Q2 2022 Moog Inc Earnings Call
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[music].
Please standby we're about to begin.
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Good day and welcome to the most fiscal year 2020 two.
Second quarter earnings Conference call. Today's conference is being recorded at this time I would like to hand, the conference that Lloyd. 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 April 29, 2020 to our most recent form 8-K filed on April 29, 2022, 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 a copy of the document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot both dot com John Thanks.
Thanks, Dan Good morning, Thanks for joining us.
This morning, we report on the second quarter of fiscal 'twenty, two and affirm our guidance for the remainder of the year.
Let me start with the key financials.
It was a strong quarter with adjusted earnings per share of $1 49, 12% higher than the adjusted $1 33, we recorded in Q2 fiscal 'twenty one.
Adjusted EPS. This quarter was also slightly above the high end of our guidance from 90 days ago.
Tuition around Covid and supply chain disruption continued to present challenges during the quarter, but our teams manage these well.
Adjusted free cash flow in the quarter, excluding the impact of our securitization facility was negative $24 million.
Finally, there is no change to our guidance for the full year full year sales will be $3 billion with.
<unk> earnings per share of $5 50.
Plus or minus 27.
Now, let me move to the headlines.
First.
The World has changed considerably since we reported our Q1 earnings at the end of January .
The Russian invasion of Ukraine is reset expectations around long term defense spending, particularly in Europe .
At this stage the impact on our overall defense business is difficult to estimate we believe however that there will be no material change over the next six months, which potential tailwind in future fiscal years.
Second Covid supply chain labor attrition and inflation continued to weigh on economic activity and make chart short term financial forecasting difficult.
Today's we've managed well through these challenges as evidenced by our results. This quarter. However, they will continue to be major distractions to normal business operations throughout the remainder of this fiscal year.
Third we took charges this quarter across our segments tied to the delayed recovery of the commercial aircraft business the Russian actions in Ukraine, and further refinements in our portfolio.
The total charges had an adverse impact on earnings per share of <unk> 59 in the quarter.
I'll provide more details on each of the charges as I move through the segment discussions.
And finally, we're pleased with the results of our second quarter, which came in ahead of forecast.
90 days ago, our plan for the year included a considerable ramp up in earnings in the second half.
Underlying outlook for the year has not changed rather some of the forecast of Q3 and Q4 earnings increase actually accelerated into the second quarter.
As a result of the stronger Q2, we're now forecasting Q3, and Q4 to be pretty much in line with Q2, both in terms of sales and earnings.
Now, let me move to the details starting with our second quarter results.
Sales in the quarter of $771 million were 5% higher than last year.
We saw increases in each of our three operating groups.
When you look at the P&L, we incurred a $2 million charge as we wrote down some inventory and receivables associated with exiting our activities with Russia.
Despite this charge our gross margin was up slightly on the higher sales and a better mix.
R&D and SG&A expenses were more or less in line with last year as a percentage of sales.
We incurred restructuring costs of $8 million in the quarter as well as an impairment charge of $15 million.
Both charges were associated with re sizing the business and continuing our portfolio shaping activities.
Interest expense was slightly lower than last year.
The effective tax rate this quarter was 24, 9%, resulting resulting in GAAP net earnings of $29 million and GAAP earnings per share of <unk> 91.
In order to compare the underlying operating performance with Q2 last year, there are adjustments, we need to make to each quarter.
In Q2 fiscal 'twenty, one we recorded 18 gain on the pension curtailments in Europe .
Excluding this gain.
The adjusted net earnings last year were $43 million and the adjusted EPS was $1 33.
This year in Q2, we incurred inventory write down restructuring and impairment charge in the quarter.
Excluding the impact of these onetime charges in Q2 fiscal 'twenty two.
Our net earnings this year were $48 million and our earnings per share were $1 49.
On an adjusted basis net earnings and earnings per share were both up 12% over the same quarter last year.
This <unk> outlook.
Our full year outlook remains unchanged from 90 days ago, we're forecasting sales of $3 billion up 6% from last year and adjusted earnings per share of $5 50 up 13%.
We anticipate a slight acceleration in earnings in the second half, we're keeping our full year EPS range unchanged at plus or minus <unk>.
To reflect the continued uncertainty in the global economic climate, particularly in relation to the supply chain.
Now to the segments.
Mind, our listeners that we provided a full page supplemental data package posted on our webcast site, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text.
Beginning with aircrafts.
Our aircraft business provides flight control products to two very distinct markets each with their own macroeconomic drivers are.
On the military side, the Russian invasion of Ukraine has changed the narrative around defense spending.
In the U S. Both sides of the aisle are aligned on the importance of strong defense spending while the European nations are redefining their level of commitment to defense budgets the <unk>.
Impact of these shifts on our business will play out over many years to come although we don't believe there'll be any material impact in the present fiscal year.
On the commercial side. The overall atmosphere continues to improve with U S Airlines showing stronger results are projecting further growth over the coming months.
Aftermarket activity is on the rise and we're seeing this filter through in our numbers.
On the other hand, the recent crash of a 737 in China. The continued delay in resuming 787 deliveries and the decision by Airbus to temper the future ramp on the <unk> hundred 50 are weighing on the longer term outlook for our business.
China's new fronts in our battle with Covid and the risk of recession in Europe arising from the Ukrainian conflict are also items we're watching.
On balance we remain bullish about the commercial business, but the lead the recovery to pre pandemic activities continues to move to the right.
This shift in our longer term view of the commercial OEM recovery drove us to take further actions in the second quarter to resize the business.
Back in 2020, we made a significant adjustment to our commercial workforce have incurred impairment charges as a result of the pandemic.
At that time the level of adjustments was based on our internal model of when we would see a recovery in the commercial business.
Our intention was to ensure we had sufficient labor and capital to response to the increase in production rates the Oems were forecasting.
The delays in expected volume recovery at our major customers made it clear that we needed to make further adjustments to our staffing and asset base this quarter.
As a result, we incurred $15 million of impairment charges and $4 million of restructuring charges in the quarter.
Aircraft Q2 sales in the quarter of $311 million or 2% higher than last year.
This quarter our growth came from the aftermarket both on the military and commercial sides.
Military aftermarket sales were up nicely with growth across a broad range of programs we.
We saw particular strength on the V 22, and F 15 platforms.
In contrast, our military OEM sales were down from a year ago.
The largest component of this drop was lower F 35 sales driven mostly by the timing of material receipts.
We also saw lower foreign military sales compensated by higher by 22 activity.
And last year's second quarter, we had $5 million of sales from our navigation AIDS business.
You May remember, we divested this business in Q1 this year further driving the negative sales comparison with a year ago.
On the commercial side OEM sales were about flat with last year lower 787 sales were compensated primarily by higher business jet sales as well as slightly higher activity on the 737 and <unk> hundred 50 programs.
We are keeping the OEM production rates on our major programs fairly steady internally in order to maintain the health of our supply chain and the efficiency of our plants.
Therefore, the fluctuation in sales numbers from quarter to quarter is less a reflection of internal production volatility and more of the impact of the timing of material receipts.
Commercial aftermarket sales were way up this quarter. This is a combination of two items underlying strength in the book of business and some one time activities that booked this quarter.
Each of these items contributed about half of the growth in the quarter.
The underlying business continues to surprise to the upside with increases across all major platforms.
The 787 continued to lead the way as international travel recovers.
We also benefited from several one time items in the quarter, including some test equipment sales. These items will not repeat in future quarters.
Aircraft margins.
GAAP operating margins in the quarter up 4% included 600 basis points of headwinds from the re sizing activities. I've described adjusted operating margins of 10, five zero percent were up nicely from the same quarter a year ago and also from our first quarter.
The strength in the aftermarket on both the military and commercial sides of the house drove the margin gain.
Aircraft fiscal 'twenty two.
Keeping our full year sales forecast unchanged from 90 days ago at $1 25 billion up 7% from fiscal 'twenty one.
However, we are adjusting the mix between military and commercial based on the experience of the first half.
And total military sales will be marginally lower than our previous forecast.
<unk> sales will be marginally higher.
We're keeping our full year adjusted margin forecast unchanged at 10, 1%.
This implies a strengthening from the run rate of the first half.
We've already seen a nice margin pickup from the second quarter.
I believe we will see some further improvements as we move through the next two quarters.
Turning now to space and defense.
Similar to last quarter underlying demand in both our space and defense markets remained strong.
The shifts in the global defense posture over the last 90 days should ensure our business in both markets remained strong for years to come.
While our space portfolio has growth opportunities in both commercial and defense related markets are present book of business is dominated by U S government contracts. Therefore.
Therefore increases in future defense spending and the emphasis on space as the next frontier in any future conflict bode well for our business.
In other news we competed with concluded some portfolio refinement this quarter and incurred a $2 million charge.
Based on defense Q2 sales in the quarter of $223 million were 8% higher than last year.
Both of the both the space and defense portfolios are driving growth in this business with the lead passing from one market to the other from one quarter to the next.
This quarter. It was the defense defense side of the house that drove the growth.
<unk> sales were up 15% driven by strong growth on a rip sure Ed Provost.
Missile applications were down marginally compensated by slightly higher component sales.
On the space side growth in our space vehicles business compensated for lower hypersonic activity and slightly softer sales across a range of our heritage components businesses.
As I mentioned last quarter, our hypersonic development activity is winding down and we will have a period of lower activity at the government decides which programs to move forward to the next phase of development and production.
Space and defense margins.
GAAP margins of 10, 8% included 80 basis points of portfolio refinement charges.
Adjusted margins of 11, 6% or up from our first quarter results and are in line with our forecast for the full year.
Space and defense fiscal 'twenty two.
There is no change to our sales forecast for the full year.
When youre space sales of $350 million, assuming a second half in line with the FERC.
Full year defense sales of $530 million <unk> assume a slight acceleration in the run rates at both our missile and component components portfolios growth.
For the full year, we're keeping our adjusted margin forecast unchanged at 11, 5% slightly better than the performance of the first half.
Turning now to our industrial systems business.
Underlying demand for our industrial products was strong over the last quarter.
Energy prices increased pilot training and the general demand for automation equipment to expand production capacity bode well for continued strength in our business over the next few quarters.
Growth across the industrial World remains healthy.
Although COVID-19 spikes, particularly in China, and geopolitical events in Europe have increased the risk of an economic slowdown next year.
The direct impact of the Russian actions in Ukraine show up in our industrial segments.
Very soon after the invasion, we made the decision to cease all business with Russia.
Our ongoing sales into Russia, where small.
So there's no material impacts to our outlook for the year.
However, this decision combined with some minor portfolio refinements across the footprint resulted in a 4 million dollar hit to earnings in the quarter just over half associated with Russian charges and the remainder of our portfolio shaping.
Industrial systems Q2.
Sales in the quarter up $236 million were 5% higher than last year.
Excluding the impact of foreign exchange movements and lost sales from portfolio shaping activities underlying sales were up over 10% organically.
Simulation and test sales were way up on increased flight simulation activity.
Into the sub markets almost doubled from a year ago. It would appear that flight training activity is finally recovering from the pandemic slowdown.
Energy sales were up on higher generation and exploration activity.
Industrial automation sales were about flat, but adjusting for portfolio shaping and our organic sales into this market were up mid single digits over last year.
Finally sales into medical markets were down slightly on lower component sales for ventilator applications.
On a positive note across the portfolio our bookings continued to be strong and our backlog is growing our challenge is meeting the demand from our customers given the supply chain constraints.
Industrial margins.
GAAP margins in the quarter of eight 8% in Q1 hundred 70 basis points of restructuring and impairment charges. Adjusted margins of 10, 5% were in line with last year and up nicely from the first quarter.
In Q1, we incurred some production disruption and moving expenses as we consolidated facilities in Europe and the U S.
Industrial fiscal 'twenty to theirs.
There is no change to our sales forecast from last quarter.
The full year, we anticipate sales of $910 million. This total assumes a modest pickup in the second half as we work to accelerate shipments to meet customer demands.
Full year forecast for adjusted margins is also unchanged at nine 5%. This margin is slightly ahead of the run rate of the first half.
So in summary.
It was a good quarter overall with adjusted earnings per share above our forecast from 90 days ago.
We saw an acceleration of some planned earnings upside later in the year into the second quarter. So that our overall forecast for the year remains unchanged at $5 50, plus or minus 20.
This full year forecast assumes a second half performance slightly ahead of the first half but in line with the second quarter, both in terms of sales and margins.
Cash flow in the quarter was soft, but this should recover in the second half.
As we look to the next six months that are both risks to our plan as well as opportunities to do better.
At the risk side and escalation of hostilities in Ukraine, our spreads to other parts of Europe could materially change the outlook.
Also further aggressive lockdowns in China as they fight the omicron variance could exacerbate the supply chain challenges and so overall economic growth.
On the opportunity side, the rebound in global travel could drive further commercial aircraft aftermarket upsides and an easing of supply chain constraints could provide the opportunity to accelerate sales in each of our operating groups to meet customer demands.
As always we try to weigh the possibilities of both upside opportunities and downside risks and provide the market with our best estimate of the outcome.
Overall, our business remains very healthy and we believe there are many opportunities to see continued growth in both sales and margins over the years to come.
For the third quarter, we anticipate earnings per share of $1 45.
So minus <unk> 15.
Our range continues to be relatively wide due to the uncertainties in global economic conditions. Despite these uncertainties our backlog is strong and our outlook remains bullish.
Now, let me pass it to Jennifer who will provide more color on our cash flow and balance sheet.
John Good morning, everyone. As a reminder, we amended our securitization facility in the first quarter under the facility our receivables financing.
City Arie, Thanks, Sal receivable to a financial institution up to $100 million.
We reached that level at the end of our second quarter and we were at $90 million at the end of our first partner.
Due to the structure of this facility the associated receivable are not recognized on our balance sheet.
The new structure reduces our working capital level to provide.
A comparable look at our cash generation and financial position, our fair share of free cash flow and net working capital metrics without the benefit of the new facility will also include the metrics is calculated off of our financial statements near the end of my comments from here.
We're keeping our forecast for free cash flow unchanged for the year.
Free cash flow in the quarter was negative $24 million.
We saw pressures this quarter on working capital most notably as we worked down significant customer advances that we received in the first quarter.
Receivables also grew in the second quarter, we continued investing in capital expenditures at a similar rate to the past few quarters.
We're able to make these investments from a strong financial position we're in over.
Over the past eight quarter, our free cash flow conversion on adjusted net earnings and over 100%.
The negative $24 million of free cash flow in Q2 compares with an increase in our net debt, adding in debt related to the securitization of $52 million during.
During the second quarter, we acquired team accessories for $12 million.
Keane accessories based in Ireland and specializes in the maintenance repair and overhaul of engine and airframe component.
This business will be part of our commercial aftermarket service offering.
We also had cash outlays of $8 million for the quarterly dividend.
And $4 million for share repurchases.
Net working capital, excluding cash and debt as a percentage of sales at the end of Q2 with 29% up from 27, 6% a quarter ago, but in line with the levels. We saw in 2021.
The increase during the quarter largely resulted from an expected work down of significant customer examples on military programs that we received in the first quarter.
We also saw growth in receivable.
Experienced growth in receivables and commercial aircraft program, where our production level is higher than the rate at which customers are taking delivery.
We're maintaining steady production levels to ensure a healthy supply chain inefficiencies in our facility.
Timing of invoicing.
I think from strong sales late in the quarter also drove higher levels of receivable.
In addition in advance that built up from pandemic relief on the defense business online this quarter.
This growth in receivables as a percentage of sales was offset by growth in Tampa.
On the inventory front this quarter marks our fifth straight quarter of decreasing inventories as a percentage of sales we continue to make progress on our initiatives to reduce inventory levels, while being very mindful of ensuring sufficient inventory levels on hand, and a supply chain constrained environment.
Capital expenditures in the second quarter were $37 million in line with our spend over the last.
Key corridors.
This level of capital expenditure reflects our investment facility to support growth and provide next generation manufacturing capability.
At quarter end, our net debt was $711 million, including $122 million of cash.
The major components of our debt were $500 million of senior notes and $320 million of borrowings on our U S revolving credit facility in.
In addition, we had $100 million associated with the securitization facility that does not show up on our balance sheet.
We have $756 million of unused borrowing capacity on our U S revolving credit facility our.
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 kind of incurred an additional $581 million of net debt as of the end of our second quarter.
We are confident that our existing facilities provide us with the flexibility to invest in our future.
Our leverage ratio at two three times on a net debt basis as of the end of our second quarter compared to two seven times a year ago.
Strong cash generation and earnings drove this improvement.
Our leverage ratio is at the low end of our target range at two in a quarter time to two and three quarters time.
Cash contributions to our global retirement plan totaled $17 million in the quarter compared to $14 million in the second quarter of 2021.
Contributions have increased for our defined contribution plans as participation growth in our U S plan.
Global retirement plan expense in the second quarter was $21 million.
From $13 million in the same quarter a year ago.
In the second quarter of 2021, we recorded a 6 million curtailment gain associated with terminating our defined benefit pension plan in the Netherlands, which reduced our pension expense last year.
Meaning increase in global retirement plan expense relates to the growth in our defined contribution plan.
Our effective tax rate was 24, 9% in the second quarter compared to 21, 6% in the same period a year ago.
Adjusting for impairment charges and restructuring activities in the second quarter. This year, our effective tax rate was 24, 4%.
In the second quarter of 2021, there is no tax expense associated with the curtailment gain on the termination of the Netherlands defined benefit pension plan.
<unk> this benefit the effective tax rate in the second quarter of 2021 with 23, 9% the.
The increase in our adjusted effective tax rate is due to the relative mix of earnings.
Okay.
In the second quarter, we incurred 59 of impairment and restructuring charges of which two thirds were noncash charges.
We're keeping our forecast for free cash flow are the same as our forecast from 90 days ago, We expect free cash flow generation, excluding the benefit from our securitization facility to be $78 million in 2022.
45% on an adjusted net earnings.
Working capital more specifically receivable will consume cash this year customer.
Customer advances inventory and payable will all be sources of cash and will partially offset the consumption of cash by receivable we.
We expect capital expenditures in 2022 to be $150 million.
Depreciation and amortization are expected to be $94 million.
I'd also like to share some of the metrics and amount to be able to calculate from our financial statements. These.
These reflect GAAP accounting for the securitization facility.
Free cash flow in the quarter with negative $14 million and free cash flow generation for the year is projected to be $178 million.
Which is about 100% conversion on adjusted net earnings.
Networking capital was 25, 6% of sales at the end of the quarter.
Our financial situation continues to be strong we're positioned nicely to fund organic growth and make investments in our operation that will serve us well for years to come.
With that I will turn it back to John for any questions you may have.
Thanks, Jennifer Ali we would be happy to take any questions. We have known from our listeners.
Of course, thank you and if you would like to ask a question. Please press star one on your telephone keypad.
You're on a speakerphone, please pick up your handset and make sure. Your mute function is turned off so not your signal reaches our equipment again.
Star One if you would like to ask a question.
And we will go ahead and take our first question from Kristine <unk> with Morgan Stanley . Please go ahead.
Hey, John Jennifer and good morning.
Good morning Christine.
Oh on inflation.
Can you provide more details in terms of how much youre able to pass through to customers and then on the supply side.
How much of your raw materials do you have long term agreements with and are those suppliers honoring your contract.
So.
Let me break it down between A&D and industrial Chris Christie typically on the industrial side, we have a lot more ability to pass through.
Inflationary cost pressures or price adjustments, so I would say on the industrial side, we have been very active to try and make sure that we don't get caught in the squeeze but the timing is never perfect of course, but I would say in general on the industrial side, we're pretty well covered we typically don't have long term pricing agreements with any of our customers on the aerospace and defense side.
On the commercial side as you are aware with the Oems typically we have long contracts long pricing duration contracts, but typically they are also we have worked very hard over the years to try and lock our suppliers into a similar timeframe it doesn't always work but.
Really covered for a reasonable percentage of the prices on the commercial OE side.
And then on the military side typically we will also try to do the same.
If military if our input cost increase if we most of the time, we've got one year, maybe two to three year.
The multi year contracts on some of the major military OEM programs. So the opportunity to re price comes up it just doesn't come up quite as quickly I'd say on the industrial side. So inflation is definitely a concern it's something we're watching Christine.
But it is not the case that we've got a lot of fixed price from some of our suppliers and on the industrial side, we have the opportunity to adjust prices relatively quickly on the defense side. The price adjustment takes maybe a little bit longer before you can walk through some of the major programs.
Thanks, John that's really helpful. And then on the restructuring charges that you took in the quarter, how should we think about incremental margins going forward as volume recovers, presumably now you've got a better cost footprint for how much higher should we expect that incremental margins to come.
Well the way I would put I would put it slightly differently Kristine because the vast majority of its up to $25 million, we took about $3 million associated with Russia, and then those $3 million of what I call portfolio shaping but the vast majority of a $19 million of it was in the aircraft business and that really was us taking a step back and say look we have.
Projected OEM recovery rates by now of 2020, and 2022 2023 higher than what they are now seeing and of course, our projections were based on what both Boeing and Airbus thought back in 2020, and so we've made the adjustments to the size of the business, both the capital base and the.
The employees to reflect on an ongoing basis, maintaining profitability rather than it's going to be more profitable next year over year. After year. We're in we're saying there is no adjustment one way or another Christine, but it's more about we were over facilities.
And overstaffed, given what we're now seeing in the recovery of the OEM rates. So there's no real incremental margin in that sense. What I would do is I would say is the actions that we've taken are to secure the margin profile that we were going to anticipate over the coming few years.
Great John and if I could squeeze one more and I'll pass on to the next analyst.
When you mentioned about the labor adjustment.
What does that mean in terms of your preparation for when OE production rates actually do come up and how do you balance between that lower cost structure and the flexibility to ramp up it seems like the 77 Max is actually 31 per month now and if Boeing is able to get the.
J a approval for the 77 from second half of this year. It seems like Daniel have upward pressure, there and the rest of the industry, we're seeing labor shortage really be an issue.
How do you balance that chooses to make sure that when you do need the labor you can get it back and meet those production rate increases.
Yes.
Good question to ask Christine.
Let me just <unk> as an example, we've described that we have maintained our production level on the 87 over the last.
Year, or so and we are maintaining our production level and the kind of the three to four ship sets a month level and the reason we're doing that is because we want efficiency of the factory and we want to make sure that our suppliers are not we don't cut them off and then tried to restart up youre aware of Boeing is not shipping any at the moment. So what's happening is we're building inventory of finished products.
Of course, that's part of the receivable story that Jennifer was telling as well and so when Boeing Boeing is aware of this we have agreed with them about this whole process, but when they start shipping again, they have a lot of them in inventory then they are going to wrap up to I'm not sure what the number three about four months five months, but it would be quite a while before their race and the.
<unk> and their inventory means that we would have to actually increase our production level and that would give us sufficient lead time I believe more than sufficiently time, probably a year or two to put the necessary labor in place to do it. So we have they've got lots of inventory sitting on the tarmac. We are building inventory to keep the supply chain running efficiently and therefore I'm not concerned.
About our ability to respond that would not be a problem, we will be able to respond.
Quickly enough to meet any demand increase AC.
Great. Thank you for the color.
Welcome and thank you.
And next we will go ahead and take our question from Michael ceremony with truly Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking the question I guess.
John just to maybe stay on pristine line of thinking I mean, you guys implemented.
A significant restructuring plan in aircraft controls in 2019.
Okay.
And I think you've said the rates at this point now Werent really where you're thinking they were they would be I mean, it seems like the 780 sevens.
One that would be a big dip.
Difference.
How aggressive what youre planning in terms of.
Production rates at this point in 'twenty, two I mean, it certainly seemed like we all knew the wide bodies werent going to recover for some time, so I'm just trying to further understand.
What was driving that that impairment and restructuring when you guys seemingly started this process and probably had a good opportunity to even do more win win rates and volumes were pretty low in the COVID-19 downturn.
Yes, so thats the previous restructuring Mike was in 2020. It was I think it was a quarter after the downturn and keep in mind at that time, there was nobody knew what was going to happen and so we erred on the side up in Brazil.
In response to kind of Christine's question of making sure that if the if the Oems will going to come back sooner that we had both state and necessary capital and the people in place to do that so we tried to cut as deep as possible, but recognizing that the.
The Oems, where we're going to do that.
If you look at what happened this quarter, while <unk> to the 185 got pushed out by several years that was a big production program that we were planning for and Airbus temporary.
Ramp from six months to fiber months so.
And thats been kind of an ongoing process I think if you go back into the early 2000 Twenty's.
Our fiscal year I think they were all projecting six seven months.
On the rates and it's just not happening. So this was it was what I'd call. Our assignments majority of it was a noncash charge, but it was a refinement based on what we are now seeing and how long it's going to take for that Oems recovery to happen.
Okay, and what was specifically the impairment charge related to.
Most of the equipment machines that were building this type of stuff.
Okay. Okay.
Utilized machine.
Okay and then just on on this bill.
Building ahead.
<unk>.
Specifically, I guess, a 787 and the receivables.
What are the mechanics, there in terms of.
Inflation raw materials I mean.
It sounds like you've got work this out with Boeing but I'm just trying to think about.
The value of that inventory, you're holding are you able to effectively.
Pass that on to Boeing as you are building ahead, or just I guess the mechanics. There I mean, you kind of mentioned OEM long term pricing, but.
Any any differences or color there I mean, it seems like as youre holding inventory that.
That inventory could maybe potentially to keep going up in value here, just given the tightness on raw materials and inflation.
Well, our pricing to Boeing is not as I mean, we renegotiated pricing with Boeing.
A year or two ago, Mike. So that's that's fixed for the foreseeable future. So that's the value of that inventory is not going to change I mean.
Because it's part of it as far as 787, and we have an agreed upon price points. So that doesn't change. We are we have we've obviously done this in collaboration with Boeing to say, we need to we need to keep our production facilities going in we need to keep our supply chain going because the cost to all of us and the potential disruption. If you get a line break will be much more difficult.
Restarts than going from four months to five a month to six months.
So we have discussions with that but there is a definitely a growth on our receivables associated with this because we are clearly building inventory now one thing thats nice about airplane programs is that they we don't change that is hardware.
Hardly ever if ever given the type of product with it. So it doesn't age I was in any way, but it also the <unk> won't change because of inflation the value on our books won't change because of the because of inflation over the foreseeable future. So I don't we don't worry about any of that.
Okay. I mean has your margin your negotiated margin with Boeing on that specifically gotten squeezed I mean, especially in this environment I mean, it sounds like youre going to have some pretty sharp headwinds on the 787 from a margin standpoint.
Yes, we don't go into the margin details Mike.
Program level to operate.
Okay, but safe to say you can't the pricing has been locked in.
A year ago, you said I mean isn't the same same hold true for four you talked about the aftermarket I mean is there.
We were just at the MRO show hearing broadly suppliers getting 5% to 10% pricing I mean are you still locked in on the aftermarket with 787 in terms of pricing with Boeing.
Typically by the way our contracts with all of the Oems work is that there is a.
Factor between OEM pricing in the aftermarket pricing typically on the aftermarket. That's also escalation clauses that are different from the OEM side. So they are linked to the OEM price in the aftermarket price earnings, but typically the contracts around.
Adjustments inflationary adjustments or escalation clauses are different in the aftermarket.
I can't get into any more details than that.
Okay, Alright, perfect. Thanks, guys I'll jump back in the queue.
Thanks, Mike.
Sure.
We will take our.
Next question is from Matt Hi.
Linda with Cowen. Please go ahead.
Yes.
Thanks, so much so I'm a little confused about the 787, how come if you're building the inventory and I assume youre not shipping it how come it doesn't appear in inventory going up as opposed to appearing in receivables going up.
Because we have a long term contract with Boeing a long term supply contract with Boeing Cai and so therefore, it becomes a <unk>.
Okay. So it's basically.
<unk> been booked as I say it goes through the sales, but then it's there okay. So.
So that's why but I was wondering evolve that's why.
When we look at our sales of the seven Theyre fairly steady despite the fact that Boeing is assuming anything right.
Alright.
So.
Many other suppliers or most of them are going to Oman.
Youre going at three to four months, you've basically how like how many of these things do you have sitting around I mean, I would think it's going to be like a pretty big number.
While Boeing is taking some of them because they're still building airplanes. As you know they are not shipping airplanes, but they are still building airplanes and then we are obviously there are conversations about who holds watch where kai as you might imagine I would say, we don't have as many of them as Boeing has sitting on the tarmac.
So tell us about this.
Yeah.
But there is there is a certain build of finished products.
As I say, we have done this in agreement with Boeing we visited the Boeing factory in Charleston Abouts.
A couple of months ago and they are only question was are you sure you can get to seven a month when we tell you all again soon.
So they were not there you got to be able to ramp up you got to be able to wrap up so their focus at least a couple of months ago was you got to be able to respond because once we get going we're going to be ramping up pretty quickly.
So the level, we've chosen in consultation with them. We feel is the ideal level for the type of product, we make to keep the equipment and the facility is going nuts.
Not to overbuild as to be able to respond appropriately if and when they see their rates globe.
Do you have a guarantee.
I guess my concern would be that.
They have 100 and inventory you've got quite a few not 100, but quite a few that in fact, if it takes longer that you will then have to you do you have any guarantees that they will pay you and if you don't have to bring your rate down to two or a pause for a while.
We have a long term we have a long term supply agreements with Boeing where obviously the only people that make that stuff.
You said like if the airplane program went away would you have an inventory problem that of course, yes.
I'm, just saying I'm, just saying if it takes them longer.
That that.
You would have to go down to a lower rate.
Yes.
And I think that would be something so what we've tried to do is rather than adjusting the rates quarter to quarter based on the latest news. We said why don't we lock it in at the rate. We're now asked and we review that each quarter and we.
Might decide in three months or six months or nine months again in consultation with what Boeing is seeing to say well, let's go down.
Have a ship set amongst our ship set a month and so we would try to throttle. This in a way that's controls and that also allows us to make sure. The supply chain continues to function appropriately and ensures that we can wrap up again at the rate that we need so yes, we would adjust but we our objective is to adjust slowly and deliberately rather.
And saying well, let's stop now for the next two quarters does not make anything and then let's go back to making for about three or so.
It's about trying to level load the facility at a at a level that we think is a sensible level for the type of product we're doing.
So Boeing has said that nobody is going to be going at five they're going to be at five a month or less through the end of 'twenty. Three so the most favorable case for you is that they start actually taking these in pain.
So until then just so I understand it until they really start taking the three to four so that your inventory doesn't continue to build out your receivables don't continue to build up.
That number is going to go up and once it comes down if it ever gets to I don't know five or 10 in inventory youre going to have a big cash flow crusher at some point, but you go negative until then is that fair way to think about it it will be a drag on cash until until they start to.
Sure.
<unk> shipped more than we're actually making that is true but.
But as we start to look into the next fiscal year I think we should start to see that equation change so.
Right and do you have any similar situations like on the <unk> hundred 50 or any other important programs.
So no and I would also add we have been in conversations that we are in continuing conversations with Boeing about the cash implications of building ahead, essentially what they're doing and so there are conversations around that so we're making sure that we're managing that effectively with Boeing to make sure that the.
Overall situation is as bad as it can be.
Great.
We spent a lot of time on this just one last one the advances they came down this quarter, but they have spiked up substantially so so where should we expect that the advances go as we move forward.
Yes, okay.
The advances that we've had our activity largely on military customers as you mentioned in the first quarter. We had a very significant went up about $100 million, we can work it down.
I would say looking forward for the rest of the year, we're going to continue to work down, but I think it's probably going to be a net positive positive as of maybe $10 million yourself from where we are right now we do anticipate getting some more advances again on the military side of the business.
So we'll see.
Net net.
It will go up from where they are or they will go down.
Sorry, they won't go probably up just a little bit.
From where they are right now.
Got it and last one so as we think ahead they seem to be at an abnormally high level or I mean going forward is is this kind of a normal level. So they might fluctuate $510 million to $15 million, but they stay more or less at this level or if there are a lot of room for them to either go up or risk to take.
Go down.
I wouldn't say that there is as you mentioned, we're at a very high level right now compared to our historical norm.
Right now, we're seeing strength in that business as it relates to the military and the willingness on the funding of that so I would expect that to stay at these elevated levels for some time.
Excellent. Thank you very much guys. Thanks.
Thanks, guys.
And as a final reminder, the star one if you would like to ask a question.
And it appears we have no further questions at this time.
Alex Thank you very much indeed for helping us with the call. Thank you to all our listeners.
We look forward to reporting out again in 90 days' time. Thank you.
Okay.
And with that that does conclude today's call. Thank you for your participation you may now disconnect.
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