Q3 2021 Circor International Inc Earnings Call
[music] greetings and welcome to Circle, our International third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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I will now turn the conference over to Alex Mackie, Vice President financial planning and analysis and Investor Relations. Thank you Sir you may begin.
And welcome to circle or is third quarter 2021 earnings call.
I'm joined today by Scott Buck out sort of course, president and CEO and it'd be kind of all the company's chief financial Officer.
Before we start I'd like to remind you that today's presentation and press release are available on <unk> website at investors that circle or dot com.
Today's discussion contains forward looking statements and only represent the company's views as of today.
These expectations are subject to known and unknown risks uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks.
Well I'll circle or may choose to update these forward looking statements at a later date the company specifically disclaims any duty to do so.
You can find a full discussion of these factors and third of course Form 10-K, 10, Qs and other SEC filings also located on our website.
On today's call management will refer to GAAP and non-GAAP financial measures. The reconciliation of certain non-GAAP measures to the comparable GAAP measures are available in our earnings press release and slides.
With that I'll turn the call over to Scott.
Thanks, Alex and good morning, everyone.
Third quarter delivered another strong quarter and executed well, despite a challenging global supply chain environment.
We continue to see strong demand for our mission critical products with year to date orders and backlog up 11% and 15% respectively.
Notably industrial organic orders growth was 28% in the quarter and our industrial backlog is up 30% year to date, well above pre pandemic levels.
While aerospace and defense orders were down in the quarter due to timing.
Well positioned on growing commercial and defense programs and continue to launch new products for our customers.
Revenue in the quarter was up 2% organically with operating margin up 80 basis points year over year, and 240 basis points sequentially.
EPS was up 39% versus last year.
It is important to note that revenue and earnings for the quarter were adversely impacted by supply chain disruptions that intensified through the last month of the quarter.
More specifically, we saw approximately $10 million of revenue push out of Q3 due to supplier input delays logistics constraints and ongoing labor availability challenges.
This reduced our organic growth by roughly five points in the quarter.
Our teams are working to mitigate the impact of supply chain issues by qualifying alternate suppliers reengineering.
Reengineering product with higher grade materials, and expediting shipping in order to continue delivering to our customers estimated.
Looking forward, we expect these challenges to continue through the fourth quarter, resulting in a $15 million impact on revenue.
For the year, we expect approximately $25 million of revenue to push out of 2021.
This is reflected in our revised full year guidance, which would be will discuss later.
Our strategic priorities on people growth acceleration margin expansion and free cash flow continued to be our guiding principles I'll talk more about select accomplishments from Q3 later in the call.
Now, let me turn it over to cover the financial results.
Thank you Scott and good morning, everyone.
Let's start with the financial highlights on slide three.
Organic orders up a $194 million in the quarter were up 15% versus prior year.
We saw strong year over year increase of 28% in industrial.
In all regions.
Orders were down 10% in aerospace and defense.
Due to the timing of large defense orders.
Organic revenue was $191 million.
Up 1% versus prior year.
Revenue came in approximately $10 million lower than expected.
As a result of the supply chain challenges that Scott mentioned upfront.
Adjusted operating income was $19 million or 10, 1% up 80 basis points from prior year.
240 basis points from the previous quarter.
Finally.
We delivered <unk> 50 of adjusted earnings per share up 39% versus prior year.
And generated free cash flow of $7 million.
Moving to slide four.
Industrial organic orders were up 28% versus last year and down 9% sequentially.
Order growth was apparent across all regions.
Strength in North America and EMEA.
Aftermarket orders were up 42%.
In our downstream aftermarket backlog is the highest it has been since 2017.
Our book to Bill ratio for the quarter and year to date is one one and indications of continued end market demand.
Industrial organic revenue was up 3% versus last year and up 1% sequentially.
By region we.
We saw year over year strength in EMEA, and China and India.
Partially offset by lower revenue in North America.
Despite the strong backlog from the first half.
Fly chain and logistic constraints became the biggest challenge than expected in the quarter.
This adversely impacted revenue by $6 million or five points of organic growth.
Adjusted operating margin was eight 7% up 80 basis points versus last year, and up 70 basis points versus Q2.
Improvements were driven by productivity and continued value based pricing up 2%.
Partially offset by higher inflation.
Expect further margin expansion in Q4.
Turning to slide five.
Aerospace and defense orders were $54 million down 10% versus last year and flat sequentially.
Or does the lower versus prior year due to a large non repeat defense order with a dreadnought submarine in 2020.
The commercial aerospace recovery continues led by narrow body program.
<unk> seen sequential growth for the past three consecutive quarters.
Revenue was $61 million.
One 2% year over year and up 2% from prior quarter.
Slightly lower revenue was primarily driven by lower defense OEM shipments.
Partially offset by the government and commercial aerospace.
Up 10% and an improvement in defense aftermarket revenue up 7%.
Similar to industrial Aerospace and defense was also impacted by the global supply chain and logistic constraints.
Which negatively impacted the quarter by $4 million or six points of growth.
Finally <unk>.
Operating margin was 24, 2% in the quarter.
50 basis points year over year, and up 430 basis points from Q2.
We were still able to expand margin in a challenging global environment.
Pricing actions.
Annuity and favorable defense program mix.
We expect margin in Q4 to be roughly in line with value.
Turning to slide six.
Free cash flow in the quarter was $7 million, an improvement versus prior year, but lower than expected.
More specifically.
And for higher milestone collections on long term projects that moved out of the quarter.
We will collect this cash in future quarters as we complete this project.
We reduced our total debt by $22 million versus prior and ended Q3 with <unk>.
$445 million of net debt.
Due to the lower earning and cash outlook for the year.
And now expect to improve our leverage approximately 0.3 turns by the end of the year.
We will continue to use all free cash flow generated to delever.
Please turn to slide seven.
Starting with fourth quarter guidance.
We expect revenue to be up 1% to 3% organically, which include $15 million of delayed revenue out of the quarter due to continued global supply chain logistics and labor challenges.
Industrial we expect orders in Q4 to be up more than 10%.
And revenue is expected to be up 3% to 6% with.
With growth across most end markets.
In A&D.
Fourth quarter orders are expected to be up greater than 50% driven.
Driven by large OEM defense programs.
Revenue on the other hand is expected to be flat to down 5%.
With double digit growth in commercial aerospace and defense aftermarket offset by lower deliveries on defense program.
We're expecting adjusted earnings per share of 60% to 65 in the fourth quarter with.
With incremental and decremental margins of 30% to 35%.
Corporate cost is expected to increase by $1 million versus prior year.
Finally.
We're planning for free cash flow of $10 million to $15 million in Q4 as you can expect supply chain constraints will continue to impact our ability to compete in process projects and collect milestone billings from customers.
As a result of the supply chain challenges late in Q3 and into Q4, we are revising our full year guidance.
Organic revenue is expected to be flat to down, 2%, which reflects $25 million of revenue delayed out of the year.
Adjusted earnings per share of $1 69.
The $1 74.
Is lower as a result of this reduction in volume and free cash flow is expected to be $49 million.
Now.
I'll hand, it back to Scott to discuss our market outlook.
Thanks, Amit, let's get started with our industrial outlook on slide eight.
As <unk> mentioned in the third quarter, we saw continued order strength across all industrial regions with year to date backlog exceeding pre COVID-19 levels.
In Q4, we expect another quarter of double digit orders growth led by North America.
Virtually all end markets are expected to grow with commercial marine and downstream showing the largest year over year improvement.
On revenue, we expect modest improvement year over year with growth between 3% to 6%.
Our short cycle products are expected to be up 6% to 9% overall, primarily driven by aftermarket growth between 8% to 11%.
Our longer cycle end markets are expected to be roughly in line with last year.
Many of our midstream and downstream customers are prioritizing aftermarket projects in the near term and our OEM project pipeline and backlog remains strong.
And commercial Marine we expect to see growth as shipbuilding activity in Asia continues to recover from historically low levels.
Finally pricing is expected to net roughly 2% as pricing actions that were taken in Q2, and Q3 start to roll through our top and bottom line.
Moving to aerospace and defense.
Q3 orders were flat sequentially and down versus prior year, driven by a large non repeat order in Q3 2020.
We expect a significant increase in Q4 orders.
The increase versus prior quarter and prior year is driven by large defense orders continuing recovery in commercial aerospace and strong medical growth.
A&D revenue in the fourth quarter is expected to be flat to down 5% versus prior year, primarily due to supply chain constraints and the timing of shipments for large defense program.
Defense revenue is expected to be down 10% to 15% with lower shipments on our OEM program.
On the other hand government orders for defense spares and MRO services picked up in the third quarter, and we expect aftermarket revenue growth, 10% to 15%.
Commercial aerospace is expected to continue its recovery with 25% to 30% growth following three consecutive quarters of sequential orders growth.
Revenue from commercial air Framers will be up 20% to 25%, mostly driven by the increased recovery in narrow body aircraft production, most notably the <unk> hundred 20.
Aftermarket revenue growth is expected to improve as aircraft utilization continues to increase.
Finally pricing is expected to be a net benefit of 3% for defense and 4% for commercial.
I'd like to provide a third quarter update on our previously shared strategic priorities.
These priorities continue to guide what our team works on every day.
We're investing in growth, we launched eight new products in Q3 and remain on track to deliver 45, new products by the end of 2021.
I'll share two exciting new products on the next slide.
Next.
Our teams continue to drive price increases in both industrial and aerospace and defense to help offset growing inflation.
Many of these price increases are permanent and will help drive top and bottomline growth going forward.
In industrial we increased prices are implemented surcharges on many of our product lines in Q2 and Q3.
This drove the incremental price, we're showing in Q3 and Q4.
For A&D, we typically match the length of our customer contracts with our supplier contracts, which has helped us mitigate material inflation.
Additionally, we continue to use value based pricing where appropriate, especially in the aftermarket.
To drive margin expansion, we're making key investments at two of our biggest industrial sites in the U S and Germany.
With new modern equipment and processes implemented we expect to see an improvement in safety quality and productivity.
We're making really good progress with our 80 20 initiatives.
With this structured approach, we've built a meaningful pipeline of growth and simplification opportunities and have already used 80 20 to implement strategic price increases at our U S site.
Even more importantly, when talking to the team. It's apparent that 80 20 is becoming a part of our culture and how we do business.
Before we move to Q&A.
I want to highlight two new products, we recently launched.
These products are particularly exciting because they show how <unk> accelerating growth by leveraging our technical expertise into new growing markets, where we do not currently play.
For the past several years, our team has been looking for opportunities to penetrate the green energy sector by leveraging our sealing technology and competence in designing and manufacturing products for high pressure gas storage and transport applications.
The first set of products for applications in the hydrogen market.
Hydrogen isolation valves and modular them regulators are critical components of the control system hydrogen gas transportation trailers.
Our balanced isolation valve has very low leak rates at extreme temperatures and pressures in the modular dome regulator developed and manufactured in India allows stable pressure control.
We're the first supplier to meet the latest EU transportation regulation on the balanced valve and were able to secure more than $1 million of initial orders so far in 2021.
The second new product I want to share is a switch module with kinetic sensors for landing gear position detectors on commercial aircraft.
Our switch module inside the aircraft wheel is engineered to detect the landing gear position and turn on the electric motor, allowing the aircraft's taxi itself with no engine are telling.
This technology not only allows more efficient and safer ground transportation, but also contributes to reducing carbon emissions by burning less fuel.
Both of these new products showcase how we're accelerating growth through new product development and expanding our portfolio into new markets.
With that being I will be happy to take your questions.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Good morning, Nathan morning, Nathan how are you.
Good thanks.
Starting off on free cash flow it looks like relative to the previous guidance of about $30 million.
But out of this year and into next year can you maybe give us a little bit more color on that milestone payments when you're expecting now.
And then just any out there.
<unk> color you can give us around free cash flow and when do you expect that to collect that cash.
Yes, absolutely Nathan Thanks for your question. So look if you if you.
Think about the free cash flow guide that we gave previously for the year versus where we are there's really a few different things going on first of all you saw our guidance being lower on the income side. So that has an impact on it number two on the working capital side the milestone billings that we expected to do.
And for the year has been pushed out to the right and it's really tied to tied to two things first of all it's tied to logistics, both inbound and outbound and our ability to get product in the door and be able to ship, what we need to do to be able to bill our customers. Secondly is tied to raw materials that we need to finish the job. So that we can hit the milestone biller customer and collect the revenue.
Right I'll connect $1. If you will so that's kind of what's driving that from a timing standpoint look it's not gone obviously, we will get the gas just a question.
This pushed a quarter to the right or to the right, but as we start to ship those projects and as we start to build our customers as we hit milestones are going to collect this guy. So I would expect 2022 to be the.
So you're going to start to collect this cash.
Okay. Thanks for that and then.
You talked about supplier input delay right and labor availability, maybe you can just expand on each of those.
I mean, obviously.
Everybody daily unique content being that bad debt and just any color you can give us on on those things what youre doing to walk around.
And when do you think you might be able to catch up to the backlog here.
Sure I'll take that one Nathan.
So I think that I think the first thing to point out about <unk>.
And maybe as an apparent when you start thinking about this is we don't really make any any standard product. We're not building product for inventory everything we make is custom so we get an order we source. It we built it and we ship it and so we're pretty dependent on our supply base to ship us product on time and so what we're seeing is pretty broad based.
In terms of supply chain disruption it's global.
The.
To drill down a little bit.
The common things that are global are really around logistics.
Both inbound and outbound were seeing challenges on castings from casting suppliers globally and to some degree labor availability.
The main if you were to step back and say, what's impacting our revenue the most roughly 80% of the impact on revenue is driven by the supply chain and logistics challenges that we have and it's mainly the inputs of delays and then the delays with respect to logistics.
It's about 20% I would attribute to labor availability and to some degree customer delays, which may be supply chain related as well, but we do have customers basically telling us they don't want the product on the original ship date and to hold onto it and ship. It later.
For us on the labor availability piece were on average across <unk>, we're running about 5% below where we'd like to be on direct labor.
But that doesn't capture the real story, we have certain factories that are running up to 10% below direct labor, where they'd like to be so so we are having some challenges getting getting the direct labor in the door.
If you drill down a little bit on on by business industrial the sourcing challenges that we're having is mostly around motors and actuators to some degree we're seeing some some bar stock some raw material challenges, but it's mainly motors in ashworth actuators on the A&D side, it's more linked to electronics so.
We've got a pretty broad based.
Team working across the globe on this and <unk> been working for are actually quite a while since we since we saw this coming six months ago, but we're qualifying new suppliers as you would expect to.
Increase the number of options, we've been reengineering, our lot of our products with alternate materials.
<unk> material, where it makes sense and where we can we've been very proactive about raising price.
We're getting a lot more price here in the second half than we did in the first half.
And on the labor side.
Our whole team pretty much globally, we've added shifts and we're running overtime to try to compensate for some of the shortages that we have around the world. So so I just wanted to just clarify where we are on this so we did see a delay in Q3, we're anticipating that it doesn't get better in Q4, so that we're going to see about 15 million.
Of revenue drop out of Q4 linked to its linked to all of these leave to all these different.
Delays on the supply side.
Just one follow up to that on the supply chain stuff.
Getting walk in bulk using <unk> is there any expectation that the improved Ali in 'twenty two are easy.
Or are we looking at these well into 2022.
Well what are what our suppliers are saying in our supply chain team is saying is that this is likely to have them give us some kind of headwind through the first half of next year. So.
We're expecting that Q1, we're still going to be dealing with some of these issues and then it starts to get better in Q2. So so.
Virtually nobody around the world that we're hearing from is expecting this goes away this year.
No I think sorry, thanks for taking my questions.
Thanks Nathan.
Our next question comes from the line of Jeff Hammond with Keybanc. Please proceed with your question.
Hey, good morning, guys.
Good morning, Jeff Hey, Jeff.
So.
Just to follow on that.
The revenue delays.
Got that.
Do you see pushing to the right. So.
Ship some of those in <unk> and you can get further delays or like.
Just trying to understand like when the catch up happens.
Yes.
I'll take that and then you can jump in a b, but in essence thats whats happening.
<unk> mentioned, it with respect to large projects, which.
Which is affecting cash as well so essentially what we're seeing is.
<unk>.
We're not seeing suppliers arent shutting down I mean, it's not a it's not an issue of not being able to get supply. It's just everything is shifting to the right and in some cases, just shifting to the right a lot and so we're seeing revenue we're seeing milestone billings, we're seeing shipments on moving to the right and so the $15 million that were.
Highlighting in Q4 will go into Q1.
The question is how much of Q1 is going to shift into Q2, but we do expect that these delays are going to take.
Into early next year into Q2 before before Theyre going to be fully worked through.
The only thing I'd add is just one more thing is as our customers are delaying delivery too right. I mean, they are having supply chains and their supply chain issues on their end, so they're asking us to delay our shipments to them as well. So the two the effect is all over and to Scott's point.
It's getting pushed to the right because you can see our backlog is pretty strong. So you should expect to see that come back into the first half in 2022 for that matter as a supply chain issue start to settle down and we start to get this product out the door.
Yeah.
Okay, and just to be clear, though that the $10 million in revenue that you missed in <unk> does that ship in <unk>.
Yes. So if you think about the revenue right at 10 million that got shifted out of Q3. Some of that is going to come back in Q4, but then you have an effect on Q4. So for the year really what you are looking at a $25 million shift out of the year.
But yes some of that some of that <unk> 10 from Q3 comes back within Q4 also had some revenue slipping out of out of the corner into next year.
Okay.
And then just on like the the Lumpiness then.
I just want to understand what lumpiness than what maybe a change in the trajectory because I know like.
Mike F 35, you know they've changed some delivery schedules et cetera.
Yes, so so we're expecting.
So in terms of change in trajectory, we're not we're not.
We're not expecting any kind of change in long term trajectory and growth rate in our defense business. So yes, it's lumpy.
We've had three quarters of relatively low orders, which might be what you're referring to but youre going to see a very strong quarter here in Q4, we're expecting.
Jack Joint strike fighter large orders, we've got a number of different missile switch orders that we're expecting to come in so you're going to see you're going to see very strong orders here in Q4, so the underlying momentum in that business. We still feel good about the last thing I'll say is that in addition to the programs that we're on that are growing.
We continue to launch a lot of new products in the aerospace and defense more than half of the products. We're going to launch this year are in aerospace and defense it'll be north of 30 of the 45 products. We launched this work this year in aerospace and defense.
As you probably know we don't we don't launch products in aerospace and defense unless we've won it and unless it's on our platform. So we continue to add to the to the portfolio here. So there is no no fundamental change in our outlook for defense right now.
And on the commercial side as you know, we continue to see that improve quarter to quarter.
Okay, and then just last one the refinery business I think you said people are kind of delaying projects and shifting the aftermarket.
Any kind of thoughts on how that flows are changes into 2022.
Yes, I think I think we if you were to have asked us.
Six months ago, we would have said we would have expected stronger revenue in our downstream business in Q4 than what we're at now and what we're guiding right now and the difference is not the aftermarket piece of the business that part is running pretty strong right now.
Is the OEM piece of new capital projects piece, so the backlog remains.
<unk> remains good the pipeline of new projects remains good.
We're expecting a strong first half and orders and then that turns into into stronger revenue and probably Q2 Q3 and Q4 of next year or so so it's a delayed from what we would have said six six months ago.
But the aftermarket is looking pretty good the aftermarket tends to be higher margin, but we really start to make good money in downstream in both the OEM and the aftermarket are kicking in and so we don't expect that to start hitting into the revenue until the middle of next year.
Okay. Thanks, guys.
Thank you.
Okay.
Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.
Hey, good morning, guys.
Good morning, Andy.
Got her be your incremental margin that mid Forty's in Q3 was relatively good. Despite the supply chain stuff you talked about I think you talked about 30% to 35% in Q4. So can you talk about what youre doing to maintain margin I know you've talked about using material productivity to offset costs. What have you looked like in terms of price versus cost.
Given the second half 'twenty, one margin performance does that give you confidence that you can drop through at that 30% to 35% level in 'twenty two.
Yeah.
So.
Sure.
Thanks for your question, Andy I think let me, let me start with what we're doing and then I'll get into the confidence going forward.
<unk>.
The way this has evolved through the year you might remember the first half of the year. We were we were delivering material productivity in excess of inflation and price the price increases were dropping straight through that changed here in the back half as the inflation has started to increase and have a bigger impact.
Material productivity versus inflation equation flipped and so now inflation is bigger than material productivity, but we've also been very proactive with price. So we're getting significantly more price in the back half than we were in the first half. So as you look at what's happened in Q3 and Q4 for <unk> overall.
Inflation is higher than material productivity, but price if you add in price net net.
Dropping through positive to the P&L. So inflation is eating into normally would be 100% drop through on price, but the price is still in excess of what we're seeing on the inflation side. So so we've been very very aggressive on the pricing side.
Regarding the drop through in Q3.
That's largely what it is it is it is largely driven by price and productivity that we've been driving across the company. So not just material productivity, but factory productivity as well.
There is some mix help as well in Q3, but yes, we are expecting the same the same drop through in Q4.
As we go into next year I want to talk about 80, 20, a little bit because youre going to start to see the impact of 80 20 billed through next year I don't think youre going to see huge numbers from 80 20 until for the next 12 months to 18 months, but certainly the low hanging fruit is already starting to surface. So as you know in the industrial.
Real side of the business, we've been working on 2020 in three of our largest sites for the last six months or so.
With the overall goal.
Simplifying really understanding the core in this part of the business and focusing resources, where we can drive profitable growth.
And we're making a lot of progress here and we've got some some large customers, where we know we're not getting 100% share of wallet, we're changing the way we work with them, we're driving a lot more intimacy with them than what we had before and we're starting to see.
Some good good reaction from that there's also some low hanging fruit one of the things that the early things that we identified here is the way we price.
We price our 20 customers very similar to the way we price our <unk> customers.
Loud us to be a lot more aggressive here in the back half of the year and the way we price and is some of what youre seeing in the drop through as a result of US driving 80, 20 and driving pricing in a more strategic way across the portfolio. So that's just a couple of examples so regarding drop through going into next year, we're feeling pretty good with all of the things that we've got.
In process right now, yeah, and just to build on that a little bit of a couple more examples.
If I want to add two to just give you more color and is politically as Scott mentioned, there's a lot of low hanging fruit that we're working through another. Good example is in the past we have not charging our customers for example, expedite fees when we've done something special or above and beyond the normal course of business. So.
It's a low hanging fruit and it's not big dollars, but again. These are things that we're looking at an 80 20 length has given us the ability to actually do identify these opportunities.
As you think about 2022 just to build on what Scott said part of this exercise also is to really simplify our operations and look at our factory and to lay out and how do we streamline our factory to serve oversaw about eighty's and take out complexity. So you should also see in general us driving more productivity because of 80 20, as we streamline our operations and streamline our our factory floor.
Very helpful guys, and then I just wanted to follow up on previous questions in the sense that you mentioned the five points of organic growth headwind in Q3, because of the supply chain and that would still put you short of your previous guidance for Q3 organic growth is that just the defense timing and the OEM oil and gas.
Headwind is there anything else going on that's holding you back a bit.
Yes, Youre right.
The supply chain issues is not the full the.
A full GAAP to the guide and it really it comes down to the timing on aerospace and defense Dill.
Deliveries and so we did see some some some shipments get pushed out of the third quarter into the fourth quarter, we're not exactly sure why if it's maybe supply chain related with our customers.
But we've been asked in certain cases on both sides of the business actually to to to not ship. The way. We originally intended in the third quarter. So it's mainly just timing on the defense side and Andy sequentially. If you look at the aerospace and defense business, you're going to see a big ramp up from Q3 to Q4 to Scott's point, the timing comment I just want to tell you that sequentially Q3.
Q4 is a pretty decent ramp in aerospace and defense business.
Great and then Scott just regionally you mentioned industrial strength should be led by North America. What are you seeing for instance in China, given some of the macro concerns in India has had supply chain issues in the past it seems like better analysis of what are you seeing internationally.
So.
We are so yes, so north America is by far leading in terms of orders growth in the fourth quarter.
I'd say I'd say, we're seeing more modest growth in EMEA.
China, China, we are seeing a slowdown so I would say we saw much stronger growth in the first half in China orders and what we're seeing right now India continues to be good for us.
India's order if the order strength continues to be good so China would be would be one area that is that's definitely weaker than what we're seeing in the first half. So we're seeing very modest growth in China right now.
I appreciate it guys.
Thank you.
Our next question comes from the line of John <unk> with Sidoti. Please proceed with your question.
Yes, I just wanted to go back to the deferred revenue.
Regional take was that it was largely concentrated in aerospace and defense and now I'm not entirely certain.
Certain programs that are being pushed to the right.
<unk> of course.
<unk>.
Being hit harder than others.
And if your customer base that likes to maybe.
Pull forward some of those.
Orders and deliveries.
Labor capacity to fill those orders if they decided to move it.
Quicker than you expected.
So.
I'll start and then maybe a beacon.
Jump in here.
The the supply chain issues and the delays to revenue.
Very broad based they're global.
And they are across both aerospace and defense as well as the industrial business. So if you look at the $15 million in Q3 of a deferred revenue.
Roughly for US it was an aerospace and im sorry, the $10 million in Q3, I'm, sorry, correct myself, there the $10 million of deferred revenue in Q3 four of it was aerospace and defense and six of it was in industrial.
And linked to supply chain and its logistics its supplier input in some cases, its customers asking us not to ship.
It's a fairly broad based challenge that we've got.
Around supply chain issues.
In the business.
So I don't know if that answers. Your question John there were some delay there were some delays on shipments in aerospace and defense. It was in one facility.
And it was linked to a couple of programs. The joint strike Fighter for example was one of them, but but.
But that's that's not the major that's not the major concern that we have here going forward and then John just taken a step forward and looking at Q4, the $50 million that we talk about it's pretty evenly split between industrial and Mandy and Thats really again tied back to what Scott said earlier, which is our supply chain related again, 80% of that is supply chain and logistics related both inbound and outbound.
The revenue doesn't go away. It just gets pushed to the right. So that's why if you kind of take an impact of Q3.
The impact to Q4, you're looking at a $25 million pushed out from 2021 into 2022, and so that's where we are.
And if those orders did come in do you have the labor capacity to fulfill them.
Yes, yes, we do so we're working on that it has been a challenge and an end.
I don't anticipate its going to go go away right away.
But as I mentioned, a little bit earlier on the call we were adding shifts across really across the globe, we're running overtime across the globe. So it's costing us a little bit of money to do this but we're pretty committed to making sure. We can ship ship for our customers as well as we can in this kind of environment.
We are.
We're tracking those pretty closely we feel like we're going to be able to close the gap on the labor side over time.
And we don't think labor is going to be the challenge going forward. We're more concerned about the supplier input challenge in managing that then we are the labor side.
Okay. Thanks, Ed I don't know if you can answer that Scott.
Aftermarket growth.
Do you have any sense, if your customers are kind of rebuilding a restocking their own inventory.
Worried about their own supply chain or is it jobs out there that theyre actually going forward with and looks like there's going to be an increased service revenue and service maintenance work in coming quarters.
Well I think the aftermarket growth that we're seeing.
Yeah.
Across both business is really driven by the increased activity around the globe. So as you know in industrial we sell into.
Textiles automotive.
I mean, all kinds of different industries as the economy's growing utilization is going up and I think that's driving that's driving usage of our installed base in aftermarket in support of that so I think thats largely the same in on the aerospace and defense side, especially on commercial where aircraft utilization is going up and driving more aftermarket.
So it's really the only area of the business that we're seeing.
Capital projects coming back slower is as those long cycle businesses downstream and midstream even in those sectors. The aftermarket is running pretty strong it's really the OEM piece of that business that we're seeing.
And we're seeing that come back slower so the pipeline still feels good.
We still got bidding on a lot of work, but it's still it's slower coming back on the OEM side.
Okay, Alright, and you highlighted the hydrogen product I'm curious a couple of things.
How much product you actually sell into the truck market and is that actually an avenue that you're exploring to launch additional new products.
So hydrogen for sure is an area that we're looking to launch new products. So we've got.
We've got a strategic business development team.
Team in our industrial group that is breaking down the different aspects of the hydrogen economy. The emerging hydrogen economy, you will segmenting.
Segmenting, the supply chain and identifying opportunities for our technology and that's really how they identified this opportunity.
To you with.
Within truck trailers, we don't sell a lot into the trucking industry, John we do sell a lot into energy and all the different components of energy.
Whether it's natural gas or oil and then hopefully hydrogen here going forward. So we're always looking for these opportunities. This happened to be one I thought was interesting that we could highlight.
Hopefully we will have more of these going forward, because I think theres going to be a lot of severe service mission critical flow control kinds of opportunities and hydrogen as this market starts to starts to grow.
Great great. Thanks for taking my questions.
Thanks, Matt.
Ladies and gentlemen, there are no further questions at this time. Thank you for joining US today. This does conclude our conference call. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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