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spk31: Good morning and welcome to the Belfu's fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the call over to CJ Marie Jean Marie Young. Please go ahead, Jean.
spk29: Thank you, and good morning, everyone.
spk28: Before we begin, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors. Additional information about factors that could potentially impact our financial results is included in yesterday's press release and is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our subsequent quarterly reports and other filings with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website. Joining me on the call today is Dan Bernstein, President and CEO, Fruit2Wik CFO, and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan. Dan?
spk22: Yes, thank you, Jean. We are very pleased to report a strong finish to a record-breaking year at Bell. where we demonstrated that even during a year with a challenging supply chain environment, our team's dedication and hard work has paid off. We would like to thank all our associates for allowing us to reach these milestones. Each of the three product groups saw double-digit top-line growth this year, with our power group leading the way with a 32% increase in sales year over year. Excluding the $32.5 million in raw materials surcharge, invoicing during 2022, power sales were up 17% over 21. Sales of our circuit protection products and CUI and EOS products have all had record sales in 22, reflecting double-digit growth over the respective 21 levels. Over the past three years, the power group has been a major focus. Through a combination of strategic acquisitions, target investments in EVs, and a thorough review and realignment of SQ profitability. This group closed 22 with sales of $288 million and a gross margin of 30.5%. Even within the 22 physical year, this product group saw substantial margin expansion every quarter, starting at 27.1 in quarter one, 28.2 in quarter two, 32.4 in quarter Q3, and finishing quarter four at 33%. Our connectivity solution group saw a 13% increase in sales in 2022 over 2021. With this segment, commercial aerospace revenue closed at $31 million for the year, up 75% over 2021, highlighted by a jump in aftermarket revenue, as well as continued support of new aircraft production. Shipments to our distribution partners remained strong throughout 2022. with some offsetting softness noted in our military and network ad markets. Our magnetic solution group posted 11% increase in sales in 2022 versus 21, largely due to a high demand from our networking customers, particularly during the first half of the year. Further, our signal transformer business had an increase in sales of 6.8 million in 22, primarily due to price increases taken earlier this year, and a higher demand from its medical industrial customers. Lean initiatives were also implemented at Signal's factory in the Dominican Republic during the year. The combination of these actions resulted in a $3.2 billion of EBITDA in 2022 versus what was a previously break-even business in 2021. The balance of the magnetic solutions group is going through a major facility consolidation project in Asia, as announced last quarter. Through the year, we're incurring 7.1 million in restructuring costs related to this move and anticipate an additional 3.3 to 4 million in costs to be incurred through the third quarter of 23. There are currently 180 associates at our new BGX facility, and we expect the headcount to double during the first quarter of 23. The transition is being aided by approximately 10% of the indirect staff from our Wing Ming facility who agreed to work at the new facility going forward, providing continuing manufacturing practices and knowledge. This project is programmed as planned and is scheduled to be completed by the end of Q3 23. Even with the best financial results in our history, we will continue to strive for improvement on the margin side and recognize there's more work to be done on this front. On the HR side, our new global head of people, joined the company in November. Suzanne's focus has been driving our continuous improvement around Bell's culture, compensation program, and talent recognition development, and of course, retention. Our people are our most important asset. Based on the culture assessment formed in late 21, we understand there's a myriad of changes that need to take place within Bell in order for our associates to thrive. Changes take time and steady progress has been made on this front throughout 2022. With more to come throughout 2023, Brazil is now slowly up to speed. In 2022, our management team engaged in an executive off-site session where we discussed our near and long-term strategies free from interruptions of our day-to-day responsibilities. It was from these discussions that we assessed our global footprint and made a difficult decision related to operational restructuring conditions. The four facility consolidation projects announced last quarter are all present as planned and targeted for completion later this year. Our executive strategy session will continue in 2023 with a focus on further improvement on the company's bottom line. We're proud of all our associates for the job well done this past year and how that collaboration effort translates into our best results. This is a significant progress and should be celebrated. The past two years have been focused on riding the ship, strengthening Bell Foundation as a business. Many of these initiatives identified will be completed by the end of 23, such that we now are in a position to be more fully focused on Bell's future as an organization. At this point in time, I would now like to turn the call over to Lyd to update on the financials. Lyd?
spk30: Thank you, Dan. Overall, fourth quarter sales were $169 million, an increase of 15% from the fourth quarter of 2021. Gross margin for the quarter increased to 31%, as compared to 26.7% a year prior. By product group, power solutions and protection sales were $82.1 million, up 39% from last year's fourth quarter, primarily led by an $11.1 million increase in sales of our front-end power products, 4.1 million of higher sales of industrial power products, and 2.8 million of growth in EV sales. Of these increases, 10.5 million related to invoicing of premium charges on materials. Gross margin for this group was 33% for the fourth quarter, a 210 basis point improvement from Q4 21, largely driven by a favorable shift in product mix, the benefits of pricing actions taken over the past year, and some favorable impact from FX. Our power solutions and protection group had a book-to-bill ratio of 1.0 during the fourth quarter of 22 and a backlog of orders of 356 million, an increase of 48% from the 2021 year end. Turning to our connectivity solutions group, sales were 47 million, an increase of 8% from last year's fourth quarter. mostly due to the continued rebound of commercial aerospace and strong sales through our distribution channels. Military sales continued to be challenged this past quarter, resulting in a 12% year-over-year decrease in the defense end market. Gross margin for this group came in at 23.6% for the fourth quarter of 2022, down slightly from 23.7% in the fourth quarter of 21. Throughout the majority of 2022, this group had been impacted by inefficiencies related to a ramp-up in the workforce needed to accommodate the rebound in commercial air. The connectivity solutions group had a book-to-bill ratio of 1.06 during the fourth quarter of 2022 and a backlog of orders of 119 million at December 31st, an increase of 40% from the 2021 year end. Lastly, our magnetic solutions group had Q4 sales of 40.1 million, down 10% from last year's fourth quarter. Gross margin for this group improved significantly to 29.5% in the fourth quarter of 2022 from 22.9% a year prior. Margins for this group benefited from pricing actions taken over the past year and a favorable shift in exchange rate of the Chinese renminbi versus the U.S. dollar, which lowered our labor costs in China versus 2021. Our magnetic solutions group had a book-to-bill ratio of 0.49 during the fourth quarter of 2022 and finished the quarter with $91 million worth of orders and backlog, down 37% from the 2021 year-end level. The reduction in backlog for our Magnetics products is largely driven by lower demand from networking customers as they work through their inventory on hand. At the consolidated level, there were $27 million of orders that were scheduled to ship in Q4, which did not, primarily due to component availability. Our selling general and administrative expenses were $25.1 million, or 14.8% of sales, up from 21.9 million in the fourth quarter last year, but down slightly as a percentage of total sales. Within SG&A, the primary increases were related to salaries, fringe benefits, and rep commissions. Turning to balance sheet and cash flow items, we ended the quarter with a cash balance of 70.3 million, an increase of 8.5 million from the 2021 year end. Our working capital increased by 28.1 million during 2022. We saw a 20.1 million increase in our accounts receivable balance. Our DSO were 58 days at December 31st, 2022, compared to 54 days at December 31st, 2021. Inventories increased by 33.1 million from last year end. While there was continued investment in inventory during the second half of 2022, it was to a lesser extent compared to the first half of 2022. In addition to changes in working capital, other items impacting cash flows for full year of 2022 included capital expenditures of $8.8 million and our continued dividend program where we made payments of $3.4 million. Cash paid during 2022 for income taxes was $14.6 million, and interest payments totaled $3.4 million. I'll now turn the call over to Baruch for additional color and outlook on 2023. Baruch? Yep.
spk26: Thank you, Lynn. Hello, everyone. Nice to speak with everybody. Looking back at 2021 and 2022, We recognize the tremendous amount of contribution and work that has gone into getting Bell to this point in our journey. This has really been an all hands on deck efforts across our global team members and locations. As Dan mentioned, we're happy to close out 2022 with the wind at our backs and head into 2023 and beyond with a sharpened sense of focus and direction in our pursuit. As we look out to 2023, we see a good amount of opportunity for both growth in certain areas and margin improvements. While managing continued supply chain constraints in certain components, inflationary pressures, COVID restrictions, easing in China, and our previously announced facility consolidation plans, we will continue to pursue growth in certain end markets, lean out the cost structure, and position Bell to capture the long-term positive tailwinds related to our products, broadly speaking. Pivoting to backlog for 2023. As we enter 2023, this quarter in 2024, we saw a sub one book to bill for the first time in a while as we've been working on reducing our lead times and getting deliveries out the factory. We're working with our customers to get this rationalized as it related to their needs today versus what they thought six to nine months ago. While we see some softness in demand in consumer facing end markets, We believe the larger factor here is customers needing to work through their high levels of inventory and adjusting to the reduction in lead times across most of our products. This is particularly the case for magnetics. On the other hand, we are seeing robust demand in the areas of commercial, aerospace, military, and e-mobility. To that end, and as noted by Lynn, we're seeing a rotation in contribution of where the bookings are coming from. Power has been steadied. connectivity is growing while magnetics are slowing on new orders that when all added together, our backlog is relatively flat. In short, lead times in certain areas are coming down and other areas increasing, and bookings that are coming in are higher quality on margin. Using backlog as a basis for our assumption on 2023 revenue outlook, first we want to level set on the starting point, as it was alluded to earlier in some of the commentaries. 2022 total revenue was $654 million. But when normalized for the raw material surcharge invoicing, revenue was closer to $622 million. To the best of our knowledge, and using the $622 million as the base, we expect top line to be flat to plus or minus low single digits on either side of that, given the number of moving pieces in either direction. to give you a little more insight and highlight a few key areas. Our commercial air business should be one of our leaders of growth this year, given some of key positions we are on, coupled with overall growth. Our key acquisition of RMS in early 2021 has set us up to capture this growth cycle in a very nice way, both on the top line and margin side. Q4 direct sales into commercial air customers were 8 million, up 55% from Q4 2021. And we expect sales to grow in 2023 to be in the double-digit territory. This is a great testament to our team and their ability to strengthen Bell's position on the commercial aerospace end market. On the defense side, following a few years of low order volumes, the current global affairs in Europe have been beneficial to us. We expect top-line growth in the defense segment to be in the double-digit zone for a full year 2023 as well. For both commercial air and defense, we have spent a lot of time improving them last year as they sit within our connectivity group. As you recall, we have previously spoken about the significant ramp in headcount that occurred in Q1 2022 that adversely impacted our margins throughout last year. For 2023, we expect to have a meaningful reversal here and see the team's hard work pay off. On the mobility side, we nearly doubled growth in 2022 over 2021 to $20 million. We would not be surprised if we had another double again in 2023 and have committed new CapEx dollars in 2022 to expand production and meet this robust demand. We also doubled down on strategic investment in InnoElectric, where we now have a one-third minority stake, with the ability to expand our ownership if certain profitability thresholds are attained. InnoElectric consists of a highly skilled engineering team focused on onboard fast charging technology for the commercial vehicle use. They're very similar to Bell in terms of customers and market focus, which we believe is the right place to be. Through this partnership, we expect to jointly grow and channel real revenue synergies. We want to welcome our new partners and are looking forward to an exciting road ahead. On the networking and data center side, we remain bullish in the medium term, given all the secular tailwinds in the NM market. But for 2023, we will see an overall slowdown as it digests the rampant growth since 2020. We serve this market out of both our power and magnetics group. The supply chain in magnetics has smoothed out, given there are fewer components in this product set, and this is where we are seeing the reduction of the longer-term backlog. Lead times for our magnetics products are about currently running 20 weeks, which is half of what they were this time last year. On the power side, and given the constraints on CERN, I see demand here remains robust. So net-net, this market is a tale of two cities for us in 2023, but strongly believe in the medium to long-term prospects of this business. This also is a testament to our product strategy diversity. Of course, while no business is immune to adverse economic cycles, our business is highly diversified and aligned with secular trends and megatrends in CERN areas. Looking ahead, we see continued strength in Bell as the breadth and depth of our portfolio, our deep customer collaborations, cost takeout initiatives, and doubling down in key areas underpinning our profitable growth. For Q1 2023, it's off to a good start with strong January numbers. Today, we believe Q1 2023 will be up mid to high single digits over Q1 2022. We expect better performance on the margin side as well compared to Q1 2022, though down from Q4 2022 due to the usual seasonal impact from the Chinese New Year to our business. For 2023, we're also focused on getting our previously announced consolidation plans to fruition while continuing to look for areas of improvement. To sum it up, We're excited about 2023 and believe we're in a great position to perform well due to our focus on continuous improvement and diversity of product offerings and end markets, even with an uncertain macro backdrop. With that, I'll turn the call back over to Dan.
spk14: Dan? Dan? Sorry.
spk15: Claudia, can we open up the call for questions, please?
spk31: Okay, thank you sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment please while we poll for questions.
spk02: The first question comes from Theodore O'Neil from Litchfield Hills Research.
spk31: Please proceed with your question, Theodore.
spk05: Theodore O' Thank you and congratulations on the good quarter. A couple of questions about InnoElectric. Not clear, is this a customer or are you selling product to them or both?
spk26: So they are a manufacturer of a product. They have a complementary product set. It's its own business. We took an equity stake in the business, and we think we bring a complementary skill set on the operations and business side of it in terms of sales and marketing, customer connectivity, and manufacturing side that would be additive. They have a great product set with a lot of nice software and packaging capabilities, but it is an ownership stake. Just a little bit more clarification.
spk22: I wouldn't call it a manufacturer at this time. We see it more as a technology product portfolio. They're in the process now of building up their sales. So they're at the initial stage. We felt very strongly that their product portfolio will align very nicely with our product portfolio going forward. So for us, it was more of an extension of our R&D and their R&D capabilities. and how we believe that they have the best products going forward in the EV marketplace where we participate in.
spk05: Okay, that makes sense. And what sort of milestones are you looking for to take further investment stake in the company?
spk26: Yeah, I'd say it's really a revenue and certain profit thresholds will be the key guiding post there.
spk05: Okay. And Farouk, you mentioned sort of leveling out the revenue for this year and talking about how there was, you know, expedited costs, et cetera, that was about $32 million of revenue in the year. I would have thought those would be like super high margin part of the business. Was it not?
spk26: No, it's not margin. It's actually lower margin than our kind of you know, kind of gross margin. So I would say it actually brings us down as a percentage of sales. But, you know, these are not intended to be a high-margin money-making thing. This is really a convenience expedite fees, trying to get product out the door, partnering with our customers and paying, let's say, you know, unnatural fees just given the times we're in. So, no, they're from a percentage of sales that they're actually dilutive. Okay. Okay.
spk05: And, Lynn, the $27 million in orders that didn't ship due to component availability, is that in a specific area?
spk30: It's really across the board, Theo. Yeah, probably largely in power and magnetics, not so much on the connectivity side.
spk04: All right. Thanks very much. Thank you.
spk31: Thank you. The next question comes from Jim Ricciuti from Needham & Company. Please proceed with your question, Jim.
spk20: Hi. Thank you. Good morning. I just was hoping to get a little bit more color on the Q1 outlook. Are you assuming that there's still this relatively high level of raw material surcharges in the quarter? And then is this a case where you see that gradually dissipating as we go through the year and eventually going away, Q2, Q3?
spk26: Yeah, I would say we start really seeing this in a noteworthy amount in Q2 last year. We thought it would slow down into Q3, Q4. It actually didn't. So it's really Tough to predict that, but we don't think they're going to be around here, because these are not part of the normal way of doing business. As for Q1, we are seeing still some PPV surcharges in there, but it's really hard to take a guess at what that would be, so we generally are not going to try to guess it, given that we do know this is not usual.
spk20: Got it. You know, you've given us some percentage growth in e-mobility. I may have missed it, but have you been able, did you quantify the level of e-mobility sales in the quarter? And, you know, what I'm trying to get to is how we're thinking about the outlook for this business, which clearly it sounds like this is one of the areas of the business that you see some pretty good growth opportunities as you look at not only the current quarter, but further into 2023.
spk30: So, Jim, I can take that one. So, e-mobility sales for Q4 were 6 million, and that was up from 3.2 million in last year's fourth quarter. And just to clarify, we did have additional sales out of our e-mobility group throughout the year, but these numbers are just looking at products that go into actual EV end applications. So, $6 million for Q4 versus 3.2 in last year's Q4. And on an annual basis, it was right around $20 million versus $10 million last year.
spk20: And just with respect to the line of sight you have in this business, it sounds like this is an area of the business you feel still has some pretty good growth prospects for this year. Is that fair to say?
spk26: Yeah, I think we do have a big growth process for this year. I think, you know, it would not be, you know, we definitely see the potential for it to double again this year. We have committed CapEx dollars to expand our production capacity. And I think we just ideally need to get a little bit of help from the component shortages side that will help us to get that stuff out the door. So it's a very rapid growing line for sure. I don't know, Dan, if you have any more inside of that, but that's kind of my insight.
spk20: Nope.
spk26: Nope.
spk20: Got it. And just on the magnetic solutions group, there obviously are some puts and takes in that area. And I guess what I'm wondering is, do you have a sense as to when some of these customers will be working through the inventories that they have And I have one quick follow-up. Thank you. Okay.
spk22: On that one, I think, you know, we deal a lot with the networking people. And, again, their hands are tied with basically they can't get power supplies in from us because of the ICs. So, you know, we have customers that are expediting fees to us. On the other hand, are canceling magnetics from us because we can't get the ICs in properly. We still think there's a long lead time out there, but to flush out the inventory for the magnetic side, we think it'd probably be at least six months to nine months. I mean, six months, probably best case. Nine months, worst case.
spk20: Got it. And the follow-up to that is just you're still seeing pretty good demand, clearly, on the power side from this segment of the market. How do we think about... you know, the potential that as things begin to normalize, you see the level of demand in this part of the business slowing a bit?
spk22: Again, you know, I think the sales, you know, because of the IC constraints, I think, again, our backlog, I think the difference we see now is instead of, you know, a buyer gives us four orders during the year, the buyer now gives us one order a year. So we spent a lot of time more focused on the backlog where that's staying compared to the bookings. And for the power side, the backlog is pretty strong. We do think we do have a lot of NPR that is going on. With the acquiring of CUI, that's been a real growth engine, plus EV that's really leading the sales growth, we still think that power has great opportunities going forward from a growth standpoint.
spk09: Thank you.
spk31: Thank you. The next question comes from Hindi Susanto from Gabelli Funds. Please proceed with your question, Hindi.
spk15: Good morning, Farouk and Lynn. Good morning, Hindi.
spk10: Good morning.
spk07: Farouk or Lynn, can we go over the math for commercial aerospace market, like where the current run rate is versus the pre-pandemic level? And then I think is it reasonable to assume that based on past acquisitions, when things go back to the baseline, your new baseline should be higher than the pre-pandemic level?
spk30: So on the commercial air side, we finished the year, and these are direct sales conditions. into customers. So this excludes anything going into commercial air through distribution. Year-to-date sales were 31 million. That was up from 18 million last year, so a 75% increase. If we look at the pre-pandemic levels, it was around 40, 45 million in that range. And that was for our cinch business and RMS combined. So we are not back at that level yet. We certainly hope to get past that. in the next year or two, I would say. Farouk, I'm not sure if you have any additional comments here.
spk26: We'll surpass. And to your point, Hindi, I think there'll be a new baseline. So I think that number, the 45, is kind of the three, four-year-ago baseline. So I do think we're discovering what that baseline is.
spk07: Okay. And then similarly, for the defense market, would you be able to share what the current run rate versus historical baseline is?
spk14: Sure. So for the military market, so that was around $38 million for the year.
spk30: And that was down slightly. It was down about $1.5 million from the prior year on a year-to-year basis. I know that military has been running low the last few years. I don't have the historical view at hand, you know, looking back to, you know, 2019, 2020.
spk22: Let me see. I can, I think, I can help you, Lynn, if you want. If you go to 220, defense was $34 million. 21 was $32 million. And then I have $30 million for 2022. Based on your email, so I assume it's correct.
spk07: And then one additional question. On the data center market, any expectation how long customers will digest their inventories? Some companies did... share expectation that there may be some turnaround or return to growth in the second half of the calendar year 2023, whether you have any type of that market view?
spk22: Maybe I can handle that one. On the data center market, three or four years ago, it was a substantial market for us when we supplied people like Facebook and Google. However, during the price pressures we saw in that business, It wasn't a portfolio that we thought made sense for us. So for now, it's become more of a niche market in this area, and we are focused on a lot of other markets where we have better margins. But again, the cloud is not what we consider networking from our standpoint. I see.
spk08: Does that help you?
spk07: Yes, I think that's helpful. Any information on the current round rate? for the data center market?
spk22: I can't say. I don't have that breakout. But I don't think it's enough to move the needle substantially. I think we maybe have three or four key, I mean two or three, I'm sorry, three or four key customers in that marketplace.
spk06: Okay. But none of the big boys.
spk22: You know, again, not Amazon, not Microsoft, not Google or Facebook. I see.
spk08: And then any insights on the networking market?
spk26: Hindi, is your question about how big our exposure to the networking data center is?
spk07: No, like the state of the networking market. I think in a magnetic networking, customers are working down on their inventories. Okay. So whether there's any outlook like when customers will fully digest their excess inventories previously on the data center market and then now in the networking market.
spk22: But I think it should be reflective. I think data is the same as networking where people are looking. You know, in our industry, everybody says six months. So anytime there's a problem, they say six months. So I think everybody's expecting to flush out their inventories over the next six months. Again, the problem was that they brought in too much materials, but they didn't have the ICs to build the material. So now as they get the ICs in, they're working down the other materials, so the ICs and the other materials will be in line with each other. From what we understand... Go ahead. I'm sorry.
spk26: Sorry, Dan.
spk22: Go ahead. Nope.
spk26: Nope, that's it. Yeah, I was going to say, Hindi, so just to maybe thread the needle, from an end market perspective, You know, every kind of the public things that we're reading, it seems to be, you know, going okay. But we supply that end mark from two different sides of the house. The magnetic side, as you point out, too, is a more simple product set. That supply chain is smoothing out. So we were able to get them and deliver products to them, you know, at a faster rate than they're able to get the power supplies that they needed. So they're sitting there with, you know, kind of a little over inventory on the magnetic side of us. but the demand is still there in the power. So it's a little bit of a nuanced discussion because it just depends what product is coming in. So it's not a market issue as much as it's what's the product that's going into it.
spk15: I see. Okay, that's very helpful. Thank you, Dan, Lynn, and Farouk.
spk11: Thank you.
spk15: Thank you.
spk31: Thank you. The next question comes from William Kim from Presidio Asset Management. Please proceed with your question, William.
spk03: And good job, Christine, to improve those margins. I was wondering, going forward, could you guys provide a cash flow statement for the quarterly earnings releases?
spk16: And if you could give us an idea of what free cash flow was for the year and the quarter.
spk14: Baruch?
spk30: Yeah, so we can certainly look to do that for going – And let me just... So I can give you the year. So cash flows provided by operations for the year was $40.3 million.
spk14: And then we had $8.8 million of CapEx. So if your definition of free cash flow is...
spk30: cash provided by operating less capex, it's about 31, 32 million.
spk14: 31 million.
spk09: Okay.
spk03: And I guess, you know, it is, I'm assuming there's some more capital usage there. Is that going to continue to be a significant use of cash as you grow? And, you know, how can we think about free cash flow conversion, I guess, from an EBITDA perspective and a net earnings perspective? considering that it seems that free cash flow is significantly lower than even your net earnings numbers.
spk26: So, you know, a lot of work last year and 2020 has gone into the P&L side of it, I would say. So trying to get our EBITDA up and just overall profit margins. And we saw that sequentially happen through the year. That's kind of step one. Obviously, we saw the cash consumption and working capital investment go in there pretty rampant as we think about inventory and some of the issues going on there. So I would say we have an elevated working capital number. So in normalized times, it should not be taking that kind of cash suck, if you will. Historically, we've been around 10 million of CapEx. which is, again, in regular times about right for us. This coming year, we'll spend a little bit more given a lot of consolidation work going on. But, you know, and then obviously we have our interest rate and we have our cash taxes, which I'd probably say our dividends are pretty probably steady. Obviously, we pay down our debt and interest rate environment. We all know how that's going. But I would say the biggest thing is we're trying to get our profitability up and margin improvement, which we have been continuing and will continue to do more of. I think we need to work on slimming down a little bit our inventory position, and we think that will occur as things normalize a little bit.
spk03: So it should improve. When you say normalize, are you talking about a normalized working capital environment or are you talking about kind of a slowing growth environment?
spk26: I would say, you know, the easing of the supply chain and availability of materials. We have, you know, as we think about WIP and, you know, finished goods that we're supposed to ship, as Lynn, you know, was talking about, we had $27 million of orders that were scheduled to ship, but we couldn't because potentially we had some missing pieces or our customers didn't have the other parts of the bill. So we end up sitting on bigger amounts of inventory. So As the supply chain eases up and becomes a lot more predictable where you can build, buy your raw materials, make it, and send it out, that will bring it down. Obviously, we've put a lot of money in our inventory the last couple of years, and partially because of the disruption of the supply chain.
spk17: Understood. Thank you.
spk31: Thank you. The next question is a follow-up question from Jim Ricciuti from Needham & Company. Please proceed with your question, Jim.
spk20: Thank you. I'm wondering if you could perhaps size the impact of the dilution to gross margins in the quarter from some of the material surcharges that you alluded to.
spk30: I think from a gross margin perspective,
spk14: it's less than 100 basis points.
spk30: It's, you know, so it's not a, that's from a gross margin perspective.
spk26: Yeah, I think it's 10 bips. Yeah, so you're right, 10 bips. Our gross margin would have been higher as a percentage of sales if that was out.
spk20: Maybe you could also talk to the pricing environment and maybe more broadly. I think Bill has talked about going through the product portfolio, looking more closely, not only at pricing, but perhaps going through the skews and seeing what makes sense and what doesn't make sense. I wonder, as we think about the way you're characterizing the year, to what extent do these pieces play into the overall outlook for the business? Baruch, do you want me to take that?
spk22: I'll do the overall pricing. Again, very simple in our industry. As longer lead times go out, pricing tends to be firmer or higher. As lead times come down, pricing does become a little bit more competitive. We're just starting to see it in some of our product lines. We don't think there'd be any pricing pressure overall based on past history. If you look at our military aerospace business plus our power business, we think the pricing overall should be pretty firm or strong. On the magnetics and the circuit protection group, they might face pricing pressure that they haven't seen post-COVID going forward. And it's our major focus now is if we do face that, are we getting our cost in mind to address it properly? So we're doing everything we can to maintain and improve our current margin structure. And we know that we have to do a better job of really streamlining the organization and So when these price pressures do come in, then we can handle it a lot better. And again, not walking away from something because of lower margins. Ruth, can you add some more color to that?
spk26: No, I think that covers it. Obviously, you know, we're focused on profitable growth, you know, with healthy margins. We understand that it's a price and a cost gain. On the price, we talked about it already, I think, a lot last year. We're doing a lot on the cost side of it. At least if we do get those phone calls, depending on what part of the business is and the profitability profile is then noted, we will have a more cleaner cost structure to make an educated decision on, you know, where do we concede, where do you not? In some cases, maybe the answer is not. Maybe in some cases, we are sole position. And then that's a different discussion than maybe some of our commodity-based stuff. So because of the diversity of our portfolio, Jim, I don't think it's a one-size-fits-all. But I think the guiding post is get our cost in order, add value to the customer, and try to resist price downs. But we know we're not going to be successful at 100% of our SKUs.
spk20: Got it. Now, thank you both.
spk31: Thank you. At this time, there are no further questions. I'd now like to turn the call back to Mr. Dan Bernstein for closing remarks. Thank you, sir.
spk21: Thank you, Claudia.
spk26: clarification. I misspoke. When the question was asked of the impact of the surcharges, I had said 10 bps on gross margin, but it was really closer, you know, it was a little bit under 100 bps. So our gross margin would have been higher if it was removed. So just a point of clarification there. Sorry, Dan. Go ahead.
spk22: No problem. Thank you for joining our call today. We're looking forward to report our results in April. I wish everybody a good day and a nice weekend. Thank you.
spk31: Thank you very much. Ladies and gentlemen, this does conclude today's teleconference.
spk02: You may disconnect your lines at this time, and thank you for your participation. Thank you. you Bye. Thank you. Thank you.
spk00: Thank you.
spk31: Good morning and welcome to the Belfu's fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the call over to CJ Marie Jean Marie Young. Please go ahead, Jean.
spk29: Thank you, and good morning, everyone.
spk28: Before we begin, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors. Additional information about factors that could potentially impact our financial results is included in yesterday's press release and is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our subsequent quarterly reports and other filings with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website. Joining me on the call today is Dan Bernstein, President and CEO, Fruit2Wik CFO, and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan. Dan?
spk22: Yes, thank you, Jean. We are very pleased to report a strong finish to a record-breaking year at Bell. where we demonstrated that even during a year with a challenging supply chain environment, our team's dedication and hard work has paid off. We would like to thank all our associates for allowing us to reach these milestones. Each of the three product groups saw double-digit top-line growth this year, with our power group leading the way with a 32% increase in sales year over year. Excluding the $32.5 million in raw materials surcharge, invoicing during 2022, power sales were up 17% over 21. Sales of our circuit protection products and CUI and EOS products have all had record sales in 22, reflecting double-digit growth over the respective 21 levels. Over the past three years, the power group has been a major focus. Through a combination of strategic acquisitions, target investments in EVs, and a thorough review and relignment of SQ profitability. This group closed 22 with sales of $288 million and a gross margin of 30.5%. Even within the 22 physical year, this product group saw substantial margin expansion every quarter, starting at 27.1 in quarter one, 28.2 in quarter two, 32.4 in quarter Q3, and finishing quarter four at 33%. Our connectivity solution group saw a 13% increase in sales in 2022 over 2021. With this segment, commercial aerospace revenue closed at $31 million for the year, up 75% over 2021, highlighted by a jump in aftermarket revenue, as well as continued support of new aircraft production. Shipments to our distribution partners remained strong throughout 2022. with some offsetting softness noted in our military and network ad markets. Our magnetic solution group posted 11% increase in sales in 22 versus 21, largely due to a high demand from our networking customers, particularly during the first half of the year. Further, our signal transformer business had an increase in sales of 6.8 million in 22, primarily due to price increases taken earlier this year, and a higher demand from its medical industrial customers. Lean initiatives were also implemented at Signal's factory in the Dominican Republic during the year. The combination of these actions resulted in a $3.2 billion of EBITDA in 2022 versus what was a previously break-even business in 2021. The balance of the magnetic solutions group is going through a major facility consolidation project in Asia. last quarter. Through the year, we're incurring $7.1 million in restructuring costs related to this move and anticipate an additional $3.3 to $4 million in costs to be incurred through the third quarter of 23. There are currently 180 associates at our new BGX facility, and we expect the headcount to double during the first quarter of 23. The transition is being aided by approximately 10% of the indirect staff from our Wing Ming facility who agreed to work at the new facility going forward, providing continuing manufacturing practices and knowledge. This project is programmed as planned and is scheduled to be completed by the end of Q3 23. Even with the best financial results in our history, we will continue to strive for improvement on the margin side and recognize there's more work to be done on this front. On the HR side, our new global head of people, joined the company in November. Suzanne's focus has been driving our continuous improvement around Bell's culture, compensation program, and talent recognition development, and of course, retention. Our people are our most important asset. Based on the culture assessment formed in late 21, we understand there's a myriad of changes that need to take place within Bell in order for our associates to thrive. Changes take time and steady progress has been made on this front throughout 2022. With more to come throughout 2023, Brazil is now slowly up to speed. In 2022, our management team engaged in an executive off-site session where we discussed our near and long-term strategies free from interruptions of our day-to-day responsibilities. It was from these discussions that we assessed our global footprint and made a difficult decision related to operational restructuring conditions. The four facility consolidation projects announced last quarter are all present as planned and targeted for completion later this year. Our executive strategy session will continue in 2023 with a focus on further improvement on the company's bottom line. We're proud of all our associates for the job well done this past year and how that collaboration effort translates into our best results. This is a significant progress and should be celebrated. The past two years have been focused on riding the ship, strengthening Bell Foundation as a business. Many of these initiatives identified will be completed by the end of 23, such that we now are in a position to be more fully focused on Bell's future as an organization. At this point in time, I would now like to turn the call over to Lyd to update on the financials. Lyd?
spk30: Thank you, Dan. Overall, fourth quarter sales were $169 million, an increase of 15% from the fourth quarter of 2021. Gross margin for the quarter increased to 31%, as compared to 26.7% a year prior. By product group, power solutions and protection sales were $82.1 million, up 39% from last year's fourth quarter, primarily led by an $11.1 million increase in sales of our front-end power products, 4.1 million of higher sales of industrial power products, and 2.8 million of growth in EV sales. Of these increases, 10.5 million related to invoicing of premium charges on materials. Gross margin for this group was 33% for the fourth quarter, a 210 basis point improvement from Q4 21, largely driven by a favorable shift in product mix, the benefits of pricing actions taken over the past year, and some favorable impact from FX. Our power solutions and protection group had a book-to-bill ratio of 1.0 during the fourth quarter of 22 and a backlog of orders of 356 million, an increase of 48% from the 2021 year end. Turning to our connectivity solutions group, sales were 47 million, an increase of 8% from last year's fourth quarter. mostly due to the continued rebound of commercial aerospace and strong sales through our distribution channels. Military sales continued to be challenged this past quarter, resulting in a 12% year-over-year decrease in the defense end market. Gross margin for this group came in at 23.6% for the fourth quarter of 2022, down slightly from 23.7% in the fourth quarter of 21. Throughout the majority of 2022, this group had been impacted by inefficiencies related to a ramp-up in the workforce needed to accommodate the rebound in commercial air. The connectivity solutions group had a book-to-bill ratio of 1.06 during the fourth quarter of 2022 and a backlog of orders of 119 million at December 31st, an increase of 40% from the 2021 year end. Lastly, our magnetic solutions group had Q4 sales of 40.1 million, down 10% from last year's fourth quarter. Gross margin for this group improved significantly to 29.5% in the fourth quarter of 2022 from 22.9% a year prior. Margins for this group benefited from pricing actions taken over the past year and a favorable shift in exchange rate of the Chinese renminbi versus the U.S. dollar, which lowered our labor costs in China versus 2021. Our magnetic solutions group had a book-to-bill ratio of 0.49 during the fourth quarter of 2022 and finished the quarter with $91 million worth of orders and backlog, down 37% from the 2021 year-end level. The reduction in backlog for our magnetics products is largely driven by lower demand from networking customers as they work through their inventory on hand. At the consolidated level, there were $27 million of orders that were scheduled to ship in Q4, which did not, primarily due to component availability. Our selling general and administrative expenses were $25.1 million, or 14.8% of sales, up from 21.9 million in the fourth quarter last year, but down slightly as a percentage of total sales. Within SG&A, the primary increases were related to salaries, fringe benefits, and rep commissions. Turning to balance sheet and cash flow items, we ended the quarter with a cash balance of 70.3 million, an increase of 8.5 million from the 2021 year end. Our working capital increased by 28.1 million during 2022. We saw a 20.1 million increase in our accounts receivable balance. Our DSO were 58 days at December 31st, 2022, compared to 54 days at December 31st, 2021. Inventories increased by 33.1 million from last year end. While there was continued investment in inventory during the second half of 2022, it was to a lesser extent compared to the first half of 2022. In addition to changes in working capital, other items impacting cash flows for full year of 2022 included capital expenditures of $8.8 million and our continued dividend program where we made payments of $3.4 million. Cash paid during 2022 for income taxes was $14.6 million, and interest payments totaled $3.4 million. I'll now turn the call over to Baruch for additional color and outlook on 2023. Baruch? Yep.
spk26: Thank you, Lynn. Hello, everyone. Nice to speak with everybody. Looking back at 2021 and 2022, We recognize the tremendous amount of contribution and work that has gone into getting Bell to this point in our journey. This has really been an all hands on deck efforts across our global team members and locations. As Dan mentioned, we're happy to close out 2022 with the wind at our backs and head into 2023 and beyond with a sharpened sense of focus and direction in our pursuit. As we look out to 2023, we see a good amount of opportunity for both growth in certain areas and margin improvements. While managing continued supply chain constraints in certain components, inflationary pressures, COVID restrictions, easing in China, and our previously announced facility consolidation plans, we will continue to pursue growth in certain end markets, lean out the cost structure, and position Bell to capture the long-term positive tailwinds related to our products, broadly speaking. Pivoting to backlog for 2023, as we enter 2023, this quarter in 2024, we saw a sub one book to bill for the first time in a while as we've been working on reducing our lead times and getting deliveries out the factory. We're working with our customers to get this rationalized as it related to their needs today versus what they thought six to nine months ago. While we see some softness in demand in consumer facing end markets, We believe the larger factor here is customers needing to work through their high levels of inventory and adjusting to the reduction in lead times across most of our products. This is particularly the case for magnetics. On the other hand, we are seeing robust demand in the areas of commercial, aerospace, military, and e-mobility. To that end, and as noted by Lynn, we're seeing a rotation in contribution of where the bookings are coming from. Power has been steadied. connectivity is growing while magnetics are slowing on new orders that when all added together, our backlog is relatively flat. In short, lead times in certain areas are coming down and other areas increasing, and bookings that are coming in are higher quality on margin. Using backlog as a basis for our assumption on 2023 revenue outlook, first we want to level set on the starting point, as it was alluded to earlier in some of the commentaries. 2022 total revenue was $654 million. But when normalized for the raw material surcharge invoicing, revenue was closer to $622 million. To the best of our knowledge, and using the $622 million as the base, we expect top line to be flat to plus or minus low single digits on either side of that, given the number of moving pieces in either direction. to give you a little more insight and highlight a few key areas. Our commercial air business should be one of our leaders of growth this year, given some of key positions we are on, coupled with overall growth. Our key acquisition of RMS in early 2021 has set us up to capture this growth cycle in a very nice way, both on the top line and margin side. Q4 direct sales into commercial air customers were 8 million, up 55% from Q4 2021. And we expect sales to grow in 2023 to be in the double-digit territory. This is a great testament to our team and their ability to strengthen Bell's position on the commercial aerospace end market. On the defense side, following a few years of low order volumes, the current global affairs in Europe have been beneficial to us. We expect top-line growth in the defense segment to be in the double-digit zone for a full year 2023 as well. For both commercial air and defense, we have spent a lot of time improving them last year as they sit within our connectivity group. As you recall, we have previously spoken about the significant ramp in headcount that occurred in Q1 2022 that adversely impacted our margins throughout last year. For 2023, we expect to have a meaningful reversal here and see the team's hard work pay off. On the mobility side, we nearly doubled growth in 2022 over 2021 to $20 million. We would not be surprised if we had another double again in 2023 and have committed new CapEx dollars in 2022 to expand production and meet this robust demand. We also doubled down on strategic investment in InnoElectric, where we now have a one-third minority stake, with the ability to expand our ownership if certain profitability thresholds are attained. InnoElectric consists of a highly skilled engineering team focused on onboard fast charging technology for the commercial vehicle use. They're very similar to Bell in terms of customers and market focus, which we believe is the right place to be. Through this partnership, we expect to jointly grow and channel real revenue synergies. We want to welcome our new partners and are looking forward to an exciting road ahead. On the networking and data center side, we remain bullish in the medium term, given all the secular tailwinds in the NM market. But for 2023, we will see an overall slowdown as it digests the rampant growth since 2020. We serve this market out of both our power and magnetics group. The supply chain in magnetics has smoothed out, given there are fewer components in this product set, and this is where we are seeing the reduction of the longer-term backlog. Lead times for our magnetics products are about currently running 20 weeks, which is half of what they were this time last year. On the power side, and given the constraints on CERN, I see demand here remains robust. So net-net, this market is a tale of two cities for us in 2023, but strongly believe in the medium to long-term prospects of this business. This also is a testament to our product strategy diversity. Of course, while no business is immune to adverse economic cycles, our business is highly diversified and aligned with secular trends and megatrends in CERN areas. Looking ahead, we see continued strength in Bell as the breadth and depth of our portfolio, our deep customer collaborations, cost takeout initiatives, and doubling down in key areas underpinning our profitable growth. For Q1 2023, it's off to a good start with strong January numbers. Today, we believe Q1 2023 will be up mid to high single digits over Q1 2022. We expect better performance on the margin side as well compared to Q1 2022, though down from Q4 2022 due to the usual seasonal impact from the Chinese New Year to our business. For 2023, we're also focused on getting our previously announced consolidation plans to fruition while continuing to look for areas of improvement. To sum it up, We're excited about 2023 and believe we're in a great position to perform well due to our focus on continuous improvement and diversity of product offerings and end markets, even with an uncertain macro backdrop. With that, I'll turn the call back over to Dan. Dan?
spk22: Claudia, can we open up the call for questions, please?
spk31: Okay. Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from Theodore O'Neil from Litchfield Hills Research. Please proceed with your question, Theodore.
spk05: Theodore O' Thank you and congratulations on the good quarter. A couple of questions about InnoElectric. Not clear, is this a customer or are you selling product to them or both?
spk26: So they are a manufacturer of a product. They have a complementary product set. It's its own business. We took an equity stake in the business, and we think we bring a complementary skill set on the operations and business side of it in terms of sales and marketing, customer connectivity, and manufacturing side that would be additive. They have a great product set with a lot of nice software and packaging capabilities, but it is an ownership stake.
spk22: Just a little bit more clarification. I wouldn't call it a manufacturer at this time. We see it more as a technology product portfolio. They're in the process now of building up their sales. So they're at the initial stage. We felt very strongly that their product portfolio will align very nicely with our product portfolio going forward. So for us, it was more of an extension of our R&D and their R&D capabilities. and how we believe that they have the best products going forward in the EV marketplace where we participated.
spk05: Okay, that makes sense. And what sort of milestones are you looking for to take further investment stake in the company?
spk26: Yeah, I'd say it's really a revenue and certain profit thresholds will be the key guiding post there.
spk05: Okay. And Farouk, you mentioned sort of leveling out the revenue for this year and talking about how there was, you know, expedited costs, et cetera. There was about $32 million of revenue in the year. I would have thought those would be like super high margin part of the business. Was it not?
spk26: No, it's not margin. It's actually lower margin than our kind of, you know, kind of gross margin. So I would say it actually brings us down as a percentage of sales. But, you know, these are not intended to be a high margin money making thing. This is really a convenience expedite fees trying to get product out the door, partnering with our customers and paying, let's say, you know, unnatural fees just given the times we're in. So, no, they're from a percentage of sales that they're actually dilutive.
spk05: Okay. Okay. And Lynn, the $27 million in orders that didn't ship due to component availability, is that in some specific area?
spk30: That's, it's really across the board, Theo. Yeah, probably largely in power and magnetics. Not so much on the connectivity side.
spk04: All right. Thanks very much. Thank you.
spk31: Thank you. The next question comes from Jim Ricciuti from Needham & Company. Please proceed with your question, Jim.
spk20: Hi. Thank you. Good morning. I just was hoping to get a little bit more color on the Q1 outlook. Are you assuming that there's still this relatively high level of raw material surcharges in the quarter? And then is this a case where you see that gradually dissipating as we go through the year and eventually, you know, going away Q2, Q3?
spk26: Yeah, I would say, you know, we start really seeing this in a noteworthy amount in Q2 last year. We thought it would slow down into Q3, Q4. It actually didn't. So it's really Tough to predict that, but we don't think they're going to be around here, because these are not part of the normal way of doing business. As for Q1, we are seeing still some PPV surcharges in there, but it's really hard to take a guess at what that would be, so we generally are not going to try to guess it, given that we do know this is not usual.
spk20: Got it. You know, you've given us some percentage growth in e-mobility. I may have missed it, but have you been able, did you quantify the level of e-mobility sales in the quarter? And, you know, what I'm trying to get to is how we're thinking about the outlook for this business, which clearly it sounds like this is one of the areas of the business that you see some pretty good growth opportunities as you look at not only the current quarter, but further into 2023.
spk30: Yes, so Jim, I can take that one. So e-mobility sales for Q4 were 6 million, and that was up from 3.2 million in last year's fourth quarter. And just to clarify, we did have additional sales out of our e-mobility group throughout the year, but these numbers are just looking at products that go into actual EV end applications. So $6 million for Q4 versus 3.2 in last year's Q4. And on an annual basis, it was right around $20 million versus $10 million last year.
spk20: And just with respect to the line of sight you have in this business, it sounds like this is an area of the business you feel still has some pretty good growth prospects for this year. Is that fair to say?
spk26: Yeah, I think we do have a big growth process for this year. I think, you know, it would not be, you know, we definitely see the potential for it to double again this year. We have committed CapEx dollars to expand our production capacity. And I think we just ideally need to get a little bit of help from the component shortages side that will help us to get that stuff out the door. So it's a very rapid growing line for sure. I don't know, Dan, if you have any more inside of that, but that's kind of my insight.
spk20: Nope.
spk26: Nope.
spk20: Got it. And just on the magnetic solutions group, there obviously are some puts and takes in that area. And I guess what I'm wondering is, do you have a sense as to when some of these customers will be working through the inventories that they have And I have one quick follow-up. Thank you.
spk22: Okay, on that one, I think we deal a lot with the networking people. And again, their hands are tied with basically they can't get power supplies in from us because of the ICs. So we have customers that are expediting fees to us. On the other hand, are canceling magnetics from us because we can't get the ICs in properly. We still think there's a long lead time out there, but to flush out the inventory for the magnetic side, we think it'd probably be at least six months to nine months. I mean, six months, probably best case. Nine months, worst case.
spk20: Got it. And the follow-up to that is just you're still seeing pretty good demand, clearly, on the power side from this segment of the market. How do we think about it? you know, the potential that as things begin to normalize, you see the level of demand in this part of the business slowing a bit?
spk22: Again, you know, I think the sales, you know, because of the IC constraints, I think, again, our backlog, I think the difference we see now is instead of, you know, a buyer gives us four orders during the year, the buyer now gives us one order a year. So we spent a lot of time more focused on the backlog where that's staying compared to the bookings. And for the power side, the backlog is pretty strong. We do think we do have a lot of NPR that is going on. With the acquiring of CUI, that's been a real growth engine, plus EV that's really leading the sales growth, we still think that power has great opportunities going forward from a growth standpoint.
spk09: Thank you.
spk31: Thank you. The next question comes from Hindi Susanto from Gabelli Funds. Please proceed with your question, Hindi.
spk15: Good morning, Farouk and Lynn. Good morning, Hindi.
spk10: Good morning.
spk07: Farouk or Lynn, can we go over the math for commercial aerospace market, like where the current run rate is versus the pre-pandemic level? And then I think is it reasonable to assume that based on past acquisitions, when things go back to the baseline, your new baseline should be higher than the pre-pandemic level?
spk30: So on the commercial air side, we finished the year, and these are direct sales decisions. into customers, so this excludes anything going into commercial air-through distribution. Year-to-date sales were 31 million. That was up from 18 million last year, so a 75% increase. If we look at the pre-pandemic levels, it was around 40, 45 million in that range, and that was for our cinch business and RMS combined. So we are not back at that level yet. We certainly hope to get past that. in the next year or two, I would say. Farouk, I'm not sure if you have any additional comments here.
spk26: We'll surpass. And to your point, Hindi, I think there'll be a new baseline. So I think that number, the 45, is kind of the three, four-year-ago baseline. So I do think we're discovering what that baseline is.
spk07: Okay. And then similarly, for the defense market, would you be able to share what the current run rate versus historical baseline?
spk14: Sure. So for the military market, so that was around $38 million for the year.
spk30: And that was down slightly. It was down about $1.5 million from the prior year on a year-to-year basis. I know that military has been running low the last few years. I don't have the historical view at hand, you know, looking back to, you know, 2019, 2020.
spk22: Let me see. I can, I think, I can help you, Lynn, if you want. If you go to 220, defense was 34 million. 21 was 32 million. And then I have $30 million for 2022. Based on your email, so I assume it's correct.
spk07: And then one additional question. On the data center market, any expectation how long customers will digest their inventories? Some companies... share expectation that there may be some turnaround or return to growth in the second half of the calendar year 2023, whether you have any type of that market view?
spk22: Maybe I can handle that one. On the data center market, three or four years ago, it was a substantial market for us where we supplied people like Facebook and Google. However, during the price pressures we saw in that business, It wasn't a portfolio that we thought made sense for us. So for now, it's become more of a niche market in this area, and we are focused on a lot of other markets where we have better margins. But again, the cloud is not what we consider networking from our standpoint. I see. Did that help you?
spk07: Yes, I think that's helpful. Any information on the current ground rates? for the data center market?
spk22: I can't say. I don't have that breakout. But I don't think it's enough to move the needle substantially. I think we maybe have three or four key, I mean two or three, I'm sorry, three or four key customers in that marketplace.
spk06: Okay.
spk22: But none of the big boys. Again, not Amazon, not Microsoft, not Google or Facebook. I see.
spk08: And then any insights on the networking market?
spk26: Hindi, is your question about how big our exposure to the networking data center is?
spk07: No, like the state of the networking market. I think in a magnetic networking, customers are working down on their inventories. So whether there's any outlook like when customers will fully digest their excess inventories previously on the data center market and then now in the networking market.
spk22: But I think it should be reflective. I think data is the same as networking where people are looking. You know, in our industry, everybody says six months. So anytime there's a problem, they say six months. So I think everybody's expecting to flush out their inventories over the next six months. Again, the problem was that they brought in too much materials, but they didn't have the ICs to build the material. So now as they get the ICs in, they're working down the other materials, so the ICs and the other materials will be in line with each other. From what we understand... Go ahead. I'm sorry. Sorry, Dan. Go ahead. Nope.
spk26: Nope, that's it. Yeah, I was going to say, Hindi, so just to maybe thread the needle, from an end market perspective, You know, every kind of the public things that we're reading, it seems to be, you know, going okay. But we supply that end mark from two different sides of the house. The magnetic side, as you point out, too, is a more simple product set. That supply chain is smoothing out. So we were able to get them and deliver products to them, you know, at a faster rate than they're able to get the power supplies that they needed. So they're sitting there with, you know, kind of a little over inventory on the magnetic side of us. but the demand is still there in the power. So it's a little bit of a nuanced discussion because it just depends what product is coming in. So it's not a market issue as much as it's what's the product that's going into it.
spk07: I see.
spk15: Okay, that's very helpful. Thank you, Dan, Lynn, and Farouk. Thank you. Thank you.
spk31: Thank you. The next question comes from William Kim from Presidio Asset Management. Please proceed with your question, William.
spk03: And good job, Christine, to improve those margins. I was wondering, going forward, could you guys provide a cash flow statement for the quarterly earnings releases? And if you could give us an idea of what free cash flow was for the year and the quarter.
spk16: Baruch?
spk30: Yeah, so we can certainly look to do that for going forward.
spk14: forward and let me just, uh, so I can give you the, uh, the year.
spk30: So cash flows from, uh, provided by operations for the year was 40.3 million.
spk14: And then we had 8.8 million of CapEx. So if your, if your definition of free cash flow is, uh,
spk30: cash provided by operating less capex, it's about 31, 32 million.
spk09: Okay.
spk03: And I guess, you know, it is, I'm assuming there's some more capital usage there. Is that going to continue to be a significant use of cash as you grow? And, you know, how can we think about free cash flow conversion, I guess, from an EBITDA perspective and a net earnings perspective? considering that it seems that free cash flow is significantly lower than even your net earnings numbers.
spk26: So, you know, a lot of work last year and 2020 has gone into the P&L side of it, I would say. So trying to get our EBITDA up and just overall profit margins. And we saw that sequentially happen through the year. That's kind of step one. Obviously, we saw the cash consumption and working capital investment go in there pretty rampant as we think about inventory and some of the issues going on there. So I would say we have an elevated working capital number. So in normalized times, it should not be taking that kind of cash suck, if you will. Historically, we've been around 10 million of capex. which is, again, in regular times about right for us. This coming year, we'll spend a little bit more given a lot of the consolidation work going on. But, you know, and then obviously we have our interest rate and we have our cash taxes, which I'd probably say our dividends are pretty probably steady. Obviously, we pay down our debt and interest rate environment. We all know how that's going. But I would say the biggest thing is we're trying to get our profitability up and margin improvement, which we have been continuing and will continue to do more of. I think we need to work on slimming down a little bit our inventory position, and we think that will occur as things normalize a little bit.
spk03: So it should improve. When you say normalize, are you talking about a normalized working capital environment, or are you talking about kind of a slowing growth environment?
spk26: I would say, you know, the easing of the supply chain and availability of materials. We have, you know, as we think about WIP and, you know, finished goods that we're supposed to ship, as Lynn, you know, was talking about, we had $27 million of orders that were scheduled to ship, but we couldn't because potentially we had some missing pieces or our customers didn't have the other parts of the bill. So we end up sitting on bigger amounts of inventory. So As the supply chain eases up and becomes a little more predictable where you can build, buy your raw materials, make it, and send it out, that will bring it down. Obviously, we've put a lot of money in our inventory the last couple of years, and partially because of the disruption of the supply chain.
spk17: Understood. Thank you.
spk31: Thank you. The next question is a follow-up question from Jim Ricciuti from Needham & Company. Please proceed with your question, Jim.
spk20: Thank you. I'm wondering if you could perhaps size the impact of the dilution to gross margins in the quarter from some of the material surcharges that you alluded to.
spk30: I think from a gross margin perspective,
spk14: it's less than 100 basis points.
spk30: It's, you know, so it's not a, that's from a gross margin perspective.
spk26: Yeah, I think it's 10 bps. Yeah, so you're right, 10 bps. Our gross margin would have been higher as a percentage of sales if that was out.
spk15: Got it.
spk20: Maybe you could also talk to the pricing environment and maybe more broadly. I think Bill has talked about going through the product portfolio, looking more closely, not only at pricing, but perhaps going through the skews and seeing what makes sense and what doesn't make sense. I wonder, as we think about the way you're characterizing the year, to what extent do these pieces play into the overall outlook for the business? Baruch, do you want me to take that?
spk22: I'll do all the overall pricing. Again, very simple in our industry. As longer lead times go out, pricing tends to be firmer or higher. As lead times come down, pricing does become a little bit more competitive. We're just starting to see it in some of our product lines. We don't think there'd be any pricing pressure overall based on past history. If you look at our military aerospace business plus our power business, we think the pricing overall should be pretty firm or strong. On the magnetics and the circuit protection group, they might face pricing pressure that they haven't seen post-COVID going forward. And it's our major focus now is if we do face that, are we getting our cost in mind to address it properly? So we're doing everything we can to maintain and improve our current margin structure. And we know that we have to do a better job of really streamlining the organization and So when these price pressures do come in, then we can handle it a lot better. And, again, not walking away from something because of lower margins. Ruth, can you add some more color to that?
spk26: No, I think that covers it. Obviously, you know, we're focused on profitable growth, you know, with healthy margins. We understand that it's a price and a cost gain. On the price, we talked about it already, I think, a lot last year. We're doing a lot on the cost side of it. At least if we do get those phone calls, depending on what part of the business is and the profitability profile is then noted, we will have a more cleaner cost structure to make an educated decision on, you know, where do we concede, where do you not. In some cases, maybe the answer is not. Maybe in some cases, we are sole position. And then that's a different discussion than maybe some of our commodity-based stuff. So because of the diversity of our portfolio, Jim, I don't think it's a one-size-fits-all. But I think the guiding post is get our cost in order, add value to the customer, and try to resist price downs. But we know we're not going to be successful at 100% of our SKUs.
spk20: Got it. Now, thank you both.
spk31: Thank you. At this time, there are no further questions. I'd now like to turn the call back to Mr. Dan Bernstein for closing remarks. Thank you, sir.
spk21: Thank you, Claudia.
spk26: clarification. I misspoke. When the question was asked of the impact of the surcharges, I had said 10 bps on gross margin, but it was really closer, you know, it was a little bit under 100 bps. So our gross margin would have been higher if it was removed. So just a point of clarification there. Sorry, Dan. Go ahead. No problem.
spk22: Thank you for joining our call today. We're looking forward to report our results in April. I wish everybody a good day and a nice weekend. Thank you.
spk31: Thank you very much. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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