, but we can share our planning assumptions as we look to fiscal 21.
On the military side, we're assuming the demand for our products will remain strong and that our operations and suppliers, we continue to operate effectively.
On the commercial OEM side, we're working to the production schedules, our major customers and published by recognizing that there remains considerable risk in that outlook.
For the commercial aftermarket, we're assuming a modest pickup in demand in the second half of the year.
Turning now to space and defense.
Sales in the fourth quarter of $207 million were 9% higher than last year.
The strength was all on the space side of the house with sales up 40% from a year ago.
We saw strength across the entire portfolio space products, including Hypersonics propulsion.
The Onyx and satellites.
Defense sales were down 5% as a result of a much softer security markets and lower sales on missile programs.
The security market has been particularly hard hit by the pandemic as onsite installations of grounds to a halt.
Space and defense fiscal 20.
Full year sales of $770 million were up 13% from fiscal 19.
Space was a major driver of the growth with sales up 34% year over year.
We saw that with every product line within space, we're benefiting from increased government spending both on military applications, such as Hypersonics and similar missions and NASA to put us back on the move there.
There was also increasing commercial interest in space from tourism to launch vehicles for low cost assets.
As the space market evolves, we're gaining share in many of our product categories, and it's increasing our scope of content on new platforms.
The defense sales were up marginally year over year tire sales and ground vehicles, and it's enabled systems compensated for lower sales and security applications.
Sales of components used in midsize steering applications were in line with a very strong fiscal 19.
Space and defense margins.
Margins in the quarter of 14.2% were very strong.
We're particularly pleased with this margin performance in the face of a global pandemic and at a time when we're experiencing elevated levels of lower margin funded development work.
Full year adjusted margins of 13.3% were up from 13% last year.
Again this is an outstanding performance given the challenging conditions through the year.
Based in defense fiscal 21.
At the moment, we're assuming that fiscal 21 would be somewhat similar to fiscal 20 with continued strength in both the space and defense markets.
We do not however, anticipate we'll see a continuation of the explosive growth in the space Marcus we enjoyed in fiscal 2000.
Industrial systems Q4.
Sales in the quarter of $225 million were 4% lower than last year.
Excluding the impact of foreign exchange and acquired sales underlying organic sales were down almost 10% from the prior year.
Sales were higher in one of our four markets.
Sales into medical applications were up on strong demand for Boulder, Ivy and enteral product offerings.
Energy was down on lower investment in offshore oil exploration in the industrial automation was down the combined effects of the pandemic and a general slowing in capital investment has.
In simulation and test sales were down.
Early on depressed demand for flight simulators.
Full year sales and industrial systems of $909 million or just 1% lower than last year.
However, there was a significant shift in the mix through the year.
Medical with the bright spots for the year with sales up 20% on strong demand for our pump products and for various components used in breathing equipment.
Sales into our energy markets were up slightly the results of the acquired sales from our GE acquisition.
Sales into industrial automation, we're already slowing as we enter fiscal 20 and that slowdown accelerated in the second half as competition.
Finally sales as a simulation and test markets were down across all major sub markets, including a protest auto test and flight simulation.
Industrial systems margins.
Adjusted margins in the quarter were 9.7% down from last year on a less favorable mix and factory inefficiencies across the footprint as a result, the results of the big shifts in demand by Submarkets.
In the quarter, we incurred $11 million of charges combination of restructuring and asset impairments as we look to we size the business and consolidate our activities.
Adjusted full year margins were 10.3% with the average margin in the second half down almost 200 basis points from the average margin in the first half.
Industrial systems fiscal 21.
The industrial business is probably the most difficult to predict given the range of end markets we serve.
As we look into the coming year, we're assuming no recovery in demand for our energy industrial automation, our simulation and test products.
We believe the world will continue to struggle with the effects of Covance and recovery in investments will only begin in fiscal 22.
For our medical markets, we expect another good year, although we think demand will moderation from the highs we saw in fiscal 20 as the surge in demand for Covance related equipment wanes.
Summary guidance.
Fiscal 20 was an extraordinary year by any measure.
Employees around the world Rose to the occasion and delivered an outstanding performance.
As we close up the year accompany a strong and well positioned to continue to whether the cobot storm through fiscal 21.
Over the coming 12 months are planning reflects continued strength in the defense space and medical markets continued weakness in the industrial markets and a stabilizing of demand in the commercial aircraft market.
Overall, a year, what somewhat similar to the second half of fiscal 20.
Over the last six months, we've re sized our business to align with the future demands our liquidity is strong and our leverage is in our comfort zone.
After one quarter of capital Conservation in Q3 were back to a more balanced capital allocation strategy this coming year, including actively seeking acquisitions, which complement our internal strategy and drive our growth.
We'll also invest in programs and innovations, which will fuel our long term organic growth and continue to invest in improving our operations.
Right the challenges around us, we remain very optimistic about our business and the future potential.
Our long term strategy of technology focus market diversity and financial Prudence paid off handsomely in fiscal 2000.
Fiscal 21 will be a year of renewed investments to prepare ourselves for the recovery. We believe will come in fiscal 2002 and positioned to position us to take advantage of growth opportunities.
Now, let me pass it to Jennifer will provide more color on our cash flow and balance sheet.
Thank you John Good morning, everyone. We had another incredibly strong cash flow quarter, making the back half of it here a record free cash flow generation.
These results during a time filled with uncertainty and pressures in some of our end markets.
Our company wide initiative, and our focus on cash conservation and liquidity continued to contribute to our strong cash performance.
Free cash flow in the fourth quarter $73 million, bringing the total for the year to $191 million.
Free cash flow conversion adjusted for charges associated with the pension settlement and the pandemic with nearly 300% in the fourth quarter and over 100% printing here.
At the outside of the pandemic in the March timeframe, we made significant adjustments to our major capital deployment activity.
Hi into M&A for his office.
Often share repurchases.
And at our canton and delayed certain capital expenditures.
We also took measures to slow our incoming inventory to be inline with expected demand.
In addition to these cash release measures. We also accurately reduced expenses to mitigate the impact to our operating margin.
We continue to focus on cash preservation and cost management. However, we have resumed in Boston in a measured and balanced way and our strong financial position affords us the opportunity.
The $73 million of free cash flow for Q4, compared with a decrease in our net debt of $37 million.
During the first and fourth quarter, we repurchased about 600000 shares of our stock for $37 million and resumed paying our quarterly dividend.
The full year free cash flow of $191 million compared with an increase in our net debt of $105 million.
We repurchased 2.9 million of our shares for $215 million $854 million to pre acquisition on June 18, and paid $25 million of Kevin.
Working capital, excluding cash and debt as a percentage of sales at the end of Q4 was 28.4%.
The same level as the quarter Intel rope.
Robust collection, including on defense contract were offset by increasing inventory continuing the trend we experienced earlier in the year.
Capital expenditures in the fourth quarter for $18 million about the same levels in the third quarter and down from a $27 million quarterly run rate in the first half of the year.
We actively manage and prioritize our spending focusing on compliance and business critical project.
Depreciation and amortization totaled $21 million continuing at a fairly constant level throughout the year.
At the end of Q4, our leverage ratio, which is net debt divided by EBITDA was 2.4 times the same as a quarter ago.
Yeah, Thats, a trailing 12 month, adjusted EBITDA and our share buyback activity was offset by strong free cash flow generation.
At quarter end, our net debt was $845 million, including $85 million of cash in.
The major components of our debt for $500 million at senior note.
$362 million of borrowings under U.S. revolving credit facility and $69 million outstanding on our securitization facility.
We have nearly $700 million of unused borrowing capacity under U.S. revolving credit facility.
Our ability to draw on the unused balance is limited by our leverage Covenant, which has a maximum of 4.0 times on a net debt basis.
Our leverage is based on trailing 12 month, adjusted EBITDA and had been impacted by the decline in our business related to the pandemic eight times leverage we could and incurred an additional $552 million of cat as of the end of our fourth quarter.
We are confident that our existing facility provide us with adequate liquidity to successfully navigate through these uncertain times.
This past quarter, we took a meaningful step out as being in the pension business significantly reducing our exposure I settling about half of the liability for our largest defined benefit plan.
And plan is in the U.S. and it's been close to new entrants from more than a decade.
We fully funded this plan in 2018, and adjusted our investment strategy accordingly to reduce our exposure.
In the fourth quarter, we purchased an annuity for retirees, where leasing asset in the plan and we took advantage of favorable market conditions to obtain attractive pricing.
Retirees continue to receive their same benefit and a reputable insurance company now carry the application.
With this transaction, we settled $486 million of the plans projected benefit obligation, which triggered settlement accounting.
This resulted in a $121 million noncash charge as we accelerated unrecognized losses on equity into our earnings.
We remain fully funded and its plan and are in the process of adjusting the plan's investment portfolio to address the plan three meaning participant Dane.
Cash contributions to our global retirement plan totaled $12 million in the quarter compared to $10 million in the fourth quarter of 2019.
Global retirement plan expense in the fourth quarter was $21 million up from $18 million in the fourth quarter of 2019.
For the full year cash contributions to these plans were $46 million and expenses $79 million.
Expenses were 2021 is expected to be $72 million.
Decrease in expense next year includes a modest benefit resulting from shifting assets and the U.S. plan after settling a substantial portion of that obligation.
Our effective tax rate excluding charges associated with the pension settlement and the pandemic was 28.3% in the fourth quarter compared to 21.2% in the same period a year ago.
The higher adjusted rate in this year's fourth quarter, primarily reflecting earnings mix changes here and lower state tax accruals in the U.S. last year.
For all of 2020, our adjusted tax rate was 20.9% compared to 23.1% in 2019.
The lower tax rate in 2020 reflects an increase in foreign tax credit utilization associated with our 2019 tax return filing.
Reduction in rate related to taxes accrued on accumulated earnings and one of our foreign jurisdiction.
And legal entity restructuring that reduced withholding taxes previously accrued in another foreign jurisdiction.
As we look forward, we are well positioned to invest in our business mix.
We expect free cash flow to be respectable and 2021.
We may see shorter term pressures on inventory as we continue to adjust to changing demand from our customers. However.
However, the benefits associated with these efforts to create operational efficiencies in our business will outweigh. These pressures later in 2021.
With respect to capital expenditures, we are beginning to ramp up from the constrained levels of the back half of 2020, after just a quarter or two of pausing see capital deployment activities. We've returned to allow a balanced capital allocation.
With that I will turn it back to John any questions. You may have thank you, Jennifer and I'll hand, it back to Jake our operator to help us with questions.
Ladies and gentlemen, if you would like to ask a question today. Please signal by pressing star one on your telephone keypad just keep in mind. If you are using your speaker phone make sure. Your mute function is released telemetry truck equipment once again star one for questions.
Became terminate with Robert Spingarn with credit Suisse.
Hi, good morning, and.
And thank you both for so much detail actually quickly I want to start with a with you Jennifer just on the cash flow and and in the absence of 21 guidance, but based on the color you offered in John offered how should cash flow trend next year, not just from a high level.
Yeah, So as I mentioned, we're feeling comfortable.
Comfortable in our look out for cash flow next year. So historically, we've looked at a cash flow generation and the 100% range from from that free cash flow generation conversion ratio.
We expect that that the reasonable target as we look forward. There's a few things going on that well be puts and takes as being moved forward.
We may see we had an incredible collection quarter from receivable standpoint.
We may see pressure on the opposite direction of that depending on how things go from government contractors.
From an inventory standpoint, we do have opportunities here in the near term, we will be facing some continued pressures on.
Possibly related to our customers continuing a de stocking.
And however, as they move later I can here, we should see benefit from some of our operational efficiency on Atlanta touching the operations 2.0 that we mentioned several times before.
We certainly have a lot of opportunity, especially on the inventory side of the business and the working capital as we look forward air position nicely from.
I answer position, so that we can start investing more in our business and that includes our ramp up on capital expenditures. So overall, we should see some increase as we move forward through the year, we'll continue to monitor the situation and adjust our plans accordingly, but we're feeling confident in where we'll come out for cash flow from.
Hi, Jeff.
Just on on the inventories are there any areas, where you might need to build inventory that's now been depleted.
During this past year in drawn down where we might be seeing some recovery in certain spots.
I don't know that I expect to see anything that would be meaningful expires and growth in inventory from a restocking level. There certainly maybe some smaller pockets of that nothing to try that.
HM.
I think our greatest opportunity is is really some of the efficiencies on that should overtake the at current situation related to the pandemic and should be able to see some of those down in the later parts in here.
Okay, Okay, and then John I had a high level sort of broad question on space, just because its growing so well and I think you already said it won't grow quite as much and in 21, but it's clearly among the fastest growing businesses. You have then I wanted to see if you could dig in a little bit.
Or perhaps and and talk about the relative sizes of the military civil and commercial space pieces of that and where are your major positions are on big programs.
So so you're right I love the space business.
What has been going gang busters over the last year. Ironically, if you look at the space and defense business, It's kind of a story of two markets that have gone up in sequential year. So defense was kind of flat to up a little bit in fiscal 20. It grew at 19 from 18 by almost 25% from 18 to 19 space was kind of flat and then space has is huge.
EPS growth of 45% as we got into the Twentys and one of the things I said is as we look to fiscal 21. We believe we believe both markets will remain strong, but we're not anticipating space will continue to grow at anything like that pace.
We've really tried to provide a full range of components for our space applications kinda devices into launch vehicles. Most of the launch vehicle work is from spectral controlled their actuators that control the steering of the rocket engines at the bottom of the of the Miss out on to the vehicle that allows us to watch race and the various avionics products and then once you get to say.
Like Weve got everything from fewer control system solar arrays Rice, we've got small rocket engines.
The Onyx a whole range of different components that go into it and.
And so we've just seen broad strength across both of the vast majority of our space business and I won't break it down into specific but the vast majority is government spending so what I'd say government spending I'm talking about military space and then of course, the NASA work to put folks back on them, but in the end almost all of it is government spending plus actually even on the commercial side some of the key.
Personal stoppages take up of new large in our space x. they their commercials, but a lot of the money is against government related money for launch we've seen a lot of strength and.
The the this push that space is viewed as the next frontier in terms of fall from the military perspective. So I think there's a lot of acceleration in military spending and so all of our component businesses are seeing an uptick from that but for that part of what we're also doing in this space business is we're evolving to provide more scope of supply.
Some of our major customers and so instead of providing four or five different proponents we're starting to see opportunities to put those components together into a small satellite calls at this at this stage, it's still relatively early although having said that Rob we've been at this as a kind of a shift in strategy to be a more integrated provider for fyfe.
Or more years, so it's not as if this is a kind of a one year thing that we just discovered well that's starting to pay dividends were starting to be seen as an integrator of components not a full upside might not payloads bought an integrator components and so I believe we're gaining share through scope gain as well as share to market gain plus of course just growth in the market.
And so I think it'll spaces and up and down business, it's something that you need a strong summer far because I think it was four or five years ago I had quite a few conversations with investors, where they said well why didn't you just sell the space was a baby she just get out of space because at the time space was kind of not going anywhere, particularly fast and that of course now it's a it's a star in our portfolio. So.
[noise] space. We you know, we really looked at that strategy about six seven years ago, we define where we wanted to go got out of it you may remember we got into some operations in Europe. We sold goes off we saw little bit of a shrinking of the business, we consolidated and and now we're blocking and tackling with great components and that the market is doing.
Well, so we're very pleased with this.
So it's fair to think that over time, it's bigger than 10% of the total I understand today you know this your sales are depressed, but it sounds like it's got some endurance as a growth market.
I would definitely think so of course note as I say that because so much of it is some of that spending whether directly or indirectly.
What happens in the future there if there was a shift that said, we don't see space as a future military frontier then.
You wouldn't know, but we are engaging into whole new space opportunities as well as small as that not not building small satellite, but providing long services for small sounds like so so yes, we think the space business has a nice growth opportunity and could be north of 10% and our business in a few years' time.
Thanks very much.
My pleasure.
Now we will move to a question from Cai von Rumohr Cowen [laughter]. Thanks, so much and nice quarter guys.
Hi, Good morning, Joe.
Good morning. So you have this this write off 200, Bips and aircraft on the fixed price development contract can you tell me is the contract work fixed so that we will know that this is truly behind us.
Or how much longer. So this thing have to go you know, leaving us presumably with some residual risk.
Yeah. So.
So I I as you know kind of you know the way you do these estimate that completes the EEI sees as you take everything you know at the time and you make your best possible estimates and you look at the contract value and then you take any adjustments through the PMDA and so as we sit here today, we believe that we have taken account of all future risks and I had to take it and that's it.
To recharge the contract having said that the contract is probably going to go for another 18 months to two years and so there's always residual risk and particularly as you get on the types of things. We do as you get into qualification. If you. Just if you you know you cannot plan for a qualitative or the other hands every now and again phase.
This happened in fall and if that happens you can end up taking an additional charge because the contract value is fixed and that's all it costs more to fix it so as we sit here today, we've taken all of the risks into account that we know off but there are kind of events that can happen in the course of a development programs that are you know cannot be planned for and you kinda simply.
Take a reserve on its call. Unfortunately unfortunately.
But we're feeling pretty good and you know when we take fixed price development programs. You know, we're taking some charges on that the vast majority of it is paid for and it's because we believe theres a you know a long term future of it. So it's it's a little bit like an R&D investments and as I mentioned, the R&D internal R&D has come down by $10 million. This year funded development has gone up by 20.
EBITDA dollars and so there's 200 bits part of the problem a dollar charge I couldn't put down and well you know it's kind of like an internal R&D type of thing because we are investing in a problem. We just didn't anticipate it would play out this way, but you see all the price I mean, just happens across the board as things unfold, what we do is not easy and its we do the best we thought that he had to estimate.
Tossed, but sometimes stuff happens that you know you can't predict.
Absolutely so Jennifer maybe could you give us a little color on the rest of the.
The working capital items I mean, it looks like you accelerated your payment of excuse me that your payables you know really came down a lot. So you're not stretching any of those and although customer advances does a little better than expected. How should we were you know expect payables risk.
See bubbles in customer advances to kind of go.
As you go through the year to the extent you can comment on that.
Sure let.
Let me start with what the quarter for the customer advances we have all kinds, we didn't really cover that before so customer fan says.
Nice nice quarter again generating a lot of a lot of the activity advantage, we're seeing a bunch of that predominantly on the U.S. defense side of the business. So our customer enhances it come in strong our payables as you mentioned, we have not been stretching payables to at all so that's that.
Kinda neutral in the quarter.
As we look out next year in these other areas I would say that in customer advances, we've got a really nice strong balance right now and our customer advances due to the increase that we had we will be working some of those down as we go.
Go through the year, so that will be a pressure as we look forward into next year.
On the payable side, we are looking to have that largely near the activity that we would have from a receiver both perspective, so the level of activity in our business, we're going to see both on the refi side and on the payable side.
So I wouldn't expect anything to be honest I, just think when we look at both of those areas together.
So that's kind of how we're looking at it but overall when we keep all of the aspects together, we're feeling like we're in Neely.
Really knowledge shape looking for ways to have continued good strong cash flow.
Terrific and then John you Didnt talk I mean, obviously you haven't provided guidance, but is it can you give us any kind of color you noticed your rough sense in terms of the pattern for the year like it's going to be I mean, what you're talking about is clearly maybe a little bit more difficult to start the.
Sure and then a little bit better toward the end of the year, but any color you could give us in terms of <unk>.
The rough pattern as you as you see it today.
For the year.
Well, let me, let me do it by market <unk> and [noise].
Because I'm not sure I have a good answer for you, but if I, let me start with defense and space. So our anticipation our assumption is that they would both remain strong so it.
This year was very strong and so we would hope that they would maintain the level of this year, maybe we'll see a pickup here or there but F. 35, as you know we had a super here some of that depends on timing and but it's pretty much at race.
You know there could be some pressures in some programs here or there so I assume that they they stay similar to the second half of fiscal two right. That's kind of the assumption that we have there and I don't think that will very much as we go through the year I think they're both very strong and so maybe we'd have to get maybe you'd have some ups and downs quarter to quarter, but if the ABL.
Ridge of next year was equivalent to the average of the second half I think we'd be feeling pretty good metal.
Medical it Super year. This year some of the sales that were a little bit artificial because we've got some very large orders early on in the pandemic. We described some of that for vegetative motors and actually we've seen a reversal of some of those as we've gone through the third and fourth quarter and the man who is one of those things where when you look at it just said, let's be really careful we don't buy all.
With this inventory because you know in two or three months time, they're going to be coming back, saying no you don't need that much [laughter] give you. An example, we had a demand for ventilator Motors. We had just been qualified before the fact that it gets to be a motor supplier preventative. So these are small these are some of the dollar motors. So it's not a big number but it's a matter of 800.
And within about a month it went up to almost 800 per month. It went to almost 40000 per month.
And since then that's kind of on loans don't have much more sensible EPS. So we saw some real pick up in the second half and so that says as we go into next year, we think the medical business what remains strong relative to say a 19, but it may come off the ball a little bit from some of the kind of the the bulk the kind of the bumps that we saw in fiscal 20 industrial.
HM.
Not optimistic about it the industrial business came in general.
When I say that you know we saw a slowdown we were already seeing the economy slow before we hit the pandemic and our assumption is that the pandemic would be with us through all of fiscal 21. So we're not assuming its going to get better in March our July we're just gonna say, let's assume it's they're all year and so we're going to have to operate with a lot of people working remotely all that the challenge as opposed.
With us.
And so when we look at the industrial business.
I just don't see a recovery coming our thought right now is if there's going to be a recovery, it's going to be into fiscal 22, and if anything maybe we could see a softening as we go through the year. If we don't see some of the pandemic effect starting to wane.
So yeah within industrial industrial automation is a big contributor far as the energy business. I mean, you can't it's automatically but that always is going to take off again anytime soon so that would be would stay at the dollars and then the simulation and test you know a year ago, we were optimistic.
The thought was that that was going to be a lot more simulator trading on the Max.
You know the Max numbers better than we do I mean in terms of how many of them are going to get out there and how many pilots are gonna needs.
The demand for simulators, just does not seem to be there and so that's probably going to stay soft for the year.
So those so that so those are all kind of down to the commercial.
Commercial on the OE side, we'd hope would stabilize or you know the appetite strayed from Boeing and Airbus. It was in the Accseven was 10 was 14 down to 10 now and then maybe down to six next year.
But if you look at our bowling business. It that would suggest it would be down about 45%, it's down over 50% and Airbus business on the Athree 50 rate from 10 to five would be down 50%, it's down in the second half over 70% and so our hope is that those rates will stabilize and what it is it's this de stocking effect that we've talked about so we hope as we get it.
For the year by the second quarter, we would see that stability in those rates and then we can our factories are so I used to that rate, but there's still oversights today, because they're not even taking at those rates. So we hope to see some stability there and then the commercial aftermarket maybe we'll see a little bit of a pickup in the back half of the year, but I mean would that goes all the way.
You know the way we're describing it is you know the second half all 20 through most of next year now I wouldn't say, we have pretty good in the aircraft business quarter to quarter, sometimes we've got some unusual foreign military business. We've got some mix shifts that you can see some bumps are down and so as we go through.
For the year, we may see some bumps, which I would caution you to wait until we maybe talk our way through it before jumping to a conclusion that there was a big shift but.
So that's the other thing that we might see but they get that type of volatility even see quarter to quarter in normal years.
Thank you very much.
You're welcome.
And that's a reminder, ladies and gentlemen to ask a question press star one on your telephone keypad. We're now moving to a question from Ken Herbert from Canaccord Genuity. Please go ahead.
Yes, hi, good morning.
Morning, Ken.
Hey, John and Jennifer appreciate all the detail you provided I wondered if you could just help John with thinking about margins into next year at least Directionally and how this could play out I mean, it looks like.
Third quarter was probably the troughs in margins, but.
But it sounds like Youve clearly got some cost actions and volume is probably the biggest single swing factor should we think about 21.
Can you quantify sort of what you've done on the cost front and then can you give any more color on how we should think about incremental volumes across the year as we do get or incremental margins as we do get any any improvement in volume sounds like more of the back half of the year.
And let me offer some thoughts on the cat I'm I'm I'm doing the bobbing and weaving here. Despite all of the attendance to lock it down on fiscal 21, so I.
I continue to get good color I'm on my Hope is our hope is that what we're trying to do is explain how we're thinking what were seeing and the assumptions, we're making and that the that you folks then can make the best guess because we don't know I mean, we don't know anymore than I think anybody knows what's going to happen over the next 12 months, but let me tell you what I think on the margin front.
Aircraft, let me start with aircraft so aircraft in the first half of the year had margins you know that kills the 11% second half of the year, if I adjust for the the the charge associated with the military program. We're in that kind of four and a half so mid mid low to mid single digits.
We think next year that should do a bit I mean, we should see a little bit of a pick up weve done a lot of restructuring assuming the commercial demand stabilizes and that gets better but just stabilizes as we get older. There's inventory de stocking, we should see a bit of a an improvement for that and assuming that the military business continues strong you know that's that's a whole lot. So so I would hope that we would see era.
Crops margins improve from the second half of fiscal 20 space in defense, we had blow up margins this quarter and as the cool, but restrictions continue I think we're already starting to see you get a certain amount of fatigue that comes in and the you know the efficiencies with which you can get focused on keep in mind.
A lot of what we do in space and defense, it's not production. It's a lot of folks getting together coordination between development production supply chain and what everybody's apart with all of the tools that we still have today you Miss some stuff and so I could worry that there might be some efficiencies that weve been just by virtue of the fact that everybody is not together and talking to way we normally do.
And so we had a stellar year in that 20, maybe margins would come off the board a little bit there.
And then industrial or they you know what that means is right in the past I I worry about our industrial business because I think there's I just don't see any recoveries coming we are in the process, we talked about it in our Investor day, It's really looking at the portfolio taking steps to resign as the business consolidate activity. So we would be doing some of that and continue to do that through all of 21.
I, just don't see demand picking up and so I could see pressure on the industrial margins and so when I put it all together, maybe a little bit of upside that aircraft relative to the second half a little bit of downside on space and defense limited downside and industrial and I put it all together and I, maybe there's some upside in margins as we get into next year, but I am right now.
We're not betting on us.
Hopefully that helps CAD.
No John that's very helpful. That's that's all I could ask for just maybe one other way to think about this from my standpoint is you're not talking much about sort of operations 2.0, but as you think about.
Cost actions you did in the back half of the year in particular, how much of that doesn't come back or or can you maybe help with sort of how you with as youve right sized the business and taking cost out.
What are we looking at moving forward in terms of how much of that are you able to keep versus how much of that eventually comes back as volumes return.
Yeah. So so so we talk about $70 million of restructuring in the second half of the year. Most of that almost 60 of that was an aircraft. The remaining 10 was 10 or 11 was in industrial but.
The vast majority of the cat was asset write downs inventory write downs the asset impairments itself. So that kind of goes off the capital base and so you might say well you know depreciation might come down a little bit in the future and that's true, but well do it but it's not as if there's if I've got 70 million you know what it's called 60 is kind of stuff that's associated with write down if that's not.
Just coming back that's just write downs of the.
The values on machinery inventory that we have we're not going to be able to do is to sell et cetera.
The other piece of it is restructuring and severance and we should see a little bit of a pickup from that as we go into next year. So yes, we will see some gains from that as we go into next year, but it's not as if there's 70 million 70 million comes back next year. Unfortunately, that's not the mass that we got that we've got going so there will be some gain from that Steve.
Realizing demands on the commercial side is really important because we did see we did a big restructuring in the third quarter in commercial I'm thinking that that's it we're just going to do it once everybody goes on and then the fourth quarter demand continues to soften and so we are we're looking for a floor on the OEM side and the de stocking has.
Been enormous I mean, it's so the advertised rates are not what we're producing so that's what we're shipping to by any means so we're going to have to see that stabilized which would give us a floor and then we can start building from there and of course as production volumes come back we should start to see a pickup there.
That's great and just one final question John on the commercial aerospace side on the OEM side.
[noise] I mean, it sounds like the inventory issue could could drag on for a couple more quarters or into the first half of 21 as you think about announced rates from Boeing and Airbus do you see risk that there's further downside or I guess, how would you there's always risk how would you how would you characterize the risk around further.
Rate reductions beyond what's been announced from either Airbus or Boeing.
Well, let me, let me mention something on the AD inventories up so if we look at the incoming inventory, we're down from where downbeat from that that the raised EPS in the second quarter of an aircraft to the rate that we anticipate in the fourth quarter, 40% were down from having kind of purchase materials about.
$150 million in the second quarter of 19, when business is going normally we're going to be down to $90 million. So we have done a ton of work and the whole operations 2.01, improving the supply chain meant that we had an organization in place that we could respond quickly, but that's a 40% drop on 60% drop in OEM production, so far and so we're.
Still in that catch up and it may take another few quarters before we can get our supply chain to slow down to the point that we're seeing with our OEM. So so weve. We may continue to see inventory pressure, but it's not because we're not reducing what were buying it's just we cannot get down there as fast as the drop in demand, but that will change and that you know the title was hard on that sometimes as we go.
Through second maybe third quarter of next year.
In terms of rate Ken I'm, you know we.
We always say, we follow what our OEM customers. They not only is it the best information. We have got we are contractually obliged to make sure that we do what they tell us that they're going to do a.
Beyond that I think the risk you know that I'm seeing is the same as what I read and you retained with all of all of the investment community the analyst.
You guys are spending you know an enormous amount of time, following Boeing and Airbus and passenger miles and all those things and so were I guess, what I'm going to give you would be second hand, which would be property coming from your colleagues in the market. So it seems like theres additional risk from what I read I just read this morning. It was something that said if anything it doesn't look like.
White bodies white bodies do not seem to have the future that weve that they had hoped for what is international travel is going to come back what does that actually get back and they are the big ones for us are the seven industries. It so whats the white body, Luckily that bodes very new airplanes, and I think they both have a tremendous long term future and so as we get out hopefully it's a 22 23 24.
See that pick up but I you know if you ask me we'd be assumed that the risk to the downside as we go through 21, rather than the risk of being to the upside that we won't be able to keep up with production.
Thank you very much.
Now moving to a question from Michael CRM only with [noise].
Jewish Securities.
Hey, good morning, guys nice results I'd like for taking my question here, Hey, John just to be a a pain I mean, you've given us a no sort of pacing items and directional movement of revenues up margins free cash flow conversion you you've got 60% of the business.
Some defense medical you've got 1.7 billion backlog shippable, what was what was the internal conversation like about not giving specific guidance I mean, it seems like you could have put something conservative out there now and I. Appreciate you know there. There's a you know its scope and we don't know what's going to happen, but you kind of go.
EBITDA given us enough year, where you know we we've got some you know data to make some good assessments you usually give any EPS range. That's you know plus or minus 25 cents. It seems like you could have done that with everything you've you've kind of given us here. So why didn't you guys give guidance on m. daughton a specific level.
And.
Well I think it was so we didn't have a lot of conversations.
I think actually what Weve given is a lot more detail that allows you to make a series of judgments about what do you think about always rates or Airbus rates are de stocking based on what you see across the industry. What's your sense of where you see the industrial world Gold and if anything I I believe we provided more.
Details that allow you to make a better assessment I defer to come up with your portion of what you think the future looks like for US we're managing the business today, you know today as the a set of assumptions that I've given you the things that we don't know and of course, you don't know none of US know is what else might happen over the coming year, you know what right now who back it looks like you had.
Policy might look like in three months time, I mean, given the uncertainty that we're sitting with today and so it's the uncertainty in the environment that to for us to pick a number of you know pick any number 3456 it doesn't matter.
Just say, we think it's going to be that number and then to be gauged topic I feel would be counterproductive because it does it can drive behavior to some extent to say look we said this is the street. So we wanted to make sure. We do that what we want to make sure that we are running the business as effectively and efficiently for long term value creation as possible and so for that reason.
And if an opportunity comes up to invest we will we will invest in it because we think it's the right thing to do long term, even if it has a short term impact we may spend more on capital and capital investments over the coming years, if we see the opportunities arise.
And you know if I were to give you a number today, because maybe something comes up or something that we could see you know efficiency changes that we've talked about we could see more efficiency challenges. If we're going to spend another you're walking through college and we may have a situation, where we're we're explaining that and so I feel like I've, given your everything or we'd given you everything that we know.
And I think you can put together models that you feel like our are pretty good and I guess to give you just a fixed number of didnt feel rice, yeah, sorry, Okay that was the thinking and for what it's worth.
Got it no. That's good that's helpful and yet we certainly do have a lot of items, what about can be just break down or maybe deconstruct the aftermarket a bit I know the revenues you know were small, but you know they were up over 30% on a sequential basis can you give us any color you know what you're what you're seeing there you know I.
No you've got you know sort of variety of sort of end market channels or whether its provisioning or just [noise] spares, but what are you seeing any aftermarket.
Well what happened in this quarter sequentially as well.
Well.
Let me give you another little data point, if you look at commercial because you know when we did the investor day and actually even when we got into coal, but we tried to stress to the market in commercial aircraft is an important piece of our business, but it's not the whole business, where you know what a diversified company. So we're a real safe bet as we go through this crisis, we believe at that time commercial was back.
March April commercial was just over 20% of our business in the fourth quarter commercial was about 11% of our business between OE and aftermarket combined until.
And so just that's just putting it into context as to the size of that under for the relevant at relative impact on the business.
So the commercial aftermarket was up I mean in the in that from the third to fourth it was up you know it was up nicely.
Our commercial aftermarket this year is 113 hundred 12 and $13 million, what the business. If I look at the second half we ran at about eight at about $40 million for the second half and that's compared with about $75 million in the first half so were significantly down I think what happened between the third and the fourth.
I was a little bit may have been just how much stuff you get back and stuff that was maybe already in the pipeline stuff. We managed to ship out as we came through the you know how do you how do you keep make itself in a coupon environment, you know a bit of a pickup here or there I don't think its a trend like I don't think that given that increase.
From the third to the fourth is anything to get excited about it at this stage if.
If we do what I said is you know the second half is $40 million. So an $80 million annualized run rate that's down from $140 million and 2019, we're hoping that we could do a little bit better than that annualized rate as we go through next year, but you know I I can't see I can't see any major pick up and just can.
Let's see it's all getting on airplanes anytime soon yeah. So that that's what we're thinking.
Okay.
I think the OE side as I think I mentioned, it's a question of I've, just stabilizing demand going into the second half it was half of what it was in the first half except the advertise reason was only down maybe 40% everybody advertise rates is down 50% at the second half on the other M 350 was down 80%.
For the first time I mean, it's just an enormous shift and so I'm, hoping those rates stabilize that we'd see a better rate than we saw in the second half, but but that's the risk I think it's to the downside on those races as we chatted about.
Got it and then just the last one on inventory you know up a little bit sequentially and I know you gave all that detail.
On you know slowing your incoming purchases and dealing with the production dropped.
It sounds like the bulk of the inventory challenges in what you're doing with his commercial aerospace I mean is there anything you know or you kind of driving that from the industrial side as well or is as we look at you guys trying to manage that inventory down should we just be thinking it's entirely commercial aero OEM.
Yes, it is to substantially the commercial OE isn't it that we're working on that you know in the near term, we're going to be continuing to look at you know de stocking like what we're delivering to our customer and we continue to work downtown reference how we're selling the incoming we see.
So we've done.
A really strong job and that are continuing to focus on that so making sure that we can't satisfy the obligations we have to our customers.
And then obviously taking advantage of opportunities that we have to streamline our processes. So that we can read through.
Reduce our inventories and the offers that we need in that and so it does provide us some opportunity I see as we move forward.
Got it helpful. Thanks, a lot guys.
Oh My God.
And ladies and gentlemen, this does conclude your question and answer session I'll turn the call back over to John for any additional or closing remarks.
Thank you Jake for your help thank you all for listening we hope that you all remain safe and healthy as we go through this coming fiscal year, you know as we went into the pandemic. We thought 20 systems. When he was gonna be D. Copeland year. We're now looking at another cold mid year I think we're optimistic of course that vaccines. All these things will come but.
The meantime, please stay safe and we look forward to reporting on our earnings at the end of our first quarter. Thank you.
With that ladies and gentlemen, this will conclude your conference as a reminder, the event to replay is available at Merx website.
For the webcast page.
Now disconnect have a good day.