Q3 2022 Moog Inc Earnings Call
Yeah.
[music].
Okay.
Good day and welcome to the Moog third quarter fiscal year 2022 Conference call Today's conference is being recorded at.
At this time I would like to turn the conference over to Anne Laure. 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.
Stripping out these risks uncertainties and other factors is contained in our news release of July 29, 2020 to our most recent form 8-K filed on July 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 the document a copy of today's financial presentation is available on our Investor Relations webcast page at Www Dot bulk dotcom John Thanks.
Thanks, Dan Good morning, Thanks for joining us.
Morning, We reported the third quarter of fiscal 'twenty, two and update our guidance for the remainder of the year.
As usual I'll start with the financial headlines highlights.
Overall it was another good quarter for the company with adjusted earnings per share of $1 61 up 44% from last year.
This quarter, we benefited from some tax specials, which added about 15 cents to our EPS.
Adjusting for this effect our underlying operations delivered $1 46 per share in line with our guidance from 90 days ago and up 30% from last year.
The macroeconomic headwinds of supply chain inflation interest rates and Covid persisted this quarter, but our teams continue to manage well and meet our commitments.
Adjusted free cash flow in the quarter was soft, but not surprising as we continue to focus on meeting our customer commitments over optimizing inventory levels.
Finally, with one quarter left to go we're increasing our full year EPS guidance by <unk> 15 to 565, plus or minus <unk> 15.
Now, let me move to the headlines.
First the macroeconomic influences affecting our business have not changed from last quarter, but they have become more acute the war in Ukraine is still raging and there is no clear and concise.
Gas supply has become a strategic weapon in the conflict threatening an energy crisis in Europe over the coming winter.
Once a decade high inflation is driving higher interest rates with more rate hikes expected before inflation is back to acceptable levels.
Slight chain bottlenecks are plaguing almost every industry and Colbert spikes continue to drag on productivity.
Finally, all of these challenges look set to continue well into 2023.
Second despite these challenges our business is doing well and we're optimistic about the future.
Our diversity across end markets long term customer relationships deep technical expertise and conservative balance sheet have served us well through Colbert the.
The same fundamentals will continue to serve us as we navigate an ever evolving geopolitical and economic environments.
We have a multiyear tailwind in our defense space and commercial aircraft markets.
Our medical market is robust.
I'll now concerns about future industrial softness is balanced by our record backlog, giving us time to react to any downturn in the business.
Finally, we're pleased with the results of our third quarter, our underlying operations are right on plan in the fourth quarter is looking solid.
Now, let me move to the details starting with the third quarter results.
Sales in the quarter of $773 million were 9% higher than last year.
Adjusting for the impact of the stronger dollar organic sales were up over 11%.
We saw organic gains in each of our operating groups taking.
Taking a look at the P&L, our gross margin was up on the higher sales and improving mix, particularly in the aircraft group.
R&D was down as engineers spent more time on funded development work SG.
SG&A expenses were up on higher travel and marketing activities as we emerge from the Covid era.
Interest rates interest expense was up on higher rates.
The effective tax rate in the quarter was low at 15, 7%, primarily the result of prior year R&D tax credits.
The results with GAAP net income of $50 million up 40% and GAAP earnings per share of $1 57 up 41% over the same quarter last year.
During the quarter, we incurred about <unk> <unk> of restructuring and impairment charges, giving an adjusted EPS of $1 61 after routing.
This compares with adjusted EPS last year of $1 12.
44% increase.
Lower tax rate this quarter resulted in a 15 gain relative to our forecast from 90 days ago.
Adjusting for this lower rates the underlying operations delivered a $1 46 in line with our forecast last quarter.
Fiscal 'twenty two outlook.
Our full year sales forecast is unchanged from 90 days ago at just over $3 billion up 6% from last year.
We're also keeping our underlying operational forecast unchanged from last quarter.
Adding the <unk> 15 tax benefit this quarter to our total EPS, resulting in full year adjusted EPS of $5 65, plus or minus <unk> 15.
This results in the fourth quarter of $1 45 in line with the operational performance in the third quarter.
Now to the segments I'd remind our listeners that we provided the 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 aircraft.
Last week, our team attended the Farnborough airshow in the UK It was.
The first major air shows since 2019, and most of the industry turned up despite the record temperatures in London the <unk>.
Major themes from the show there are the dynamics, we're seeing in our aircraft business, including commercial recovery and a positive defense outlook balanced by supply chain challenges and inflation pressures.
It is clear that commercial air travelers back demand is no longer an issue for the airlines and the growth is limited by staffing shortages on both the ground ended the year.
Demand and supply for narrow body airplanes is robust at Boeing is gradually getting the Max delivery slowing.
The wide body recovery is slower as expected, but Boeing is signaling that they are close to resuming 77 deliveries to customers.
Promote the recovery in air traffic is playing through in our commercial aftermarket and we look forward to next year, when we should start to see wide body rates increase.
The sentiment on defense is clearly positive, but the impact of world events has yet to translate into significant new contracts.
For our military aircraft business, we're not yet seeing any material impact.
The next big opportunity for this business is the award of the Florida program, which is now anticipated sometime in October .
We are teamed with Textron <unk> AC and do not have a position of this of course see the filings.
Should textron with this program could be as big as our F 35 production next decade.
Like every other company our supply chain teams are working hard to manage an ever changing landscape and for the moment, we're more focused on having sufficient inventory in stock to meet our customer commitments rather than optimizing our cash position at.
The battle with inflation is also intensified and we're working with our suppliers to minimize cost increases while also working with our customers to adjust prices where possible.
Despite the volatility in the external environment, our aircraft business is performing well and we're pleased with our progress over the last 12 months.
Aircraft Q3.
Sales in the quarter of $318 million were 17% higher than last year.
The growth this quarter was dominated by the commercial side of the business with both OEM and aftermarket sales registering large increases over last year.
Commercial OEM sales were up 25% driven by higher sales across our growing book of business and strength in our business jet product line.
Sales to Airbus were more or less in line with last year.
The commercial aftermarket almost doubled in the quarter.
The underlying demand for spares and repairs contributed just over half the growth and continues to run ahead of our forecast.
We also had the benefit of acquired sales from our team accessories acquisition, which closed in February this year.
In addition, we benefited this quarter from a onetime retrofit program, which contributed about $10 billion in sales.
Military OEM sales were up slightly in the quarter higher funded development and helicopter sales compensated for slightly lower fighter jet sales, while the strong performance at our Genesis acquisition compensated for the loss of sales from our navigational AIDS business, which we divested in the first quarter of this year.
Military aftermarket sales were about flat with last year, but down from the run rate of the first two quarters.
Despite the war in Ukraine, and the global commitments to increase defense spending we're not yet seeing any uptick in our military aftermarket business.
Aircraft margins.
GAAP operating margin in the quarter up 10, 8% was up over 300 basis points from last year.
We incurred about 20 basis points and restructuring and impairment costs, resulting in an adjusted operating margin of 11%.
We're seeing the recovery in commercial air travel flow through to the bottom line the.
The margin performance this quarter was particularly strong as a result of the outsized sales in the commercial aftermarket.
Aircraft fiscal two.
We're keeping our full year sales forecast unchanged from 90 days ago, we're tweaking the mix slightly.
We're lowering our forecast for military OEM by $15 million to 545 million.
And knowing our military aftermarket forecast by $10 million to $200 million.
On the commercial side, we're keeping the OEM total unchanged at $335 million at increasing the aftermarket total by $25 million to $165 million.
The net result is total sales of $1 5 billion up 7% from last year.
We're keeping our full year adjusted margin forecast unchanged at 10, 1%.
This results in the second half margin of close to 11% up from the first half margin of nine 3%.
Turning now to space and defense.
It was another good quarter for aerospace and defense business.
We continue to see growth across both portfolios and are optimistic that we have additional growth opportunities at future defense budgets increase.
Our products are well aligned with some of the key areas of focus for future defense spending, including hypersonic and space.
In addition to higher defense budgets changes in the way. These budgets are being spent are opening up new opportunities for growth.
Some funds are being redirected from the traditional large programs of record to finding agile solutions that solve specific problems in the fields.
The services are valuing speed of response flexibility smaller quantities and lower costs as they tackle ever changing mission requirements around the globe.
Our agile <unk> strategy is designed to meet these emerging requirements.
This strategy is built on the success of our Reconfigurable turret system.
It will take a few years to build a broader agile pride business, what we're already seeing significant interest from the market and what <unk> can offer.
Defense Q3.
Sales in the quarter of $224 million were 9% higher than last year, the combination of 3% growth in space and 14% growth in defense.
Similar to last quarter strong growth on a rip short at program drove the defense increase.
We also enjoyed some higher sales into this I'll applications and for various defense components, which compensated for lower sales into international vehicle programs.
On the space side, we enjoyed growth in our propulsion and avionics product lines as well as in our integrated suites vehicles business.
But the downside I'll walk on hypersonic development programs continue to wind down.
Our hypersonic activity isn't a temporary lull as we wait for the government to decide which technologies and programs to move forward towards production.
Given the broad range of demonstration programs we participated.
We're confident that there will be significant additional business on hypersonic in the future.
Space and defense margins.
GAAP margin in the quarter of 11, 3% included some minor restructuring charges the adjusted.
Margin of 11, 4% was up 100 basis points from last year and 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.
Full year space sales of $350 million assumes fourth quarter in line with the third.
Similarly, full year defense sales of 530 million also assumes a fourth quarter more or less in line with the third.
For the full year, we're also keeping our adjusted margin forecast unchanged at 11, 5%.
This assumes a slight pickup in margin in the fourth quarter.
Okay.
Moving on to industrial systems.
The underlying macro themes in our industrial business are similar to last quarter, although even more challenging than three months ago.
<unk> has remained strong over the last quarter with the continued positive book to Bill.
The drive to expand factory capacity in every industry to meet supply constraints is fueling orders for our industrial automation products.
Higher oil prices and the continued recovery in commercial air travel are positive for our energy and simulation businesses power.
However supply chain challenges have not abated and if anything had become more severe in the last 90 days.
In addition, we're seeing the impact of inflation coming through in higher material and freight costs.
We are compensating with price increases, but sometimes experienced a lag of several months before these price increases take effect.
The war in Ukraine continues to catch us cast a large shadow over Europe and.
And worries about winter energy crisis have increased the risk of a downturn over the next 12 months.
The strength of the dollar has little effect on our operations since our supply chain facilities and sales tend to be co located in region.
However, it does have an impact on the translation of both sales and operating profits back to U S dollars.
Finally, COVID-19 continues to pop up at various spots around our global footprint and drag on our efficiency.
All in all a very positive order book, whether it's a difficult supply chain situation.
Industrial systems Q3.
Sales in the quarter of $231 million were in line with last year.
However, the flat topline masks, a very positive underlying story of growth.
Excluding the impact of foreign exchange movements and lost sales from portfolio shaping activities underlying organic sales were up 8% in the quarter.
On a rate adjusted basis, all four of our Submarkets were up over last year.
Industrial automation was up 11%, both energy and simulation and tests were up close to 8% and medical was about 3% higher.
The strength in our industrial automation business is driven by the demand for factory automation equipment, particularly in Europe .
Constraints in global supply chain is driving this investment in capital.
Through our third quarter, our bookings continued to be very strong.
Our sales into this market are constrained by challenges in our supply chain rather than underlying demand for our products.
In the energy markets, we had higher sales into both exploration and generation applications.
A year ago oil was averaging about $60 a barrel today, it's over $100 a barrel.
And if the outlook for oil prices remains high we should see further growth in our exploration business in the future.
Test and simulation is up on increased sales of our flight simulation products.
With the recovery in air travel increasing demand for pilot training translates into a strong outlook for this business.
Finally medical sales were up marginally from last year, driven by growth in our enteral feeding product line.
Industrial systems margins.
GAAP margin in the quarter of eight 4% in Q2 30 basis points of restructuring charges.
The adjusted margin of eight 7% was down from last year and below our target for the full year.
Margin pressure this quarter came from a combination of inflation on our input costs and lower operational efficiency.
We are adjusting prices to our customers to compensate for inflation.
Also this quarter, we had a six week shutdown of our facility in Shanghai, which impacted our operational efficiency.
That was the result of the zero Covid policies in China.
Industrial systems fiscal 'twenty, two we're keeping our full year sales forecast unchanged from last quarter. Despite the shift in exchange rates for.
For the full year, we anticipate sales of $910 million.
This assumes a fourth quarter in line with the FERC.
Our forecast for full year adjusted margin is also unchanged at nine 5% with our fourth quarter recovering nicely from some of the challenges in the third to over 10%.
Summary guidance.
It was another good quarter for our business with our operational performance in line with our forecast and the tax benefit driving outsized EPS growth.
Second half of our fiscal year is playing out as we anticipated.
Our sales forecast for Q4 is in line with Q3, and our EPS forecast for Q4 is unchanged from 90 days ago.
Demand for our products is strong across all our major markets and we are managing well through the challenges posed by supply chain constraints inflation and labor availability.
As we look beyond this fiscal year, we're seeing opportunities for further growth.
The recovery in commercial air travel has already driven our aftermarket sales higher than pre COVID-19 levels, but as wide body rates recover we should see our OEM sales expense.
Defense spending is at a multi year upswing and the growth we enjoyed in our funded R&D portfolio over the last few years should gradually converts to production programs exam.
Examples of this include the Florida program, various classified aircraft opportunities and hypersonic programs.
Our industrial market is wherever perhaps most cautious with higher interest rates and concerns about energy available in Europe increase the chances of a slowdown.
However, while the moments we have record backlogs and are focused on increasing output.
As in past downturns should we see a slowing in our business we will react accordingly.
In summary in the short term our business remains very healthy and longer term, we're bullish about our prospects to grow both sales and margins.
Finally, we're anticipating Q4 sales in line with the sort of third and Q4 earnings of $1 45 per share plus or minus <unk> 15.
Now, let me pass it to Jennifer who'll provide more color on our cash flow and balance sheet. Thank you John and good morning, everyone.
Increasing constraints in the supply chain are impacting our cash flow generation and we're adjusting our free cash flow outlook for the year Accordingly.
We're seeing a couple of situations arise.
First the Vulcan materials are coming in on time, however, certain components are being delayed, causing us to build up inventories or unbilled receivables.
We're selectively purchasing certain materials in advance that we're concerned might otherwise from getting product out the door.
In the current environment, we are prioritizing meeting customer commitments over reducing inventory.
We expect pressures on receivables and inventory to continue into the next quarter, but also with strong customer advances to offset these pressures.
Moderating our full year adjusted free cash flow guidance to 20% conversion, excluding the benefit from the securitization facility.
As a reminder, we amended our securitization facility in the first quarter. This facility provides us with lower interest cost comparison, we would incur with borrowings under our revolving credit facility.
Under the amended securitization facility, our receivables financing subsidiary and sound receivables to a financial institution up to $100 million.
Our balance under this facility was $89 million at the end of our third quarter $100 million at the end of our second quarter and $90 million as of the end of the first quarter.
Due to the structure of this facility the associated receivables are not recognized on our balance sheet and.
The new structure reduces our working capital levels to.
To provide a comparable look at our cash generation and financial position, our fair share of adjusted free cash flow and net working capital metric without the effects of the new facility will also include metrics calculated off of our financial statements near the end of my comments here reference.
Adjusted free cash flow in the quarter was negative $18 million, we saw pressures this quarter on working capital most notably related to the growth in Unbilled receivables.
We also worked down customer advances that we received in the first quarter we.
We had a couple of tough quarters for cash, but over the past 10 quarters, our adjusted free cash flow conversion on adjusted net earnings has been solid at 100%.
A negative $18 million of adjusted free cash flow in Q3 compares with an increase in our net debt, adding in debt related to the securitization of $40 million.
We had cash outlays of $8 million for the quarterly dividend payment.
$400 million for share repurchases and $3 million for divestiture activity.
In addition, the strengthening of the U S dollar reduced our cash balance by $5 million.
Adjusted net working capital, excluding cash and debt as a percentage of trailing 12 month sales at the end of Q3 with 32% up from 29% a quarter ago.
The increase during the quarter largely resulted from the expected reduction of customer advances on military programs that we received in the first quarter.
We also saw modest growth in Unbilled receivables.
In particular, we experienced growth in receivables and the 787 program, where our production level is higher than the rate in which spelling is taking delivery.
Maintaining steady production levels to ensure a healthy supply chain inefficiencies in our facility.
Supply chain disruption also impacted our business as material receipts drove progress on long term contract Walter ladies and some specific items necessary to complete our product prevented us from shipping and invoicing.
Timing of invoicing from strong sales late in the quarter also drove higher level of sales receivable.
As a percentage of sales the growth in receivables was offset by lower inventory.
Inventory, Brian this quarter marks our sixth straight quarter of decreasing inventory as a percentage of sales.
We are however, starting to see pressure building inventory as we ensure that we have sufficient inventory is a critical component in our supply chain constrained environment.
Capital expenditures in the third quarter were $33 million down.
Down slightly from the past and coronary our capital expenditures. This year include our investment facility to support growth and investment in next generation manufacturing capabilities to drive efficiency.
At quarter end, our net debt was 761 alright.
Alright.
$1 of cash.
Major components of our debt or $500 million of senior notes and $344 million of borrowing on our revolving credit facility.
In addition, we had $89 million associated with the securitization facility that does not show up on our balance sheet.
At quarter end, we had $736 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 Covenant, which is a maximum of four <unk> times on a net debt basis.
Based on our leverage we kind of incurred an additional $591 million of net debt as of the end of our third quarter.
We are confident that our existing facilities provide us with the flexibility to invest in our future.
Our leverage ratio calculated on a net debt basis with two four times as of the end of the third quarter 2022.
As well as the same point a year ago, our leverage ratio continues to be within our target range during the quarter time to two and three quarters time.
Cash contributions to our global retirement plan totaled $16 million in the quarter compared to $15 million in the third quarter of 2021.
Global retirement plan expense in the third quarter with $20 million up from $19 million in the same quarter a year ago.
The increases in both global retirement plan contributions and expense related to increased participation in our defined contribution plan.
Yes.
Our effective tax rate was 15, 7% in the third quarter compared to 25% 25, 7% in the same period a year ago the.
Our relatively low tax rate this quarter reflects favorable adjustments for tax credits associated with last year's tax return.
Excluding the benefit of these adjustments.
A tax rate in the third quarter was 23, 9%.
Last year's tax rate included charges associated with the revaluation of deferred tax liabilities in the U K, mostly offset by adjustments to the previous years.
Vision.
Return adjustment in the U S.
For all of FY 2022, including the benefit associated with that provision to return adjustments.
The effective tax rate to be 22, 2%.
Base rate without these specials is 24, 4%.
As a result of the supply chain situation, we are reducing our forecast for free cash flow from 90 days ago.
Expect adjusted free cash flow generation to be $36 million in 2022.
Our 20% on adjusted net earnings.
Customer advances are expected to be strong in the fourth quarter and will partially offset the consumption of cash by receivables and inventory.
We expect capital expenditures in 2020, Q could be $140 million, reflecting the fourth quarter similar to the third.
Depreciation and amortization are expected to be $90 million.
I'd also like to share some of the metrics and amounts will be able to calculate from our financial statements.
To reflect GAAP accounting for the securitization facility.
Free cash flow in the quarter was negative $29 million and free cash flow generation for the year is projected to be $127 million, which is about 75% conversion on adjusted net earnings.
Networking capital was 27, 2% of sales at the end of the quarter.
Our financial situation continues to be strong. Despite the current pressures, we and others are experiencing some supply chain environment. We've got plenty of liquidity and are positioned nicely to fund organic growth and make investments in our operations and will make us even stronger.
With that I will turn it back to John for any questions.
Thanks, Jennifer Alain can we pass it back to you and perhaps you can line up the questions for us. Please.
Thank you Jon if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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We'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will take our first question from Cai von <unk> from Cowen. Please go ahead.
Yes, thank you very much so.
John You mentioned strong demand in industrial and strong book to Bill what was the book to Bill in constant currency in the quarter roughly.
Yes.
Roughly 20% to 120% roughly.
There is so for instance, our medical business is typically 100% because we shipped we book and ship in the same.
Excellent.
The danger, but it's well north of a 100% and has been now far.
I don't know six eight quarters. So it is very strong.
And how much sales did you lose as a result of the six week, Shanghai shutdown and I assume that's an automation correct.
Yeah.
Often our sales in China are about $60 million give or take so you call it $7 million to $8 million for half a quarter.
Oh, okay.
And I assume that's back up and running now.
Oh, yes, yes, yes, although given the situation there.
Hard to predict but yes, its backup it had a complete shutdown for six weeks I mean, there was partial people in and out the soft challenges around the rest of the quarter, but it actually completely shut for six weeks. So we're hoping that's passed but again who knows.
So really your estimate of flat sales as assumes.
A normal summer lull, but is that does that number low conservative given the bigger than demand.
It's really it's a function of our ability to get stuff out Cai.
What's driving that I mean, if we feel that so that's why we're we're thinking it's flat, it's actually I mean versus a quarter ago and increase because of course rates have changed in the translation back to dollars is lower.
But.
When we look at what we report in 90 days' time, I'm going to be explaining although we got supply chain ease that we had more hours or the supply chain was a software tougher and that that was really what drove the headlines.
As you know supply chain has been kind of an issue across the space can you give us some color on like does it look about the same and also the issue of labor availability is at about the same now as it's been is it getting better is it getting worse, how would you characterize it.
I would say, it's worse than we anticipated 90 days ago, we had kind of a mental model of what it would be that perhaps it would start to ease and that didn't happen and I would say on balance it's got worse, rather than better. So on a kind of a relative basis. It was a lot worse than we were anticipating on an absolute basis, it's probably.
But it's definitely not getting better yet and so I don't see any significant improvement coming out depending on what your regional Intel is saying that their sales are down does that start to free up electronics capacity, but I think all of that is going to take quite a while to play through so no significant improvements if anything a.
<unk>.
And then I would say on labor availability Covid continues to be more of a challenge than it's not back to business as normal.
We talked about the shutdown in China, but in our operations in Germany, we had outbreaks in various parts of the production.
<unk>.
The missing four or five people out of our cost of maybe six arrays in a particular test area all of which just as a drag on operational efficiency that to some extent, we've kind of put in the rearview mirror, but thats clearly still there underlying labor availability.
I'd say that Hasnt gotten worse, that's probably got a little bit better I mean, if you re again reading what the tech guys are starting to slow hiring the auto guys are starting to potentially lay off people I think that will get better. It's not that we felt was getting a lot better yes.
But I feel like that the labor market is easing a little bit in the reports back from our operating groups in the quarter, we're not seeing I just can't get the people that wasn't the kind of the primary ticket was supply chain inflation.
Covid driven efficiencies that was there with the key themes.
And then one for you Jennifer so it looks like the so the receivables were up.
The advances were down a fair fair a bunch.
Looking forward.
What are we looking for the advance is going to continue down.
Can you start to turn those receivables a little better.
Yes, we look into the next quarter, we will see some benefit from customer advances we've got some military.
Customer advances that were expecting to come into the quarter be offset a little bit by activity of current work down. However, overall, we should see a benefit.
And customer advances.
And some of the other types of areas I think we're going to continue to see pressures in both receivables and inventory that's largely going to be Q.
Just to the same pressures that we're seeing right now in the supply chain and the production rate that we've got.
Thank you very much.
Hi.
Okay.
We will take our next question from Mike <unk> from <unk> Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions here.
Maybe Jennifer just to kind of stay on the free cash flow and what Congress asking I mean, as we look into <unk>.
'twenty three I mean, what are you guys planning for in terms of the supply chain.
Do you think you need to carry higher inventory levels deeper into 'twenty, three and I guess.
Just just thinking about the level of Unbilled and.
I guess, maybe timing your thoughts on timing of collecting there and maybe how this could impact the free cash flow dynamic I mean should we still think about conversion being a little bit depressed in 'twenty three given that these factors are going to be lingering I'm assuming.
Yes, let me we'll go on to the 23 next quarter when we get those results that I can characterize in general just general trends.
It's going to be dependent on what's going on in the supply chain environment.
Environment Loosens up we'll certainly see some relief from that.
Our contractual arrangement that's actually in production.
We continue to see pressure in a buildup of receivables.
Receivables, there, though not to the level that we have experienced this year. So there are some benefits that we see from that and I would say, it's largely going to be the supply chain dependency.
How how the situation unfolds thats going to drive how we will see that.
Just overall stepping back when we look at cash flow and the level of sales increase.
Like last year to this year.
Got close to $200 million worth of an increase in our sales and our working capital rate of 30% that does put $60 million expected working capital growth on the table.
And as you know are in the period, we're reviewing high investment in capital expenditures of $50 million over R&D depreciation amortization right now.
So just putting those types of things on the table in our current situation.
<unk>.
Conversion that would be in the 40% type of neighborhood and so for this year, we're at 20% right now as I've shared.
And that's with the supply constrained environment.
Think we're doing okay from that perspective, but the supply chain will be the factor that has the last significant as we move forward. We will have to just monitor that and see how that goes and we'll share more detail on that next quarter.
Got it but safe to assume I mean, you guys aren't anticipating supply I mean, this seems like it's going to last at least mid next year supply chain. I mean are you guys seeing any can.
Can you give any tangible signs in terms of material availability or lead times I mean, it seems like this is going to be with us for quite some time I mean I'm assuming that that's.
How you guys are planning for the business.
There is nothing that suggests that there would be instant relief tech content, just a quarter.
Yes.
Okay.
Maybe just shifting to the debt.
Aircraft margins and even the implied margin for next quarter.
Obviously, you're getting aftermarket mix is helping you have got this maybe I'll call. It a floor here of 11, 511%.
Kind of the second half here should we think about that.
Going forward I mean, obviously mix might go against you as wide body starts to come back on the OEM side, but.
Just any any directional color you can give on sort of the margins there.
We'll do that next quarter, Mike, we just want to get drawn into a fifth.
Fiscal 'twenty three outlook.
Even on the soft side so so.
I apologize.
We'll pause for it until next Florida, where we can give you a lot more detail around that.
Okay. Okay, maybe just the last one what changed.
So much and it will not so much but what really changed between your last report and this report on the military OEM and aftermarket side does that is that more supply chain. Some of the bigger programs that were hearing about out there or what was the driver of the downward revision.
Yes.
You saw the Lockheed stops they obviously came up short on what they were hoping to do on the F. 35, we've had it's a bit of the same we're just not getting as much material as we thought and on the aftermarket side, Mike It's really puzzling.
Really when you get into a situation where those conflicts.
Aftermarket picks up almost immediately and that it's just not picking up it just closed.
It is.
And it's across all of the programs, it's not one program, it's not anything in particular.
We are optimistic with defense spending that doesn't start to recover.
Right now it's kind of it's just been slower than we had anticipated and I don't have any really good answer for it because it's just too broad base across every platform wrong.
Got it got it no that's fair perfect. Thanks, guys I'll jump back in the queue.
Thanks, Mike.
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We'll take our next question from Kristine <unk> from Morgan Stanley . Please go ahead.
Hey, good morning, Jennifer John .
Interesting.
Last quarter, you took some actions to right size the asset base and the Labor force with the continued supply chain headwinds do you feel that you are now properly situated given the planned OEM production rates or would you need to make more changes.
No. We believe we're properly positioned Christine if you remember last quarter. What happened was there was kind of new news from Airbus and some of the other Oems and we adjusted based on their new forecast of what their pickup is going to be particularly on some of the wide body, but on the big programs that we're on and that was what drove it so there hasnt really been any.
Change of significance in the OEM outlook this quarter and therefore, we don't see any of that note if the Oems.
Ill take extreme example, Boeing and Airbus decided to stop making <unk> hundred $50 and 787% for the next two years, absolutely we would be taken indexes impairment charge on that but if.
If we newest we'd of course, we would also have to take it. So we believe we are property position definitely on the labor fronts, where we are in good shape. We don't see that it was an asset impairment associated with changes in the projected volumes over the remaining asset lives that caused that so at the moment, we're feeling like we're in good shape based on everything that we know.
Great and maybe following up to 77 John .
Last quarter. You also said that you guys are producing at three to four per month for the 77, if we don't see the program get.
<unk> approved by the FAA to let's say you know I don't know starting at <unk> or maybe end of the year.
How large of an inventory are you comfortable holding before you would then cut rate.
And.
So we are building as we described we are building ahead of what Boeing is.
Producing at the moment however, it's in agreement with Boeing This is not something that we're doing in isolation and we have an agreement with Boeing as well on shipping more than we're more than they're necessarily manufacturing, we're holding a little bit of inventory, they're holding some inventory. So it is an agreed upon.
Plan in order to secure the supply chain and to make sure that our operations rather effectively so I think its a sensible thing to do they are talking about ramping to five at the end of 'twenty three it into 6% to seven after that and therefore use that the supply chain will be able to keep up I think we will be very well positioned for that we have orders for all of this I also have to be.
Very clear we have orders from Boeing for all of this stuff. So it's not as if we are making and its going into inventory, it's going into unbilled receivables. So we are covered from a contractual basis on everything that we're building. The only thing is from a receivables one billing it's as I say, if we have an agreement with Boeing but that does involve us holdings of inventory.
If there were to be a fundamental shifts and Boeing strategy. If it gets delayed by a week or two or a month or two or even a quarter or two does that fundamentally shifted.
I don't think so if there was a fundamental shift in volume strategy. We would of course reevaluate the level should we be dropping that down by a ship set a month or something.
And so we will do that again in collaboration with Boeing right now, we don't see that right now what boeing's projection as.
It supports what we're what we're doing hopefully they keep hinting that they are very close with the FAA. So hopefully that happens Christine.
If the world suddenly changes in a quarter or two we are of course will adjust accordingly.
Very helpful color. Thanks, John .
Thank you Christie.
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It appears there are no further questions at this time.
I would like to turn the conference back over to you for any additional or closing remarks.
Thank you Elaine and thank you to all our listeners. Thank you for your questions and your interest.
We look forward to coming back to you again in May today, Simon will close out our fiscal year and provide our initial guidance for fiscal 'twenty. Three. Thank you very much and I hope you all have a wonderful summer.
We'll conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.