Q4 2021 Moog Inc Earnings Call
Good day, and welcome to the Moog fourth quarter and year end FY 2021 earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over do Andler. Please go ahead.
Good morning, before we begin we call your attention to the fact that we may make forward looking statements. During the course of this conference call. These forward looking statements are not guarantees of our future performance and are subject to risks uncertainties and other factors that could cause actual performance to differ materially from such statements.
A description of these risks uncertainties and other factors is contained in our news release of November 'twenty 'twenty. One our most recent form 8-K filed on November five 2021 and in certain of our other public filings with the SEC.
We've provided some financial schedules to help our listeners better follow along with the prepared comments for those of you who do not already have the document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot look dot com job.
Thanks, Anne good morning, Thanks for joining us.
We will report on the fourth quarter of fiscal 'twenty, one and reflect on our performance for the full year.
We'll also provide our initial guidance for fiscal 'twenty two.
As usual I have organized my headlines into three broad categories first macroeconomic.
Microeconomic focused on our end markets and third some more specific topics.
Starting with the macro outlook.
The macro trends, which affect our business have continued to evolve this quarter backs.
Vaccines versus Delta continues to dominate the Covid news with re openings around the world shifting the balance of power between these competing drivers.
More folks are returning to the office, while embracing a new world of hybrid work.
Businesses are seeing surging orders, but constrained by labor availability and the effects of the newly coins Grace resignation.
The description of inflation as it evolves beyond as transitory to longer lasting with an uncertain timeline for a reversion to the norm.
Finally changes challenges in the supply chain have moved well beyond the electronic components, a new car deliveries to impact almost every element of global trade.
Turning to our major end markets defence and space remained strong and continued government spending.
The Chinese demonstrated the hypersonic missile capability in August which has been described as a sputnik moment by some in the military.
Given this great tolerability it would seem the defence and space spending should remain elevated for the foreseeable future.
Our industrial markets continue to strengthen although it's hard to distinguish between panic ordering and real underlying demand.
Commercial air traffic is improving and global travel is starting to open up.
Balancing this optimism Boeing continues to face heart of Z wave.
737 approval from the Chinese authorities and work with the FAA to get 787 deliveries back on track.
Our medical markets are humming along nicely.
Both Q4.
Coming into the quarter with forecast of EPS of $1 20, plus or minus <unk> 15.
Our headline results of $1 seven includes <unk> 18 of charges compensated by eight tenths of tax benefits.
The incentive charges were result of our continuing portfolio refinements.
It included <unk> <unk> associated with product line exits with the remainder mostly restructuring charges at various sites around the globe.
Our adjusted results of $1 17 was slightly below our mid point, but well within our range.
Last quarter, we described supply chain constraints and labor challenges as watch items for the future.
This quarter, we started to feel the impact more directly on our business.
Cash in the quarter brought our total for the year to over a 100% conversion.
Looking back on the full year the following headline standouts.
First the year turned out much better than we had anticipated 12 months ago.
Last year at this time, we projected that COVID-19 will be with us throughout fiscal 'twenty, one and therefore, we were anticipating a year similar to the second half of fiscal 'twenty.
That projection would've resulted in fiscal 'twenty, one sales of $2 73 billion and earnings per share of about $3 50.
We finished the year with sales of $2 85 billion, a $120 million higher and earnings per share of $4 87.
Covid was with us throughout the year, but despite this each of our core markets is a little better than forecast and we maintained a tight lid on expenses.
Second a strong cash flow this year funded our balanced capital allocation spend we spent approximately $130 million in capital expenditures $80 million on acquisitions $32 million of dividends and $30 million of share repurchases.
We finished the year with our balance sheet in great shape, providing us with all the flexibility we need to continue to invest next year.
Third we continue to refine our product portfolio throughout the year exiting businesses and consolidating operations.
This activity cuts across all three of our operating segments and included exiting four product lines.
We also closed five sites and consolidated production into larger operations.
Anticipate that this portfolio journey will accelerate over the coming year.
A new administration in Washington has shifted the debate from tax reductions to spending increases.
Defense spending continues to be well supported on both sides of the aisle and new opportunities in green initiatives are starting to emerge.
Fifth as the year progressed, it became clear that Covid was not going away with the arrival of a vaccine and that the supply chain and labor shortages were new challenges, we would need to contend with.
The discussion around working from home versus in the office shifted to hybrid working arrangements.
We introduced a new flexible working policies our workforce.
This is perhaps the most dramatic shifts in working conditions for a generation.
And finally as I do every time this year I'd like to recognize the contribution of all our employees around the world for their continued dedication to serving our customers.
Now, let me provide some more details on the quarter.
Sales in the quarter of $734 million or 2% higher than last year.
The impact of foreign exchange and acquired sales underlying organic sales were flat.
Sales were up in aircraft controls about flat in industrial systems and down marginally in space and defense.
Taking a look at the P&L, our gross margin was up significantly on improved mix, particularly in aircrafts.
R&D was also up on higher investment in new technologies and the additional engineers at our Genesys acquisition.
SG&A expenses were up as we've returned to a more normal operating environment. After the crisis management last year.
Interest expense was down marginally on lower rates.
Our effective tax rate of 19% this quarter was unusually low and some special items.
The result was net income of $35 million up from an adjusted net income last year of 26 million and earnings per share of $1 seven up 32% from the adjusted EPS last year.
Looking at the full year fiscal 'twenty, one and comparing full year fiscal 'twenty, one with fiscal 'twenty, we need to remember that fiscal 'twenty included only two quarters of COVID-19 conditions, whereas fiscal 'twenty was a full year of COVID-19 conditions.
With that backdrop fiscal 'twenty, one turned out much better than we had anticipated 12 months ago full year sales of $2 85 billion with just 1% lower than last year.
We had low low single digit sales changes in each of our three operating groups with sales up in space and defense was down slightly in aircraft and industrial systems.
Gross margin for the year was higher on strength in the aircraft business.
R&D and SG&A were both higher reflecting the same story as we saw in the quarter increased investments and a move away from crisis management.
Interest expense was lower at lower rates.
Last year, we incurred significant restructuring charges as we resize the business.
We also incurred a pension settlement charge as we amortize half of our defined benefit plan.
Adjusting for these charges last year. This years net income was up slightly and diluted earnings per share were 1% higher.
Fiscal 'twenty two outlook.
For next year, we're projecting sales of $3 billion, an increase of 6% over fiscal 'twenty one.
We anticipate growth in each of our operating groups with the strongest gains in commercial aircraft and in military ground vehicles.
Your margins of 10, 3% would be up about 80 basis points and earnings per share of $5 50, plus or minus <unk> 20.
It will be 13% higher than fiscal 'twenty one.
We forecast that cash flow next year will moderate from the very strong performance of the last couple of years as we invest more in growth.
Now to 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 to protect.
Starting with aircrafts.
Sales in the fourth quarter of $298 million were 8% higher than last year.
This quarter the commercial business drove the increase.
Commercial OEM sales were up on the acquired sales of Genesys.
Lower OEM sales to Boeing or the 87 were compensated by higher <unk> hundred 50 sales to Airbus.
Sales into the commercial aftermarket customers were up 25% driven primarily by higher 787 activity.
Sales of business jets doubled to $7 million, but from a low point in 12 months ago.
On the military OEM side higher fund the developments and the acquired sales from Genesys more than compensated for lower F 35 sales, yielding a 12% increase in total debt.
Military aftermarket was down 16% from a very strong Q4 last year.
Aftermarket sales were lower across most of our major platforms, including the F 35 F 18, and the V 22.
On a more positive note the military aftermarkets showed a modest recovery from the low points of Q2 and Q3 this year.
Aircraft fiscal 'twenty one full.
Full year sales of $1 6 billion were down 4% from last year.
Sales of military applications were up 8% for the year, while sales to commercial customers were down over 20%.
On the military side of the house strong OEM sales compensated for a weaker aftermarket.
<unk> sales were up across a range of programs, including yesterday, five and some foreign military platforms.
Higher funded development and the acquired sales of Genesys also contributed to the growth.
Sales into the military aftermarket was down across a broad range of programs with the biggest reductions in the F 35 and V 22.
Turning to the commercial side OEM sales were 26% lower than last year, while aftermarket sales were down a more modest 7%.
Comparing our commercial sales for fiscal 19 before Covid hit we see the dramatic impact of the pandemic on our business.
Sales to OEM customers were down 50% from 2019 from $540 million to just over $270 million in 'twenty one.
Aftermarket sales fared better down from $141 million $19 million to $106 million in 2020, a drop of 25%.
Aircraft margins.
Margins in the quarter were eight 8% up from an adjusted margin of two 7% last year.
The higher sales and improving commercial aftermarket more than compensated for weaker military aftermarket sales.
Full year margins of eight 3%.
We're up from adjusted margins up seven 6% last year.
This year's margins included almost 100 basis points of additional R&D spending as we invested in the next generation of military platforms.
Aircraft fiscal 'twenty two.
We're projecting fiscal 'twenty two sales of $1 $2 5 billion up 7% from this year.
<unk> is on the commercial platforms with OEM sales up on the 737 business Jets the <unk> for the full year of Genesys.
We're also anticipating that the commercial aftermarket will continue to strengthen across our portfolio of platforms.
In contrast, military OEM sales will be more or less in line with this year with higher helicopter sales compensating for lower F 35 sales.
We anticipate military aftermarket sales will be up on higher F 35, and V 22 activity.
We're encouraged by the uptick in the fourth quarter of the military aftermarkets and our modeling that this run rate will continue through fiscal 'twenty two.
With stronger sales and an improving mix were forecasting full year margins in fiscal 'twenty two of 10, 1% up 180 basis points for fiscal 'twenty one.
Yes.
Turning now to space and defense sales in the fourth quarter of 200 billion were 3% lower than last year.
This is the first time in five years that we've had a down quarter year over year.
This quarter sales were marginally lower than both our space and our defense markets on.
On the space side, lower revenue and launch vehicles hypersonic satellite engines with cars, partially compensated by increased activity on our integrated space vehicles product line.
Defense sales were down on lower tactical missile production and continued challenges in our security business and.
On the plus side sales outlet, while defense systems, and it's enabled applications were slightly higher.
Based on defense fiscal 'twenty one.
Full year sales of $799 million were 4% higher than last year.
Over the last six years sales in this business have more than doubled.
In fiscal 'twenty, one was all in the space market.
Biggest driver was our new integrated space vehicles business, which more than doubled from a year ago to $60 million.
We also saw double digit growth in our avionics product line to over $50 million.
Defense sales were down 2% in the year, driven by lower tactical missile work and challenges in the security business.
Yes.
Space and defense margins margins in the quarter of eight 6% were disappointing.
Our space and defense sector has had a tough second half of this fiscal year. After several years of strong margin performance.
Similar to the third quarter, we saw some cost growth in several of our fixed price fixed price development contracts across both end markets.
In addition, we incurred $2 $5 million of impairment charges, as we exited certain products and contract arrangements taken.
Taken together these pressures depressed margins by 300 basis points in the quarter.
As is always the case, we believe we've captured the impact of all future cost increases within the quarter.
Full year fiscal 'twenty, one margins of 11, 1% were lower than prior years as a result of the second half impacts described above.
Based on defense fiscal 'twenty two.
Our forecast for fiscal 'twenty two projects another year of double digit sales growth.
Defense will lead the way with sales up 14% from fiscal 'twenty one.
Growth is primarily in our vehicles product line across both U S and foreign programs.
We also anticipate stronger components sales for our slippers.
Space sales will be up 5% as a result of the continued growth in our integrated space vehicles product line.
We're projecting operating margins of 11, 5% in fiscal 'twenty. Two this is up from fiscal 'twenty, one, but not back to the levels. We enjoyed a few years ago. There are two reasons for this first we're cautious after the experience of the last six months.
Second we're seeing a mix shift in the business to newer more integrated product offerings on the defense side, It's our toric business and on the space side, It's our satellite box offerings.
Combined these new product lines are delivering most of the sales growth in fiscal 'twenty, two plus as with many new business endeavors, there at slightly lower margins than our legacy business.
Turning now to industrial systems sales in the fourth quarter of 226 million were more or less in line with last year after adjusting for foreign exchange movements.
Sales were up in industrial automation energy and simulation and test with sharply lower medical industrial automation.
Automation sales were up 11% on strength across the portfolio, we see the nice rebound in this business over the last six months as the global economies have started to recover from Covid.
Energy sales were up on increased offshore production activity.
Simulation and test sales were up slightly on some project work in the materials test area.
Core flight simulation sales was down slightly from a year ago.
Our medical pump business was marginally lower as the after effects of the Covid surge slowly work their way out of the supply chain.
In addition sales of components into sleep therapy, and medical imaging rollover.
Industrial systems fiscal 'twenty one full.
Full year sales of $882 million were 2% lower than last year.
Adjusting for the impact of foreign currency gains underlying sales were down almost 5% on the year.
Three of our four major markets were weaker with industrial automation being the exception with modest growth.
Industrial automation makes up half our segment sales.
Sales into this industrial automation market dropped significantly with the onset of Covid in our third quarter last year.
It remains depressed for about nine months and since the second quarter of this year. We've seen a recovery is investment in capital goods has ramped up to meet surging demand.
This quarter, our core hydraulics and electric components business was up across most of the portfolio of end markets.
Energy sales for the year were down as oil prices remain subdued simulation and test sales were depressed all attributable to flight simulation, where our annual sales for full flight simulators were down almost 30% from the prior year.
Finally medical sales were lower as anticipated as the Covid surge we enjoyed in fiscal 'twenty waves.
A positive note fiscal 'twenty, one sales into medical applications were 12% higher than our pre COVID-19 sales.
Industrial margins.
In the quarter of eight 5% included almost 200 basis points of restructuring and impairment charges.
In the quarter, we continued our portfolio refinement selling a small product line and closing sites in Asia.
Full year margins of nine 6% were down from fiscal 'twenty on the lower sales volume and inefficiencies associated with 12 months managing through Covid.
Industrial systems fiscal 'twenty two or.
Our first look at fiscal 'twenty to suggest.
It's modest sales growth over last year.
We anticipate that our industrial automation and energy markets will be flat with this year, while both simulation and test and medical should be higher.
Although Australia automation sales will remain flat as modest underlying growth is the gated by the portfolio refinements, we're going through.
Our growth in this market is primarily limited by our ability to ramp production rather than a shortfall in demand.
Both supply chain and labor constraints are impacting our ability to grow sales.
Our energy market has been pretty stable over the last few years as the price of oil is remains muted.
Second surge in oil prices may have a longer term impact on our business if prices remain elevated.
Given the long cycle in this industry, we're not anticipating any material impact in our fiscal 'twenty two.
Simulation and test sales will be higher on additional auto test work and a modest recovery in flight simulator volumes.
We continue to anticipate a very slow recovery in the flight simulator markets over several years.
Finally sales into medical applications will be higher on additional components sales with the biggest increase in motors for sleep therapy products.
We're forecasting full year margins next year up nine 5% in line with fiscal 'twenty, one investments in new electric vehicle applications and our continued journey to refine our portfolio are suppressing margin expansion this coming year.
These activities should start to pay dividends as we get into fiscal 'twenty three and beyond.
Sure.
Summary guidance.
In fiscal 'twenty, one we learned to live with the pandemic through a full 12 months and delivered much better results than we had imagined going into the year.
Looking forward to fiscal 'twenty, two we're optimistic that the pandemic will continue to receive however, we anticipate we will be living with the effects of the pandemic on both the supply chain and labor markets for all of this coming 12 months.
Just on what we know today, we are optimistic about our business and are forecasting both top and bottom line growth.
Looking at our five major markets in fiscal 'twenty, two we believe defense and space will remain strong industrial markets will continue to improve commercial aircraft with show nice recovery and medical but a return to modest growth.
In normal circumstances, we believe our projections for the coming year accurately balances the risks and opportunities we are seeing.
However, however, we're living through extraordinary circumstances, and it is very difficult to quantify the potential impact of supply chain disruptions and labor challenges our forecast assumes some level of continued disruption in line with the trends we've seen in the last two quarters.
Additional risks include rising inflation and the impact of the vaccine mandates on our ability to deliver products to our customers.
On the positive side should COVID-19 continue to receive receipt and the supply chain constraints start to unwind, we could see upside in our industrial and commercial aircraft businesses.
After 18 months of the pandemic our strategy remains unchanged unchanged from pre pandemic times, we're a technology company focused on solving our customers' most difficult technical challenges customer.
Customer intimacy is at the core of our strategy and we believe long term relationships with our customers drive long term value.
We focus on our core technologies of motion and fluid control, while serving a wide range of end markets, which benefits from our expertise.
Capital allocation is focused first and foremost on growth both organic and via acquisitions.
We believe this is the best way to generate long term shareholder value.
We will also return capital to shareholders through our dividend policy and use our share buyback program Opportunistically.
Finally, our culture of trust and collaboration has stood the test of time and carried us through the extraordinary challenges of the last 18 months.
We are optimistic about our future while remaining realistic about the challenges.
In fiscal 'twenty, two we anticipate sales of just over 3 billion and earnings per share of $5 50, plus or minus <unk> 20.
These results represented an increase of 6% on the top line and 13% on the bottom line.
We believe that believe the year will start slowly and accelerates sequentially for Q1, we anticipate earnings per share of $1 10, plus or minus <unk> 15.
Now, let me pass it to Jennifer to provide more color on our cash flow and balance sheets.
Thank you John and good morning, everyone free cash flow in the quarter was $22 million or 65% conversion. We had another strong year for free cash flow coming in at $164 million and topping 100% conversion.
That compares to free cash flow of $73 million in the same quarter, a year ago and $191 million for all of last year free.
Free cash flow has been especially strong since the start of the pandemic six quarters ago.
And the first few quarters of the pandemic. We are focused on conserving cash to ensure we had sufficient liquidity to manage through the uncertain times ahead.
<unk> begun to increasingly invest in our business as the markets. We serve has stabilized.
Over that 18 month period, we generated $328 million of free cash flow, which is just over 150% conversion on an adjusted basis.
The $22 million of free cash flow in Q4, compared with a decrease in our net debt of $23 million.
During the fourth quarter, we paid our quarterly dividend and repurchase some shares.
Outflows were partially offset by proceeds from the divestiture of a small product line and our industrial motors business.
For the year $164 million of free cash flow compares with a decrease in our net debt of $42 million.
During the year, we acquired Genesys for $78 million.
A dividend of $32 million.
And repurchased 400000 shares for $30 million.
These outflows were partially offset by divestitures.
Net working capital, excluding cash and debt as a percentage of sales at the end of Q4 was 29, 1% about the same as a quarter ago.
We continued our trend in reducing inventory.
We also benefited from the timing of payments.
And receivables offset these benefits.
<unk> increased due to billings late in the quarter certain customers, not taking delivery and supply chain issues that delayed shipments.
Capital expenditures in the fourth quarter were $40 million, we increased our investments in capital expenditures beginning in the second quarter. This year, what's the level of uncertainty from the pandemic subsided.
We continue to catch up on capital investments that we had previously delayed. In addition, we are consolidating some of our operations into new facilities to reduce our footprint over time and recapitalizing for next generation manufacturing capability to increase production efficiencies through automation.
At quarter end, our net debt was $803 million, including $101 million of cash.
Major components of our debt were $500 million of senior notes $322 million of borrowings on our U S revolving credit facility and $80 million outstanding on our securitization facility.
We have $746 million of unused borrowing capacity on our U S revolving credit facility.
Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of four <unk> times on a net debt basis.
Based on our leverage we could have incurred an additional $609 million of net debt as of the end of our fourth quarter.
We are confident that our existing facilities provide us with the flexibility to invest generics nature.
Our leverage ratio with Q3 times on a net debt basis as of the end of our fourth quarter comparing to two four times a year ago.
Strong cash generation was offset by the pressures on EBITDA from the impact of the pandemic as well as the capital allocated towards acquisitions and share repurchases are.
Our leverage ratio continues to be within our target zone of Q&A quarter time to two and three quarters time.
Cash contributions to our global retirement plans totaled $16 million.