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 5th '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.
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 Dot com job.
Thanks, and good morning, thanks for joining us.
This morning, we 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 second microeconomic focused on our end markets.
Some more specific topics.
Starting with the macro outlook.
The macro trends, which affect our business have continued to evolve this quarter.
Vaccines versus Delta continues to dominate the Covid news with reopening 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 has evolved beyond 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 added capability in August which has been described as a sputnik moment by some in the military.
Given this great power rivalry 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 hurdles.
737 approval from the Chinese authorities and work with the FAA to get 787 deliveries back on track.
Finally, our medical markets are humming along nicely.
Both Q4 <unk>.
Coming into the quarter.
Our cast with 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.
Makes sense of charges were a result of our continuing portfolio refiners.
<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.
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 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 would be with us throughout fiscal 'twenty, one and therefore, we were anticipating a year similar to the second half of fiscal 'twenty.
That protection 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 with 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, we anticipate that this portfolio journey will accelerate over the coming year.
Fourth our new administration of 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 the vaccine and that the supply chain and labor shortages were new challenges, we would need to competitive.
The discussion around working from home versus in the office shifted to hybrid working arrangements and 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 with 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 improved mix, particularly in aircraft R&D was also up on higher investment in new technologies and the additional engineers at our Genesis 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 overall 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 were 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, but down slightly in aircraft and industrial systems.
Gross margin for the year was higher on strength in the aircraft business R&D.
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 or 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 aircrafts and then military ground vehicles full.
Full year margins of 10, 3% will be up about 80 basis points and earnings per share of $5 50, plus or minus <unk> <unk> will.
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 with the text.
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 Genesis.
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 development and the acquired sales from Genesis more than compensated for lower F 35 sales, yielding 12% increase in total debt.
The 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 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 the F 35, and some foreign military platforms.
Prior fund the development and the acquired sales of Genesis also contributed to the growth.
Sales into the 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 a $141 million and $19 million to $106 million in 2021 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% for this year.
<unk> is on the commercial platforms with OEM sales on the 737.
<unk> jets the E two and the full year of Genesis.
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 at 35 and V 22 activity.
We're encouraged by the uptick in the fourth quarter in the military aftermarket in 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 on launch vehicles hypersonic satellite engines was 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.
Plus site sales at this while defense systems, and it's enabled applications were slightly higher.
Space and defense fiscal 'twenty one.
Full year sales of $799 million or 4% higher than last year.
Over the last six years sales in this business have more than doubled.
The growth in fiscal 'twenty, one was all in the space market was the 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.
Space and defense margins margins in the quarter of eight 6% were disappointing.
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 billion of impairment charges as we exited certain product 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 component 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 protecting operating margins of 11, 5% in fiscal 'twenty. Two this is up from fiscal 'twenty, one, but not back to the level. 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 bus offerings.
Combined these new product lines are delivering most of the sales growth in fiscal 'twenty two.
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 and 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 at the global economies have started to recover from Covid.
Energy sales were up on increased offshore production activity stimuli.
Simulation and test sales were up slightly on some project work in the materials Hester.
Core flight simulation sales were 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 and.
In addition sales of components into sleep therapy, and medical imaging were lower.
Industrial systems fiscal 'twenty.
Full year sales of $882 million or 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.
They remained depressed for about nine months and since the second quarter. 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 at the end markets.
Energy sales for the year were down as oil prices remained 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 Williams.
On a more positive note fiscal 'twenty, one sales into medical applications were 12% higher than our pre COVID-19 fiscal 19 sales.
Industrial margins.
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 the 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.
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 neutral to the.
The recent surge in oil prices may have a longer term impact on our business if prices remain elevated however, 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 component 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.
<unk> and new electric vehicle applications, and our continued journey to refine our portfolio are suppressing margin expansion this coming year. These.
These activities should start to pay dividends as we get into fiscal 'twenty three and beyond.
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.
Based on what we know today, we're 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 shoals, 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're 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.
Customers to see that 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 represent an increase of 6% on the top line and 13% on the bottom line.
We believe that the leap year would 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 our balance sheets.
Thank you John and good morning, everyone free cash flow in the quarter with $22 million or 65% conversion. We had another strong year for free cash flow coming in at $164 million and topping 100% conversion that.
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 cash flow has been especially strong since the start of the pandemic six quarters ago.
In 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 this 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 Genesis for $78 million Hey.
Pay dividends 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.
Receivables increased due to billings late in the quarter certain customers not taking delivery and supply chain issues second late 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 increased 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 in our future.
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, particularly in three quarters time.
Cash contributions to our global retirement plans totaled $16 million in the quarter compared to $12 million in the fourth quarter of 2020.
Contributions have increased for our defined contribution plan in.
In the U S participation has increased and our defined contribution plan.
Defined benefit plan remains closed to new participants.
Global retirement plan expense in the fourth quarter was $20 million down from $21 million in the fourth quarter of 2020, excluding the settlement loss from last year.
For the year expense was $71 million down from $79 million without the settlement loss in 2020.
Defined benefit plan expense is down due to the settlement of about half of the liability of our largest plan with defined contribution expense related to increased participation.
Our effective tax rate was 19, 8% in the fourth quarter compared to 28, 3% excluding charges associated with the pandemic and the same period a year ago.
The lower tax rate this quarter is attributable to the release of valuation reserves.
For the full year, our effective tax rate of 22, 8% compared to 29%.
Asking rates in 2020.
This year's rate includes charges associated with the revaluation of deferred tax liabilities in the U K, mostly offset by adjustments to last year's provision in the U S.
We amended our securitization facility yesterday under the facility our receivables financing subsidiary made solid receivables to a financial institution in an amount up to $100 million.
These transfers are treated as sales and accordingly, the receivables are de recognized from our balance sheet.
The new structure reduces our working capital level.
We expect free cash flow generation in 2022, including the benefit of $100 million from the securitization facility to be in line with our long term target of 100% conversion.
Receivables will be the greatest source of cash due to the securitization facility.
We also expect inventory to continue to be a source of cash while customer advances get worked down.
We expect capital expenditures in 2022 to increase to $160 million as we invest in facilities and infrastructure to support future growth and operational improvements in the business.
Depreciation and amortization are expected to be $96 million.
Our financial situation is strong we are well positioned to invest and deploy our capital our priority at this point is to invest in our business and fund organic growth.
We continue to explore M&A opportunities the pricing remains high on that front.
We may also complement our growth strategy with returning capital to shareholders.
With that I will turn it back to John for any questions you may have.
Got it.
Thanks, Jennifer Stephanie we would like to request questions from our listeners. Please at this time.
Thank you Hey would you like to ask a question. Please signal by pressing star one on your telephone keypad.
The speaker phone. Please make sure your mute function is turn off to allow your signal to reach our equipment again that is star one to ask a question. Our first question comes from Ron Epstein with Bank of America.
Hi, Good morning, it's actually Elizabeth on for Ron This morning.
Good morning.
Question, We had was just around the supply chain and the headwinds that youre seeing there.
Harsh sketched out are you actually seeing at the chairman specifically for the moving pieces.
And just see if I can understand your question that's right Glenn.
Yes.
How long.
What kind of a difference youre seeing in lead time today versus where they were call it six months ago.
Yes.
Sure.
Anecdotal is the best we can do with that Elizabeth because we buy thousands and thousands of different parts, but I think we're seeing lead times doubling trebling. It's dramatic changes when you go to reorder something and the challenge can be that in the system in Europe and your ERP system, you have a reorder lead time I'll pick a tie in 12 weeks for something.
And we're running with that and then when you go to reorder.
Supplier tells you it's not 12 weeks, it's actually 30 weeks now and so you have this shock and then of course the response to that hopefully.
Inventory, which used to be a very bad thing now is a really good thing and so if you've got sufficient inventory to cover you through some of those long lead times that helps.
So far we have seen challenges, which have prevented us shipping some amount of product to our customers, but not to the point Jed what it's completely held us up not like the auto companies.
It's got more.
Difficult I would say over the last quarter and Theres a lot more effort from our supply chain organizations and chasing parts working with our suppliers trying to make sure we can keep the production going so.
Significant changes and it's in everything it's not.
It used to be electronic components and processors, it's everything from plastic parts to all kinds of metal parts, it's across the board.
On the flip side I would say one of the things I mentioned in my text is on the industrial automation side of our industrial systems business. Our challenge there is more.
Based on our ability to supply rather than a demand issue and we've seen our own lead times for products on the types of products. We make go out from $4 six weeks to 12, 14, 16 weeks, so more than a doubling of our own lead times to our customers. So we're kind of seeing it on both sides.
Okay, and then how do we how should we think I mean.
Fiscal year 'twenty, two guidance, but how should we think maybe a little longer term and the medium to long term, where you think growth rates growth rates.
Well I.
I don't know about long term growth rates, but I'll offer you this perspective.
Half of our business, if you take the defence and space and the vast majority of our space business is government funded business that's over half of our business.
Sure.
As I said on the call it would seem that despite the fact that we've moved from a Republican to a Democratic administration, there seems to be across the aisle support for the idea that we're back into a.
Near peer kind of major power type rivalry, particularly with China and the recent Chinese demonstration of hypersonic weapon I think has only accelerated that thinking and so we're optimistic that defense and space will remain strong for the coming years I am not sure how long that is whether there will be growth opportunities F. 35 is being torn down of course.
But we have a broad portfolio of offerings, there that we're feeling very comfortable about and as I mentioned on the call. Some of the growth to all of the growth actually we're seeing in our space and defense business next year is really around new product areas integrated towards a business that we weren't in three or four years ago and integrated buses.
I'd also a business that you'll go back three or four years, we wanted it so.
New products, New technologies, I think and the underlying budget levels should stay strong.
I have to be we all have to be optimistic about the commercial recovery both on the OE side I mean Boeing.
87% to $3 50 of the two big programs for us.
As you know Boeing is now talking about two a month and Thats down from 14, two months two years ago.
$50, maybe at four or five a month. So hopefully you get out a few years that will come back strong and with the aftermarket will come with US and then industrial right now we're seeing a surge in demand was constrained in terms of our growth by our ability to get products to our customer and hard to know if thats underlying demand or if it's a little bit of.
Reaction to supply chain and lead times going out the industrial business tends to move up and down over a multiyear cycle. So hopefully that cycle I would imagine it will at least continue in terms of the upside for the next two to three years.
And that I think it will be a cyclical business and our efforts there are to focus on new growth vectors like in the electric vehicle on the green initiatives that we think there might be opportunities in the future and then medical I'd see that growing with the underlying medical business, which seems to have nice single digit high single digit growth opportunities just given demographics.
And health care costs. So so so I'm optimistic definitely optimistic about the long term.
The portfolio is diversified across end markets, which also really helps but right now the signs I think are positive for the longer term growth beyond 'twenty two.
Thank you very much.
Thank you.
Thank you. Our next question comes from Cai von <unk> with Cowen.
Good morning, guys.
Yes, good morning, guys. Thanks, so much so.
It looks like the charge is the 18th works out to roundly seven 8 million can you give us some color where they are by each of the three groups and then I think you mentioned more product rationalization.
This year approximately what what are you talking about where is it.
Sort of maybe from 20000 feet the whole idea here.
Is.
Some products have become less profitable or it's a new strategic initiative to kind of cull the less profitable.
So let me see if I can answer the question so in the quarter Cai you're right at 18, we can call it $8 million or above.
Half of it was probably in the.
Space and defense side, the other half of it was an industrial give or take and it was exiting from a variety of small businesses.
Impairment charges associated with getting out of our product line with exiting some customer relationships.
So it's that type of thing and they were all.
A couple of three <unk> there so it wasn't all added up to 18.
It wasn't that big enough issue to call out on the front of the financial statements.
So that was what happened as I say across both space and defense.
And our industrial business is really where we saw that impact in the quarter.
In terms of what the scope was this year and we mentioned that it would be more next year. We think this year is probably about 1% of sales that we ended up kind of finding our way out of next year. It would probably be closer to 2% of sales we're thinking it doesn't sound like a big number on the total sales, but it's continuing to accelerate and you may remember that we did announce that we have.
And agreements, although it has not closed for the sale of our navigation AIDS business.
About a quarter ago, that's opticals once it closes.
Perhaps this quarter, we'll obviously, we'll report on that.
But that's just an example of it and if I look at what we think will happen next year I think.
That will probably be it'll be split pretty much across the three groups in each of the groups. There are product lines that we are not.
We don't see a long term future and add to your question is why are you doing this it really is about focusing the business on those product lines, where we believe there is either we have.
The best.
The most profitable product lines.
I think we have something thats underperforming if we have a clear strategy that says it's got a lot of future growth potential and will become a great business. We of course will stick with us and take the time on the other hand after a while if we find we're in the business, where it's not performing particularly well and we don't see that it has any real future potential we use.
We determined that it's probably best in the hands of somebody else. So it's really around refining the product line to drive long term margin improvement.
And John if.
You're going to have sort of some of these adjustments in all three groups.
What's the rough number in terms of is this another 8 million is a $12 million is it 3 million can you give us a range in terms of what we're sort of looking at in terms of P&L impact.
You mean in the coming year.
22, yes, yes, so in our forecast for next year, we have not baked that in at a plus or minus.
And so because some of them you never know what it's going to happen and you never know at what price, particularly at our selling a business.
Some of them will be closed balance, where we could we could make an estimate of the costs some of them, though our sales and so much of that depends on the price that you get and the carrying cost of it on the books and so the sales of businesses.
They could have a material swing, but most of the time it will be cash positive or neutral, but there may be.
If we are writing off goodwill.
Asset impairments, then we could see some bigger numbers, but all of it I would say is one time and that was factored out of the underlying operating performance of the business, but at this stage I cancers are I won't give you an estimate of it because I'm not sure exactly what will happen and when and I'm also not we're not sure exactly what type of price we might realize for some of the businesses sometimes.
Oftentimes, if you're faced with exiting particularly a smaller product line. We do the analysis between can we sell US do we want to wind it down do we want to exit is is it a multi year.
Find your way out of this and those conversations are ongoing.
And it's never quite clear until you get to that point as to what you actually do so for that reason, we are cautious about putting a number of others.
And then is the idea that you will be through all of these initiatives.
In fiscal 'twenty, two 'twenty three 'twenty four should be better and secondly.
To the question.
Came before me.
Where are the margins I mean, I think we've talked.
Over the years of mid teens targets for for most all of the businesses you're quite a ways away from that so is that still the target and if so about one could you reach it.
So yes that is still the target.
A lot of it.
It will happen in 'twenty, two but there is some of this stuff takes actually.
<unk>.
Then we might imagine and so it will probably continue into 'twenty three and of course on an ongoing basis when you've got lots of different product lines. It's a constant thing, but most of the adjustments I would say have been 'twenty, one 'twenty two and 'twenty three part of what we're also doing Cai I called it out in the text is we are we exited five small sites and so we're consolidating some.
Yes.
Typically what goes with that is that those additional costs as we consolidate into our larger sites and get out of some of the smaller sites are typically a product move like that is a 12 month process by the time you.
Organize that make sure it's moved it up and going into next and the next location. So that will also continue into 'twenty into 'twenty, two and to some extent also into 'twenty three and in terms of.
Building the base for margin expansion Thats exactly what this is doing is making sure that we're in the products that we need to be in to get our margins into the teams over the next few years.
And I won't provide you with a definite timeline because I've done that in the past and my words, but I can tell you that there is a continued focus on that and the whole portfolio refinement is about making sure we find ourselves in the businesses that we can be most successful and as measured by our ability to generate strong returns.
Excellent. Thank you.
Thank you.
Thank you again that is star one if you'd like to ask a question. Our next question comes from Mike Sierra Mali with Chili's.
Hey.
Good morning, guys. Thanks for taking the questions maybe just two.
Stay on work high was there just just so we're clear industrial you've got some sales I think you said it might be a 2% headwind to sales next year. So as we look at the.
The industrial segment guide.
For for next year should we assume that there is there is about two.
2%.
Best pitcher headwind in there.
How should we be be thinking about.
I guess all of the segments should we be thinking about a 2% headwind across all the segments. It sounded like they were going to be some puts and takes just just to try and get an apples to apples of where the underlying organic growth is going to be next year.
So the total growth of top line growth, Mike that we're talking about for next year is about 6% yes.
Yes.
What we said is that we may be looking at in our portfolio appointment that might be at 2%. So you'd have to take that up because as I said, our forecast is not baking in the impact of the portfolio refinement and what we're doing so 6% organic but perhaps if we if we managed to get through the refinement that we're talking about and maybe sell off some businesses, maybe you have a two.
Headwinds moving in the other direction.
As I also said that 2% is kind of spread across the three businesses. So if I take industrial right now we're forecasting a 2% growth and if you said well if you did the portfolio refinement that might be a 2% headwind to get a little bit of that what is happening though is over the last year and into next year as well as we have been transferring sales between.
Our industrial business and our space and defense, it's a it's a small number 1% 2% of sales, but what has happened is that we have had in the over the years mixed facilities. If you remember back.
A few years ago, we had our components group.
And the components group serves both industrial and aerospace and defense markets. It was a products business slip rings and motors.
It was the business that we bought from Lytton Poly side typically way back in the early two thousands.
When we took the components business and the gentleman running a retired we decided we would split it into the A&D side and the industrial side and we'd align those with our other two businesses, but what came with that of course is that they had mixed facilities. They are facilities that they both military and industrial work at over the last few years, we have been systematic.
Focusing on we have either all of our facilities are either all industrial are all aerospace and defense because we believe that that is a much cleaner way of running the business and so we have been moving product around and part of that is what came up to the industrial side as we've been moving some of the sales that were in our industrial business that our ANV related moving those product lines and in some.
This is closing a facility or two into the space and defense group. So there's a little bit of growth in the space and defense group couple of percent Thats actually a transfer from our industrial business and so theres, a little bit of that going on as well Michael in the background, but overall for next year industrial we're not seeing any growth in the energy business, that's kind of been flat for the last.
Few years recent spike in oil I don't think that plays through industrial automation as I mentioned some of that it's not growing but thats, mostly the product transfer into space and defense and <unk>.
Underlying our ability to just get more projects, where supply we're supply constrained rather than demand constrained and then we're seeing a little bit of an uptick in both simulation and medical.
Got it and then just sticking on kind of the restructuring theme I guess, where are we with I guess you were calling it at the time and aircraft operations two point, though I mean that I think the two year Mark maybe in July I would've thought I mean, youre guiding for some margin expansion I would have thought we would have started to see.
More of an impact there and then can you maybe just say what the R&D spend is going to be and if that's a headwind year over year in aircraft.
So Mike.
Normal circumstances, I would I would agree completely with it but as I mentioned in fiscal 'twenty, one our commercial aircraft business is 50% down on the 19 levels. When we started this program and our commercial aftermarket is 25% and our facilities around the commercial our commercial dedicated most a lot of.
Slowing production is in the Philippines, and so next year, we're showing margins, we're talking about margins of over 10% of our aircraft business at a time when the commercial business is still highly depressed and so I think if we could factor that out and go back to the same level.
Utilization.
<unk> sees that we had 19 on the same production levels I think we would be seeing a significant improvement in our up I know, we will be seeing a significant improvement in our operational underlying business in 2022 versus what we saw at <unk> 19.
As I say labor.
Labor vaccine mandates to supply chain constraints all of these that are swamping the impact of our internal efficiency activities. So we continue down that path. We continue to invest we continue to do better but there are just macro forces that are dramatic where like a salesforce that we've managed to trim. The sales where we are after moving into a huge storm at the same time.
So I think thats, what swapping it Mike.
Okay and last one for me and I'll jump back in the queue.
I think by market defense growth next year.
Up 7%.
Looks fantastic, especially in light of what we're seeing with the peers.
Just given all your customers guiding flat low single digits, a lot of programs coming under pressure what gives you the confidence there and whats the F 35 headwind I mean, I would imagine youre going to have some excess capacity there with the rates flatlining at $1 56 versus potentially push.
Over 200 up one point.
Yes. So there is there's clearly the F 35 top line is down about 10% next year and our forecast from what we saw this year, especially back to what we saw the level of talent.
20.
And so that played through in that but we are seeing a nice pickup on the helicopter side and particularly.
On the Florida.
Based on.
Development work, it's not based on.
Extra Nobel winning if they do that would be wonderful, but that would probably be in FY 'twenty three impact out of FY 'twenty. Two so you've got F 35 down what increased helicopter activity increase some increased development work all of that means that if we look at the OEM side were up just a tiny little bit, but we've got some additional genesis.
Sales, so you could call the OE side class.
35 down compensated by helicopters and were saying on the military aftermarket.
Up a little bit significantly down from 20, but hopefully the run rate that we saw in the fourth quarter. We had a kind of a very soft Q2 and Q3, so not much on the aircraft side actually sales pretty much in line with what we saw in fiscal 'twenty, one, but then on the space and defense side, It's under defense side Mike.
That's the total business.
We wanted to show that program and that will just be a much bigger program next year and then all of those things kind of.
Puts and takes here and there a little bit more hypersonic work, maybe a little bit less tactical missile walk a little bit more navy a little bit lesser security, but overall that all comes about and we see the growth in the integrated <unk>.
<unk> business that we have and it's the same on the space side. The growth is on is on the satellite bus and so what this is is it showing the investments that we've made over the last six to eight years and getting into more integrated products, it's showing that started to flow through on the sales line. So it's a product related.
And in innovation related growth rather than the underlying market growth. We are also seeing strong sales growth and uptake of the slippery side of our business on the component side. So that's good too. So I agree I think the primes are seeing more pressure, but we have specific product lines or areas that we anticipate growth coming into next year.
Got it got it perfect. Thanks, guys I'll jump back in the queue.
Thanks, Mike.
Thank you again that is star one if you would like to ask a question.
We have any more questions Stephanie at this time there are no additional questions at this time.
Paul.
If theres no additional questions I'd like to thank everybody for their attention. Thank you for staying with us through fiscal 'twenty, one and we look forward to.
And the increased earnings in fiscal 'twenty two thank you very much.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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