Q4 2022 Moog Inc Earnings Call
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[music].
Please standby.
Good day, and welcome to the Moog fourth quarter and year end fiscal year 2022 earnings Conference call. Today's conference is being recorded 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. The fact that we may make forward looking statements. During the course of this conference call.
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.
A description of these risks uncertainties and other factors.
In our news release of November four 2020 to our most recent form 8-K filed on November 4th 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 <unk> Dot com John .
Thanks, Dan Good morning, Thanks for joining us.
This morning, we report on the fourth quarter of fiscal 'twenty two.
Our performance for the full year.
He will also provide our initial guidance for fiscal 'twenty three.
As usual I'll start with the financial highlights.
Our fourth quarter sales were in line with our forecast from 90 days ago adjusted earnings per share of $1 36 were up 8% from last year, but at the lower end of our forecast as a result of <unk> a program charges in our space business.
Excluding these charges our underlying operations, we're right on plan.
Adjusted free cash flow of $19 million was positive, but weaker than we had anticipated as supply chain conditions continued to weigh on working capital.
Overall fiscal 'twenty two was a strong year for the company. Despite the challenges associated with Covid supply chain inflation and labor attrition.
Adjusting for acquisitions divestitures and foreign exchange movements sales were up 9% from last year adjusted operating margins expanded 50 basis points and adjusted earnings per share were up 14%.
Looking back at the full year, the following headlines stand ups.
First it was a year of which the word order was redefined for generations to come.
The Russian invasion of Ukraine in February changed the geopolitical landscape in Europe for decades.
Asia escalating tensions over Taiwan, and the consolidation of power in China under strategic Ping further eroded the relationship with the U S.
These events of redefines, the global political landscape into an east West divide TJ.
<unk> for those of us over 40.
From a loan perspective, all activities with Russia have stopped and we are taking a more cautious view of the future of business in China.
While these global events are not necessarily positive for humanity higher defense spending in the west represents a longer term tailwind for our business.
Second despite the geopolitical uncertainty it was a good year for the company overall.
Our adjusted year end results met the guidance, we provided to the street 12 months ago in terms of sales margins and EPS.
Performance to plan was all the more impressive given the continued coalbed restrictions, particularly in China, the deterioration in supply chain performance across all our markets and the emergence of inflation over the course of the year.
Free cash flow was lower than planned, but this was a consequence of deliberate decisions to prioritize customer commitments over inventory optimization.
Third organic growth led acquisitive growth is the engine for value creation, our multiyear focus on innovation continues to bear real fruit in fiscal 'twenty two.
Over the last few years, we've repeatedly described our three new growth vectors.
Our lip tourists integrated space vehicles, and our construction initiatives.
Fiscal 19. These three initiatives had total sales of less than $40 million.
Fiscal 'twenty to Salesforce.
Sales were over $160 million, a fourfold increase in three years.
Fourth our margin expansion journey continued in fiscal 'twenty two it was a busy year for resizing our businesses in shaping the portfolio.
During the course of the year, we divested three businesses with annual sales of about $60 million.
Completed restructurings in each of our operating segments exit exited our operations in Russia and closed or sold several facilities.
These actions generated $71 million and net net cash proceeds.
Fifth our prudent approach to capital allocation was unchanged from prior years, we spent $139 million on capital expenditures $36 million on share repurchases $33 million of dividends and $15 million on one acquisition and several small investments in technology startups.
We continue to look aggressively for larger acquisition opportunities, but could not find assets, which met both our strategic and financial fits or requirements.
And finally, our strong results this year in the face of significant challenges are a great credit to the 13000 Moog employees around the world I'd like to recognize their contributions and thank them for their continued dedication to serving our customers.
Now, let me provide some more details on the quarter of the year.
Sales in the quarter of $768 million were 6% higher than last year.
Resting for foreign exchange movements underlying sales were up 9% on strong performance on the A&D side of the house.
Taking a look at the P&L, our gross margin was down slightly of the charges in the space business.
R&D was lower as we shifted resources to fund the development programs.
SG&A was in line, while interest expense was up on higher rates.
The effective tax rate for the quarter was high at 31, 6% as a result of nondeductible charges associated with divestitures.
The result was net income of $29 million of EPS of <unk> 82.
In the quarter, our portfolio shaping actions resulted in charges of 44 <unk>.
Excluding these charges adjusted net income of $44 million and adjusted earnings per share of $1 36 were both up 8% from last year.
Fiscal 'twenty two.
Full year sales of $3 billion were up 6% from fiscal 'twenty one.
The main drivers of growth with our commercial aircraft business, both OEM and aftermarket as well as increased sales on our risk program in space and defense.
Gross margin was in line with the previous year, while R&D was down primarily in the aircraft segment.
Over the last few years, we continue to shift aircraft R&D resources onto page development programs.
SG&A was up in 2022 as travel and marketing expenses grew from the pandemic levels.
Interest expense was up marginally on higher rates later in the year.
The slightly higher tax rate resulted in adjusted earnings per share of $5 56 in fiscal 'twenty, two an increase of 14% from $4 88 in fiscal 'twenty one.
Our GAAP results for the year and <unk> 73 of charges associated with various impairment charges in our portfolio shaping activities.
Fiscal 'twenty three outlook.
The story for this coming year, the sales growth margin expansion and improved free cash flow with items below the operating profit line weighing on our EPS growth.
Fiscal 'twenty three we're projecting sales of $3 2 billion in.
An increase of 5% over fiscal 'twenty two.
Adjusting for the stronger dollar and loss of sales from divestiture divestitures underlying organic growth will be 7%.
We anticipate growth at each of our operating segments with the biggest gains in the commercial aircraft and space markets.
Full year margins of 11% will be up 80 basis points on stronger performance across all three operating segments.
Significantly higher interest expense, a stronger dollar and a higher tax rate will depress earnings per share by 74.
Relative to fiscal 'twenty two.
For the full year 'twenty three we are projecting EPS of $5 70, plus or minus 20.
Up 2%.
Just for reference it's interest taxes and exchange rates in fiscal 'twenty three with the same as fiscal 'twenty two.
<unk> would be $6 44, an increase of 16%.
Full year cash flow next year will be $130 million, representing a conversion ratio of 70%.
Now to the segments I'd remind our listeners that we provided a three page supplemental data package posted on our website, which provides all the detailed numbers for your models.
We suggest you follow this in parallel with the text.
Starting with aircraft.
It was a relatively quiet quarter in our aircraft markets.
That was good news on the commercial front as Boeing resumed shipments of the 787 and we're early signs that China might restart flight of the 737 Max.
909 also achieved Chinese certification.
We had the high lift system on this Chinese airplane, but a slow production ramp means our sales in the coming year are not material.
On a less positive note there was more uncertainty around the certification of the Max 710 at the end of the quarter than at the start of the.
The military side, we have not yet seen any direct impact from the conflict in Ukraine.
In October we were disappointed to learn that the decision on the Florida context will be moved out to the end of the calendar year.
We've described in the past we're teamed with bell on the <unk> and do not have a position of Sikorsky vehicles.
Finally supply chain constraints continue to weigh on the business limiting our top line growth and pressuring our cash flow.
Aircraft Q4.
Sales in the quarter of 324 million or 9% higher than last year.
All the growth came from our commercial business of almost 40% while defense sales were down 6% from the same quarter last year.
We enjoyed strong growth in both the OEM and aftermarket segments of the commercial business.
Well, we havent sales to Boeing were up over 40% with strength across the complete book of business.
Airbus sales were only up marginally from last year.
Business jet sales almost doubled and higher sales from our Genesis acquisition completed the makeup of the growth.
Commercial aftermarket sales were up almost 50% from last year.
Growth was driven primarily by a wide body programs with strong performance on both the 77 <unk> hundred 50.
Even though international travel has been slower to recover the utilization rates of the 787 and <unk> hundred 50 fleets has increased much faster as airlines have brought their most efficient airplanes back into service force.
On the military side, both OEM and aftermarket were 6% lower than last year.
Sales on the F 35, and V 22, combined with the loss the loss of sales from our diabetes divestiture were the main drivers on the OEM side and the aftermarket many of our key programs were lower including the F 15, and F 18, Despite the war on Ukraine, we've yet to see any material impact from higher defense spending filter through to our aircraft.
Aftermarket.
Aircraft fiscal 'twenty two.
Full year sales of $1, $2 6 billion or 8% higher than last year.
The story was similar to the fourth quarter with strong commercial performance compensating for slightly weaker military performance.
Commercial OEM sales were up on strong sales to both Boeing and Airbus while sales into business jet applications doubled from fiscal 'twenty one.
Commercial aftermarket was particularly strong this year well ahead of our expectations 12 months ago.
The primary driver was the faster recovery in the fleet usage of the wide body platform.
In addition, we had several one time items through the year, which generated about $20 million of sales.
Items will not repeat next year.
On the military side of the house lower sales on the F 35, and in foreign fighter programs combined with lost sales from our <unk> divestiture drove a 6% decline in the OEM topline.
The aftermarket the good news is that our sales have stabilized after a big drop in fiscal 'twenty one this.
This year stronger B 22 sales, mostly compensated for declines across much of the rest of the portfolio.
Aircraft margins.
Margins in the quarter were 10, 7% up almost 200 basis points from last year.
The recovery in the commercial book and in particular, the strength of the commercial aftermarket drove the increase.
Core R&D expense also contributed to the contributed to the improvements as engineers transferred from internal developments to funded programs.
Full year adjusted margins of 10, 1% were up 180 basis points from fiscal 'twenty, one driven by the same factors as the quarter.
Aircraft fiscal 'twenty three.
We're projecting fiscal 'twenty three sales of $1 33 billion.
Up 6% from fiscal 'twenty two.
The strength is all on the commercial OEM side of the house with strong sales growth at Boeing Airbus Gulfstream ended our Genesis product lines.
Commercial aftermarket sales will be down slightly from 22.
However, excluding the $20 million benefit from one time items in fiscal 'twenty to the aftermarket next year is actually up 9% organically.
Military OEM sales will be up slightly year over year higher at 45 and foreign military sales.
Appetite for lower V 22 sales.
Our forecast includes about $40 million in sales for the Florida program.
This assumes the V 280, as the platform of choice and that the decision is announced before the end of calendar 2022.
The military aftermarket will be in line with fiscal 'twenty two.
We're forecasting fiscal 'twenty three margins of 10, 3% up slightly from fiscal 'twenty to adjusted margins.
The higher sales are a tailwind and factory utilization improves.
Two headwinds dampened margin expansion for the coming year.
Higher commercial OEM sales tends to dilute margins overall and second the one time items in the commercial aftermarket in fiscal 'twenty two drove an outsized margin performance.
Relative to fiscal 'twenty, one aircraft margins in fiscal 'twenty, three will be up 200 basis points on the back of the commercial sales recovery.
We anticipate continued margin expansion beyond fiscal 'twenty three.
Turning now to space and defense.
For space and defense business continued its run of strong organic growth for this quarter the.
The macroeconomic indicators for both markets remain very strong.
In early October our teams attended the <unk> USA show in Washington.
It was clear from our discussions with both customers and the army.
Air Defense is becoming ever more critical capability for ground forces that this trends offers many future opportunities for our risk cars.
Also as part of our agile price strategy, we exhibited a prototype hybrid hybrid electric UAV, which can be used for various defense missions, including cargo movements and weapons suppliers.
And space, our market position as a top tier supplier of mission critical components was again on this latest quarter on.
On September 26, that's a successfully intercepted some office a small asteroid some 7 million miles from our with a dark space, perhaps are the double asteroid redirection test based perhaps submission.
The mission objective was to test at NASA could change the flight trajectory of an asteroid that might be on a collision course with or in the future.
Bulk provided various valves actuators and electronic components of this vehicles, all of which whilst perfectly well.
We're looking forward to the upcoming first launch of the arguments rocket in November <unk>.
<unk> provides the thrust vector control actuation on this agenda and on this next generation more rubbish just like we provided the thrust vector control on Apollo 11 back in $19 $60 million.
With the space market moving we believe that most heritage and demonstrated slight capability gives us a distinct advantage over many of the new entrants.
Our confidence our ability to deliver reliable solutions will continue to fuel our growth in this market for years to come.
And operational news as part of our ongoing portfolio shaping we divested our security business this quarter. This.
This business was based in Chicago with about $20 million in annual sales.
We entered this market after the 911 attacks almost 20 years ago.
We believe that the burgeoning homeland security budget will provide opportunities for growth.
The drivers vision enhanced our application was a real success during the Iraq conflict, but over the last few years. This business has struggled to meet our growth and margin expectations.
Based on defense Q4.
Sales in the quarter up $217 million or 9% higher than last year.
This quarter the growth was all on the defense side with sales into space applications down from last year.
Defense sales were way up as the production of the lip target for the onshore that program continue to ramp.
Beyond our rip business higher sales of the missile applications and there are components product line compensated for lower sales across other vehicle and naval programs.
On the space side, we had lower sales into NASA applications and in hypersonic development activities at various programs wound down in advance of future production Awards.
Based on defense fiscal 'twenty two.
Full year sales of $872 million were 9% higher than last year.
Growth was almost entirely in the defense markets driven by the <unk> program on.
On the space side, both in our integrated space vehicles, and avionics product lines compensated for lower lesser rock.
It's worthwhile, noting that over the last six years, our space and defense segment has grown at annual at an annual compound rate of 10%.
Based on defense margins adjusted margins in the quarter of nine 4% well below our run rate for the year.
Two factors contributed in about equal amounts to the disappointing margin performance.
Our supply chain constraints for space qualified components are particularly impactful this quarter.
Second our growing business and space vehicles experienced cost growth across separate programs.
Each of these factors individually depressed margins by about 200 basis points.
Full year adjusted margins of 10, 9% were down slightly from fiscal 'twenty, one driven mostly by the additional cost associated with supply chain challenges and labor inefficiencies as well as the program charges, we took in Q4.
Based on defense fiscal 'twenty, three our forecast for fiscal 'twenty three protect another year of strong organic growth total sales will be up 7% to $930 million combination of $400 million in space and $530 million in defense.
In contrast to fiscal 'twenty, two where all of the growth was under defense side of the business growth in fiscal 'twenty three is all on the space side.
Part of the story, it's an operational decision to realign the SaaS product line from the defense sector over to the space sector in fiscal 'twenty three.
This results in $25 million of sales moving from defense to space next year.
In addition in the fourth quarter, we divested our security product line.
This resulted in the loss of $20 million in defense sales in fiscal 'twenty three.
During these two effects defense sales would actually be up organically, 7% next year.
It is across much of the product line, including vehicles naval and components.
Similarly, excluding the product line transfer our underlying space sales will be up 11% in fiscal 'twenty three <unk>.
The increases in our launch vehicles and integrated space vehicles product lines.
We are projecting operating margins of 12, 4% in fiscal 'twenty. Three this is up 150 basis points from adjusted fiscal 'twenty to margins on the higher sales and the absence of material charges on development programs.
Industrial systems.
The industrial end markets remained strong this quarter with a book to Bill of about one this is a slight slowdown in bookings from our most recent quarters.
It's a story of good news today and worries about tomorrow.
As we enter fiscal 'twenty three we have a very healthy backlog relative to our forecasted sales.
Last year at this time, we had 42% of our projected fiscal 'twenty two sales and backlog.
Today, we have 57% of our projected 12 months' sales and backlog.
Gives us confidence in our forecast for the coming year.
The other hand, the backdrop of war in Ukraine, and energy shortage in Europe at highest higher interest rates globally will create headwinds longer term.
Our industrial product lines shaping continued this quarter as we divested an offshore energy business based in Scotland.
This business had annual sales of about $12 million.
Looking to the future our move into the construction equipment market also got a boost at the recent bulbar Tradeshow in Germany.
It's the largest show in the world for construction equipment.
So we were the chosen partner to provide electric solutions to three of the world's top construction equipment manufacturers Wildcats case, New Holland International and Komatsu.
Industrial systems Q4 sales in the quarter, a $227 million were in line with last year adjusted for adjusting for foreign exchange movements underlying organic sales were up 6%.
On an adjusted basis fuel sales were up in three of our four markets with simulation and test marginally lower than last year.
Both of the growth within the industrial automation market.
Majority of this business is outside the U S with over half in Europe .
In local currencies industrial automation was up over 10% from last year.
Sales into our other three major markets were more or less in line with last year.
We continue to see strong demand across a range of industrial products, while supply chain constraints that limited our sales growth.
Full year sales of $907 million or 2% higher than last year.
Similar to the quarter adjusted adjusting for foreign currency effects underlying sales were up 5%.
Increased demand for flight training simulators drove a double digit increase in our simulation test market.
On the other hand, we saw some softening in the demand for our medical products as conditions normalize post COVID-19.
Our energy and industrial automation markets were both up low to mid single digits.
Energy markets higher oil prices and increasing energy usage drove increased demand for both our exploration and generation products in the industrial automation sector. We saw increased investments in capital equipment to expand factory capacities and alleviate supply chain bottlenecks.
For the full year, our book to Bill remained above one with 12 month backlog up almost $140 million from the same time a year ago.
Margins in the quarter of six 6% include over 400 basis points of charges for portfolio shaping activities in.
In the quarter, we disposed of a U K based business.
And card.
Modest restructuring and impairment charges and sold the building in the U S. As we consolidated operations into existing facilities.
Noncash losses of about $18 million were partially compensated by a $9 million gain on the real estate sales on.
On a cash basis net proceeds from these actions was $26 million in the quarter.
Adjusted margins in the quarter of 10, 8% resulted in full year adjusted margins of nine 5%.
Industrial systems fiscal 'twenty three are.
First look at fiscal 'twenty three suggests a very small increase in sales with strength in flight simulation and medical pumps compensating for slightly lower sales in both energy and industrial automation.
Our energy market is down and the lost sales from the divestiture in Q4, while our industrial automation sales are lower on the stronger dollar.
We continue to worry about a potential global recession, and an energy crisis. This coming year. So despite our healthy backlog were forecasting sales conservatively as we entered the fiscal year.
We're forecasting full year margins next year of 10, 5%, a 100 basis points expansion on adjusted margins in fiscal 'twenty two.
Portfolio shaping activities over the last couple of years are starting to have a positive impact on the bottom line.
Summary guidance.
Time last year.
Plan for fiscal 'twenty, two with Colbert receding and the world slowly returning to our pre pandemic NOLA.
We assume commercial air travel will recover defense spending in the U S might be pressured in the industrial world will be strong.
Ted Award in Europe , growing tensions in Asia extreme supply chain disruptions and rising inflation made for a challenging environment.
The performance of our commercial aircraft business exceeded our expectations with the aftermarket, particularly strong the.
The invasion of Ukraine that the defense shifted from a potential headwind into a multiyear tailwind.
Industrial markets remained strong, but our results were tempered by the availability of parts of the supply chain and input cost pressures.
The year, our teams worked hard to meet our customer commitments and reprice, our products where possible to maintain margins.
Our initial look at fiscal 'twenty three suggests another strong year for the company with top line growth margin expansion and healthy free cash flow.
We continue investing in inorganic growth opportunities and deploying our capital to build a platform for long term success.
Our forecast for next year assumes that supply chain disruptions will continue all year, but moderate as we get into the second half. We're also assuming no major impact from an energy disruption in Europe . There are serious escalation of the war in Ukraine.
We assume continued interest rate hikes and that we'd be able to raise prices selectively to combat inflation.
As always our forecast is our best attempts to balance all of these factors provide the market with a realistic outlook.
Risks to the downside or mostly associated with an escalation of hostilities in Europe heightened tensions in Korea are a further deteriorate deterioration of relations with China.
Opportunities to do better include an earlier easing of the supply chain, a mild winter in Europe , and the potential end to the war in Ukraine.
Longer term, we're more excited than ever about our business prospects. This optimum. This optimism is based on both the external environment as well as our internal initiatives.
Externally will enjoy tailwind from increasing defense spending the commercial aircraft recovery and continued investment in space.
In the industrial world spending on automation to bring production back to the west and technology shifts to tackle climate change with boosts the need for our motion control products.
Internally our investments in new growth factors will continue to pay off.
The addressable market for our risk targets based vehicles and construction solutions is measured in the billions.
We believe our new agile Prime initiative will create further large market opportunities in.
In parallel our focus on providing world class components in our chosen markets will give us the base for enduring success.
The fundamentals of our strategy will remain constant we continue to focus on solving our customers' most difficult technical challenges, while building, our IP and investing our capital prudently to create long term value for our shareholders.
In closing, we're very excited about the future our underlying businesses are performing well our diversity across end markets provides resiliency in the face of economic uncertainty and our internal initiatives are showing enormous promise for outsized growth over the coming years, we recognize the challenges we'll face in the coming year with ongoing supply chain issues higher interest rates and.
The potential recession in our industrial market.
Despite these challenges we're very optimistic about our business and see continued growth and margin expansion over the coming years in fiscal 'twenty. Three we anticipate sales of $3 2 billion operating margins of 11% and earnings per share of $5 70.
Plus or minus 20.
Similar to fiscal 'twenty, two year would start slowly and then accelerate sequentially.
Q1, we anticipate earnings per share of $1 25, 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.
Thank you John and good morning, everyone today, I'll start with some headlines and a reminder, on our securitization program before shifting into Q4 and FY 'twenty two cash flow matters.
Sure first slug of cash flow in FY 'twenty three.
Why chain constraints continue to impact our free cash flow generation and we're projecting those pressures to remain as we head into the next year. We're.
We're continuing to purchase certain components in advance of requirement answer concerning might otherwise delayed shipments.
We're prioritizing meeting customer commitments over managing cash in the current environment, while being mindful of an increasing interest rate environment.
We're continuing to invest in our business and we will see that come through in capital expenditure.
We just amended and extended our U S revolving credit facility and we are in great shape to make these investments.
You made a couple of divestitures this year, which has generated cash that also helps to fund these activities.
As a reminder, we amended our securitization facility in the first quarter.
Under that facility with $100 million at year end.
These are the structure of this facility the associated receivables are not recognized on our balance sheet, which reduces our working capital levels.
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 securitization facility.
Ill also include the metric is calculated from our financial statements near the end of my comments for your reference.
I'll now shift over to result in the quarter and all of FY 'twenty can adjust.
Adjusted free cash flow generated in the quarter with $19 million.
Year, we generated $7 million of adjusted free cash flow.
Supply chain constraints impacted our cash flow this year.
Also decided to maintain a steady level of production on the 787 program to ensure our supply chain remains healthy and to keep our facilities operating efficiently.
This level of production exceed the rate at which selling and taking delivery, which puts pressure on our working capital.
The $19 million of adjusted free cash flow in Q4 compares with a $32 million decrease in our net debt inclusive of the securitization facility.
This past quarter, we received $36 million of cash related to the sale of two businesses in one building.
On the cash outflow side, we paid $12 million for share repurchases and $8 million for the quarterly dividend payment.
For the year, we received $71 million of cash related to the sales of three businesses in one building.
While these sources of cash are not included in our free cash flow numbers, we're able to use them to fund our capital expenditures are currently higher than historical levels.
We repurchased 487000 shares this year for a total cost of $36 million and paid $33 million on dividend.
Adjusted net working capital, excluding cash and debt as a percentage of trailing 12 months sales at the end of Q4 was 29, 7% down from 32% a quarter ago.
Half of the decrease in the past quarter and reflects the impact of divestitures.
Inventories as a percentage of sales decreased for the seventh straight quarter, and we had favorable timing on liability.
Benefits were partially offset by growth in receivables.
Capital expenditures in the fourth quarter with $33 million about the same as in the previous quarter.
Our capital expenditures for the year were $139 million.
Our focus continues to be an investment in facilities and infrastructure to support growth and investment in next generation manufacturing capabilities to drive efficiency.
At year end, our net debt was $719 million, including $119 million of cash the major components of our debt for $500 million of senior notes and $341 million of borrowings on our U S revolving credit facility.
In addition, we had $100 million associated with the securitization facility that does not show up on our balance sheet.
At year end, we had $762 million of unused borrowing capacity on our U S revolving credit facility or.
Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of four <unk> times on a net debt basis.
Based on our leverage we could have incurred an additional $664 million of net debt as of the end of the year.
Our confidence in our existing facilities provide us with flexibility to invest in our future.
We could go we amended and restated our new App III filing credit facility. It remains at $1 1 billion dollar facility and insurance in five years.
Team did an incredible job securing this deal in todays environment in which banks are facing challenges achieving appropriate returns for capital deployment.
Our terms are largely the same with our pricing grid in the same or better at various leverage levels.
Glad to have completed this transaction with a term given the current environment.
Our leverage ratio calculated on a net debt basis was two two times as of the end of 2022 down from two three times a year ago.
Our leverage ratio continues to be around the low end of our target range at two in a corner time take two and $3 one at a time.
Global retirement plan contributions and expense in the fourth quarter were relatively flat with the same quarter a year ago.
Cash contributions to our global retirement plans totaled $16 million for the quarter, while expense was $21 million.
For the year contribution to $65 million and expenses the $83 million are up due to higher levels of participation on a U S defined contribution plan.
Expenses were also higher as last year included a 6 million curtailment gain resulting from the termination of our defined benefit plan in the Netherlands.
Our effective tax rate was 31, 6% in the fourth quarter compared to 19, 8% in the same period, a year ago, a relatively high tax rate this quarter and the resulting loss of the sale.
Our energy business based in Scotland.
This loss includes a write off of the chemotherapy foreign currency Martha has no associated tax benefit.
Without this impact our effective tax rate was 23, 5%.
Last year's fourth quarter tax rate had a favorable tax impact associated with the pension curtailment gain.
For FY 'twenty to our effective tax rate was 23, 6% up modestly from FY 'twenty, one 'twenty two 8% rate.
Here's benefited from provision to return adjustments.
Next year in FY 'twenty, three we're expecting an effective tax rate at 25 zero percent.
I'll now turn to cash flow for next year in.
In FY 'twenty, three we expect growth in sales of 5%, which at current working capital levels will drive $40 million of working capital growth.
Our capital expenditures are projected to be $150 million, while depreciation and amortization is just over $90 million, creating another $60 million of pressure on cash flow.
Those two factors sales growth in capital expenditures in excess of depreciation and amortization get us to a starting point of about $80 million for free cash flow generation of 45% comparison.
The good news is that we are projecting free cash flow generation for FY 'twenty three to be much stronger in $130 million or about 70% conversion.
We're seeing nice improvement in working capital that will help us achieve the $130 million of free cash flow generation.
Assume that the enacted tax law associated with R&D expense amortization will be repealed given bipartisan support for innovation.
I'd also like to share some of the metrics and amounts you'll be able to calculate from our financial statements.
Flat GAAP accounting for the securitization facility free.
Free cash flow in the quarter was $30 million and free cash flow generation for the year was $107 million, which.
Which is about 60% conversion on adjusted net earnings.
Networking capital was 26, 4% of sales at the end of the year.
Going forward I will no longer report on the impact of securitization on free cash flow generation unless theres a material change in our securitization balance.
Networking capital will continue to include a benefit of about 300 basis points.
Our financial position remains strong we're effectively managing through the current supply chain environment, we're looking to invest to further support growth and capitalize on efficiencies and we've got the liquidity to do so.
We're maintaining leverage where we principles and our financial position is solid.
With that I will turn it back to John for any questions you may have.
Thanks, Jennifer Cynthia we are happy to take questions now from our audience.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question. Please press star one we will take our first question from Michael <unk> with.
<unk> Securities. Please go ahead.
Hey, Good morning. This is teed off to Linda on for Mike. This morning, Thanks for taking my question.
Well good morning, So first just wanted to ask with.
With the growth inflection you are expecting any commercial aero.
Excuse me in the upcoming year I was just wondering if we could get a little more color there.
Which platforms are expected to be the largest contributor to your growth.
If you expect to be fully aligned with the underlying production rates at Boeing and Airbus are if there are any platforms, where you are producing at a different rate.
So the growth is actually across pretty much all of the platform next year, it's across the Boeing book of business, it's across the Airbus book of business on.
On the Biz jet book of business and then there's some other kind of components stopped and we also mentioned the Genesys acquisition that wed see grow next year, so it's actually pretty spread across all of those we'll see some growth on the 87.
207 will see growth of <unk> hundred 50, the usual programs and of course on the Gulfstream book of business. So it's a broad base growth I don't know that I described next year sort of inflection I think 'twenty one into 'twenty two was the inflection and we're just continuing that performance on the OE side next year. The one the only program, where we essentially have a kind of a misalignment between ourselves.
And our customers the 87, which of course, we have described that some details and so for the last year. We have on average down about $3 five ship sets a month, we said, we kind of move to four in the second half, but earlier in the year, we had a little bit of a slower start and for next year. We're forecasting that we will continue at that level of four ship sets per month.
Throughout fiscal 'twenty, three I think Boeing is viewing that there are lower at the moment amendment start to ramp, but we think they.
We've already built some inventory of our soft tailor built some inventory. So we don't anticipate a ramp in our 787 production until we probably get into fiscal 'twenty four so thats the only one player.
We may see the OE move up but we would probably remain flat through all of next year. Otherwise we are we're matched with the OEM demands.
No. That's helpful color. Thank you and then just as a follow up I was wondering if you can give some color on what you're seeing just on the labor front do you have all the hires in place that you need for the upcoming year and are you seeing any meaningful pressure either from elevated attrition or our productivity levels.
So.
So the situation really hasn't changed much in the last quarter and.
It is a constant challenge to try and recruit the number of people in two areas. In particular, one is really high end machining capabilities and the other is the really specialized engineering controls engineering systems engineering folks that we want.
The way I would describe it as I'd say, we're holding our own just like everybody else, but if you go back.
So we typically ran attrition in the mid single digits. We felt that we were pretty good at that we've been running for the last year in the mid teens, but as has almost everybody else I think that in a similar situation. So that remains a challenge I think it will continue to be a challenge next year hiring slowdown in the U S. Some of the tech guys release.
Some folks it's not that those people are directly applicable to us, but perhaps it suggests that there may be a little bit of a slowdown in that might flip some stuff up but in general for the types of skills that we're looking forward. It's a constant battle to try to make sure we get them.
One measure that I kind of use as to whether or not the supply chain and the labor issues are are loosening up as whether or not we're seeing our past due to customer commitments growing or shrinking and over the last year or over the last year and even in the last quarter that has continued to tick up which says to me.
It continues to be a challenge to get the product out to the customer that we eat that they wanted that we're trying to meet their demand for and Thats a combination of component availability on the supply chain.
And the labor challenges. So it's an ongoing battle I'd say were holding our own but it's a daily flight to try and get both the parts and the folks that you need to meet the commitments.
That's very helpful. Thank you.
Thank you.
We will take our next question from Cai von <unk> with Cowen. Please go ahead.
Morning, guys.
Hey, guys. This is actually Jack on for title that has a gallon.
Good.
I actually wanted to talk about the 23 guide just kind of.
Just sort of below the line items of interest expense.
<unk>.
I would think going higher here, how do we think about that.
What are you assuming in regards to.
Are you baking in.
<unk> interest rate increases here in 'twenty three.
Just kind of square that for us.
And then just the second question.
In regards to supply chain, if you can kind of actually quantify the past dues I know you mentioned.
Component.
Components and labor I just.
And just curious if you've been able to accurately quantify those factors. Thanks.
Okay, I'll start with interest expense so for interest expense.
We're looking to see a sizeable increase next year and this year, we had $36 $8 million of expense next year, we're looking for $53 million worth of expense.
Over the past year, there has been 300 basis points of interest rate.
Hikes and so some of that happen as early as March but the biggest impact was really felt in our fourth quarter.
We have assumed the hike that just came through in just.
Just a few days ago of 75 basis points and we are assuming another 150 basis point hike after that so.
So thats really the driver of our <unk>.
Interest expense expansion, we've got about half of our interest or half of our debt that is subject to variable rate and what we do is we applied on that and that's where we get that significant growth to $53 million next year.
Let me offer some of the pass through so we don't quantify pass through I don't think Thats less.
Very helpful metric, but I'll give I'll put into context for you, it's probably running twice what it would normally run.
And any particular time, if theres always some issues with past due with a technical issue. It's a supply chain issue in what I'll call normal circumstances and in the present circumstances I would say, it's running twice, but that would have normally been so we're seeing pressure on it.
It's not that it's as I say, we're still meeting our original forecast that we get better on some stuff.
The staff is challenged.
But it's just a disruption for both ourselves and our customers and of course, our suppliers are working hard so its additional friction costs and delivering the business. So it is up.
It's not something that I would say out of the norm with others in the industry. I think we're just seeing exactly the same as others and maybe rondelet twice, what you might say if the whole world was functioning the way it was 456 years ago.
Understood Yes.
Totally understand thanks, so much.
You're welcome.
As a reminder, if you would like to ask a question at this time. Please press star one and we will pause for just a moment.
We will take our next question from Cristina <unk> with Morgan Stanley . Please go ahead.
Hi, This is Justin on for Christine.
Hey, good morning, Justin just a quick one on Florida for the programs impact that you've baked into the 2023 Guide I think you mentioned it was something like $40 million is that a hedge number or.
Or what would you fully expect.
Sure.
Reward did materialize by the end of the year.
So it's not a hedge number its kind of a.
On or off number if we win that's what we think will get because it's it'll be development. So it's engineered so it's not that there's a huge upside there is no production in that so it's really just putting engineers on it to.
To do the development. So there is not is it 40 is at 35 is a 42 I am not sure.
It's either 40 or something that's the thing if we if our wins and contracted is again, assuming we get under contract by the end of the calendar year, it's forging if that gets delayed obviously it drops off.
And if that doesn't win the party goes to zero.
I don't know I don't think that the hedge number its kind of thats, what we are anticipating assuming a win.
Okay helpful. And then have you heard anything incremental from the customer.
We've seen this kind of slipped to the right a few times.
Anything unusual that gives you confidence.
So we're not we're not privy to any of that of course.
Stay connected with Bell.
We were all anticipating at the USA that within a couple of days that was going to be announced that it just suddenly got postponed and that was a surprise to the whole industry. So I don't I don't know if anybody has that insight apart from the government folks that are working at it but we definitely don't have any additional insight.
Okay. Thanks.
Yes sure.
And it appears there are no further questions at this time, Mr. <unk> I will turn the conference back to you for any additional or closing remarks.
Thank you very much indeed, thank you to all our listeners.
We feel like we had a solid fiscal 'twenty two and we're looking forward to an exciting fiscal 'twenty three we look forward to reporting out again on our first quarter in 90 days. Thank you.
This concludes today's call. Thank you for your participation and you may now disconnect.