Moog Inc.

Good morning.

Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of July 24, 2020, our most recently filed Form 8K filed on July 24, 2020, 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 remarks. For those of you who do not already have a document, a copy of today's financial presentation is available on our investor relations webcast page at www.moog.com. John?

Thanks, Anne. Good morning. Thanks for joining us. This morning we report on the third quarter of fiscal 20 and provide some insights on the remainder of the year. Overall, it was a good quarter against the backdrop of a very challenging environment. This result is a tremendous credit to the dedication of our employees around the globe. We believe our results today should reassure our investors around our two key messages. First, short-term strength from our diversity, and second, long-term value from our fundamentals. As we look forward, our priorities remain unchanged. First and foremost is the health and safety of our employees and their families. And second, to continue to meet the needs of our customers and others. As usual, I'll start with the headlines. First, this was the COVID quarter, perhaps the first of several. We came into the quarter believing our defense, space and medical businesses would be strong, industrial would be pressured and commercial aircraft would be hardest hit. Looking back, the quarter unfolded pretty much as expected. Second, Our underlying operations performed extremely well under very difficult circumstances. Despite the precipitous drop in sales, adjusted net earnings of $30 million and adjusted earnings per share of 93 cents remained very respectable. In addition, free cash flow of $90 million was one of our best quarters ever. Third, we incurred various charges associated with resizing our business and revaluing assets as a result of COVID. We booked a total of almost $60 million in charges, including severance, write-downs, and asset impairments. Over 90% of this charge is non-cash. Fourth, on a very positive note, our activities to curtail spending and improve cash flow resulted in lower leverage and improved liquidity at the end of Q3 relative to Q2. And finally, given our healthy financial position, we're reinstating our dividend this quarter at 25 cents per share. In summary, Q3 was a very tough quarter but we managed through it well and delivered strong results. All our facilities continued to operate and the majority of our staff transitioned to working from home. Our diversity across markets, our actions to reduce expenses and improve cash flow, and the commitment of our employees means that today we are more financially secure than we were three months ago. Now let me move to the details, starting with the third quarter results. Sales in the quarter of $658 million were 11% lower than last year, the result of the decline in our commercial aircraft business and weaker industrial markets. Taking a look at the P&L, our gross margin was down on the lower sales and inefficiencies resulting from our new work practices. Our dollar spend in R&D and SG&A were lower as cost containment initiatives were swiftly adopted. Interest expense was marginally lower and we had a very low adjusted tax rate. We incurred $58 million in charges associated with the sudden change in business conditions. Excluding these charges, adjusted net income was $30 million, down 34% from last year, and adjusted earnings per share of $0.93 were down 29% from last year. Fiscal 20 outlook. As we enter the fourth quarter, the macroeconomic environment seems more predictable than it was 90 days ago. We're coming to accept our changed reality, but that new normal still includes significant uncertainty. Therefore, we believe it would be inappropriate to provide detailed guidance for our fourth quarter. However, we can offer the following color on our sales outlook. We believe our fourth quarter will look somewhat similar to our third, with continuing strength in our defense, space, and medical markets, further weakness in industrial, and little or no improvement in our commercial book of business. Now to the segments. I'd remind our listeners that we provided a three-page supplemental data package posted on our webcast site. We suggest you follow this in parallel with the text. Beginning with aircraft. Sales in the third quarter of $249 million were 26% lower than last year as a result of the pandemic. On the positive side, military sales were up in the quarter. We saw a nice growth on the F-35 program as well as in our portfolio of funded development work. Partially offsetting these increases was a decrease in foreign military sales which were particularly strong last year. In the military aftermarket, we had a blowout quarter. We had strong backlog across the portfolio coming into the quarter and benefited from transferring some of our production staff from commercial programs over to military jobs. On the commercial side of the house, we felt the full brunt that COVID had on the airline industry. Sales to our OEM customers were down over 60%. We saw dramatic decreases across the portfolio. The overall decrease was larger than we had expected, a combination of declining production rates at the OEMs, but also their actions to reduce their inventory levels. In the aftermarket, sales were down almost 50%. This was slightly better than what we expected based on flight data. We benefited from a healthy backlog coming into the quarter, and also from the relative strength of our freight customers. Aircraft margins. Adjusted operating margins in the quarter of 4.5% were primarily the result of the significant change in commercial volumes. In addition, we suffered some loss of efficiency in our production facilities, the result of precautions taken to protect our employees' health. During the quarter, we took action to reduce our commercial operations across the globe and incurred costs of $55 million. This includes severance, costs, asset impairments, and various other write-offs, all attributable to the structural decline in our commercial business. Aircraft fiscal 20. The situation in our two major markets is more stable today than it was 90 days ago. We still find ourselves dealing with uncertainty. The military side of our business has remained strong, and we anticipate this will continue into the fourth quarter. Our factories continue to operate, and our customers continue to need product. On the commercial side of the business, the situation remains volatile. The OEMs have announced new production schedules for their major programs and we have adjusted our staffing to align with their future long-term demands. However, in the short term, we continue to struggle with significant demand volatility as our customers reduce their inventory and preserve cash. This destocking was a significant factor in our third quarter and is likely to continue to some extent through this coming quarter. In the commercial aftermarket, increasing COVID cases around the world over the last month is delaying the recovery in flight operations we might have expected. Our business is predominantly on wide-body airplanes, and the dearth of international flights does not bode well for a meaningful recovery anytime soon. Overall, this continued volatility makes it difficult to predict what will happen in this coming quarter. At the moment, our assumption is that our military business will remain strong, but we'll come down a little from Q3 on marginally lower aftermarket sales. We anticipate that our commercial OEM sales will be slightly higher as destocking actions abate, and we're hopeful that the commercial aftermarket may tick up slightly. Turning now to space and defense, sales in the quarter of $184 million were 6% higher than last year. Similar to last quarter, the growth is all coming in the space market, with sales up 33% over last year. We continue to see nice growth in our hypersonic development activity, as well as strength across our portfolio of products including avionics and mechanisms. We also had higher sales on various NASA programs with activity on both the Orion crew vehicle and the Space Launch System up from last year. Defense sales were 7% lower than last year, primarily the result of lower activity across various missile programs. Sales of slip ring products on a range of flight vehicles were also down from a year ago. Sales into vehicle applications were about in line with last year, while naval and security sales were slightly higher. Defense, space and defense margins. Adjusted margins in the quarter were 12.3%, down from a very strong 13.9% a year ago. Last year, we had a particularly favorable mix where this year we experienced some inefficiencies as a result of our changed work practices. Space and Defense Fiscal 20. So far, the impact of COVID on our space and defense business has been somewhat muted. Changes to our production facilities have kept our employees safe and healthy, and our engineering crews have been able to advance our development jobs while working from home. As we look to the fourth quarter, we believe this run of stability will continue, and the fourth quarter should be somewhat similar to the third within the normal quarterly fluctuations in this business. Turning now to industrial systems, sales in the third quarter of $224 million were down 3% from last year. However, adjusting for Forex and the sales of our GAT acquisition, organic sales were down about 6%. Similar to last quarter, below the top line number, there were significant shifts in the mix between our major markets. Sales into energy markets were up slightly on the acquired sales from GAT but down organically. The continued downward pressure on oil prices is undermining investment and exploration, suggesting a recovery in our energy market is unlikely in the near term. Sales into industrial automation applications were down 17%. Capital investment was already slowing pre-COVID as the global economy started to cool. The impact of the pandemic has served to both accelerate this drop in capital spending and exacerbate its impact on our industrial automation business. Sales into simulation and test applications were also down in the quarter. In particular, our flight simulation business has softened as demand for pilot training has dropped. To finish on a more positive note, sales into our medical markets were way up in the quarter. Sales of components used in breathing aids were higher on surging demand. and sales of our medical pumps continue to grow in support of COVID requirements. Industrial systems margins. Adjusted margins in the quarter were 9%. The continued shift of our mix away from our industrial automation business is having a negative impact on our margins. In addition, the sales from our GAT acquisition are at relatively low margin due to first year acquisition accounting effects. Industrial systems fiscal 20. accurately forecasting our industrial business continues to be difficult. As we look to next quarter, we believe the underlying macroeconomic trends will continue to pressure our business. Sales into the energy, industrial automation, and simulation and test markets will continue to experience downward pressure, while sales into medical applications should remain healthy. Shifting from the macro to the micro, bookings through the third quarter were marginally below our billings, signifying a declining outlook. Taken all together, we anticipate that sales in Q4 will be slightly lower than Q3. Summary comments. At the time of our last earnings call, we were heading into a storm. We had hoped that Q3 would be the eye of the storm, the COVID quarter, and Q4 would be the transition back to a more normal business environment. That is clearly not the case, and today we find ourselves planning for several more COVID quarters to come. During Q3, we took dramatic action to reduce our spending and resize our business. These actions paid off. Today, our balance sheet is stronger than last quarter, both in terms of leverage and liquidity. As a result, we're reinstating our dividends and selectively starting to reinvest in our business. In the present environment, we believe our shareholders are best served by activities which preserve value today and create value tomorrow. We are committed to maintaining the right balance between our short-term financial strength and the long-term investments required to grow our business. Now let me pass it to Jennifer who will provide more color on our cash flow and balance sheet.

Thank you, John. Good morning, everyone. We had an incredibly strong cash flow quarter and we achieved these results during a time filled with uncertainty and pressures in some of our end markets. To ensure that we maintained our financial health during the crisis, We implemented company-wide initiatives that focused on cash conservation and liquidity. These actions directly contributed to our strong cash performance. Free cash flow in the third quarter was $90 million, up from $15 million in the first quarter and $12 million in the second quarter. Free cash flow conversion, adjusted for charges associated with the pandemic, was nearly 300%. The $90 million of free cash flow for Q3 compares with a decrease in our net debt of $92 million. During the third quarter, we did not repurchase any shares or pay a quarterly dividend. However, based on our strong cash performance and after just one quarter of suspending it, we have reinstated the dividend at $0.25 per share. Networking capital, excluding cash and debt, as a percentage of sales at the end of Q3 was 28.5% compared with 29.6% a quarter ago. The decrease largely reflects robust collections as well as increased receipts as the U.S. government raised the progress payment rates on its defense contracts. Customer advances also contributed to the improvement. Offsetting these sources of cash generation were a continued and expected buildup in inventories and a reduction in payables associated with lower spend. Capital expenditures in the third quarter were $17 million, down from a $27 million quarterly run rate in the first half of the year. We actively managed and prioritized our spend, focusing on compliance and business-critical projects. Depreciation and amortization totaled $22 million, continuing at levels from our first and second quarters. Our leverage ratio, which is net debt divided by EBITDA, decreased to 2.4 times from 2.6 times a quarter ago. The decrease in our leverage ratio was driven by our strong cash performance. Our effective tax rate, excluding charges associated with the pandemic, was 6.8% in the third quarter, compared to 23.1% in the same period a year ago. The lower rate in this year's third quarter primarily reflects an increase in foreign tax credit utilization associated with our fiscal year 19 tax return filing on a low earnings before income tax base. Cash contributions to our global retirement plans total $12 million in the quarter compared to $9 million in the third quarter of 2019. Global retirement plan expense in the third quarter was $21 million, up from $18 million in the third quarter of 2019. Our largest defined benefit plan is in the U.S. and has been closed to new entrants for more than a decade. We fully funded this plan in 2018, at which time we shifted our investment strategy to de-risk the portfolio. Accordingly, it's largely insulated from the recent market turbulence and we continue to be fully funded. The funded status also has remained stable for our international pension plan. At quarter end, our net debt was $883 million, inclusive of $106 million cash. The major components of our debt were $500 million of senior notes, $404 million of borrowings on our U.S. revolving credit facilities, and $82 million outstanding on our securitization facility. We have $654 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leveraged government, which is a maximum of 4.0 times on a net debt basis. Based on our leverage, we could have incurred an additional $620 million of debt as of the end of our third quarter. We are confident that our existing facilities provide us with adequate liquidity to successfully navigate through these uncertain times. We made significant adjustments to our major capital deployment activities in the third quarter. We have paused our M&A pursuits, had no share repurchases, suspended our dividend, and delayed certain capital expenditures. We also took measures to slow our incoming inventories to be in line with expected demand and took advantage of payment deferrals. In addition to these cash release measures, we've also managed expenses to mitigate the impacts to our operating margin. Over the past quarter, we've gotten more clarity around customer demand. We've resized the business and end markets in which we're facing significant and sustained reductions in demand, most notably in commercial aircraft. As a result, we recorded $58 million of charges associated with the COVID-19 pandemic. We incurred $5 million of severance charges and $54 million of non-cash charges. The non-cash charges include a $34 million impairment of long-lived assets, of which $9 million is a provisional charge on property that we're still in process of valuing, and a $19 million breakdown of inventory. Despite the increased level of clarity, we are still facing risks and considerable uncertainties remain. Our immediate financial focus will continue to revolve around cash preservation and cost management, while opportunistically resuming investments in a measured and balanced way. We will adjust our spending to suit the evolving landscape as we move into the fourth quarter and beyond. We are committed to ensuring that we have adequate liquidity during this crisis, protecting the long-term health of the company, and emerging financially strong and ready to capitalize on opportunities once the situation stabilizes. With that, we'll turn it back to John for any questions you may have.

Thanks, Jennifer. Anita, we'd be happy to take any questions now that come in, please.

Thank you, sir. If you would like to ask a question, please signal by pressing start one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press start one to ask a question. We'll take our first question from Robert Spingarn from Credit Suisse. Please go ahead.

Hey, good Good morning, everybody. Good morning, Bob. John, you said, and Jennifer echoed this, that you may have a little bit better visibility on commercial, not much, but can you talk to us about month-by-month trends, both OE and aftermarket, so going through the quarter just reported and then maybe what you've seen into July here?

Sure.

Let me do the OE side of the business. So the two main players, Boeing and Airbus, obviously are our two major customers. They came out over the course of the quarter with new rates on a go-forward basis. I think the numbers was Airbus was going to go from $10 a month on the $350 down to $6 a month, and Boeing was going to go from $14 on the $87 to $10, and then that kind of through the middle of next year, and then I think drop it to about $7 a month. and so we size our business with that kind of long-term demand in perspective. That's what we sized for that kind of adjustment that they were predicting. I think the thing that happened though this quarter as I mentioned at the call was they also engaged in a significant amount of inventory rebalancing or destocking or however you'd like to call it and so if I give you those numbers, 14 to 10 on the 8-7 and 10 to 6 on the 8-350, You might say, well, that's a 30% drop, 35% maybe drop in production rates, and yet our OE business was down 60% in the quarter, and that reflects the destocking. So we saw just a significant and much, much larger drop than we would have anticipated from the production rate adjustments that the major airline air framers were making. And we think that's probably likely to continue as we go into the fourth quarter. It's very hard, Rob, to actually know exactly what that's going to look like, because what happens is, we have either we have orders from our OEM customers and then they just push the orders way out or we don't have orders and they order on a short time frame they give us a long term forecast but they order on a relatively short time period and the orders that you expect just literally don't turn up and so I'd say the quarter was on the OE side reflected that it reflected a kind of a volatility that was you know today we look like we're pretty good and then tomorrow we get a push out that pushes things out by a year are you know we're expecting orders every two weeks for for new shipsets and then suddenly for a period or two you actually don't get them so it was volatile but the number was it was down 60% and I'd say that was pretty pretty fixed across the quarter you know we report on what this quarter looks like as we end up the year so I don't want to get ahead of that we're just a couple of weeks into the quarter but but I think we're anticipating that that kind of destocking would continue and so the downside of that is we've resized but we've resized for their long-term production needs and we're not resizing for the short term that might be a quarter or two whether it's just much less demand and so we still end up carrying a little bit of extra costs that we don't in theory need but we will need in September, October, November whenever that comes back.

Before you go further, just quick to clarify, you said 14 to 10 on the 8-7. and that would be 30%. The de-stocking takes you down. I know you're not, the 60% is not necessarily specifically the 8-7. How do we then factor in the continued decline later to 7 a month?

Yeah, so we've adjusted our staffing to probably, you know, so that's not out at the present thing that's projected to be July of next year. And so we want to make sure that we've got the staffing to make sure that we can keep our and so on. So, you know, I think we'll be able to maintain that 10 a month through that period of time. So that's, you know, that's 12 months away. And with attrition and some other natural things, I think we'd be able to adjust. It's always easy, you know, if you know that in 12 months time there's going to be a 30% cut in the rate, that's something that you can adjust to. It's the precipitous fall-off that was so difficult to, you know, that required such difficult action. So we're staffed to make sure that we can meet their needs. translated to exactly 10 a month from us, so there's a little bit of fluctuation there. There's also a little bit of timing advance on it, and again, they're holding a certain amount of inventory. But we're feeling comfortable that we're sized to meet there for the next 12 months, and then we'll make sure that we're properly sized after that.

Okay, and then on the aftermarket.

Yeah, the aftermarket pretty much was down 50%, and I'd say it was fairly constant as we went through the quarter, and right now I think it's pretty much in that same in that same zip code. We monitor the amount of returns we get. There's a couple of elements to it. There's the amount of returns we get, and then there's the spares that we sell. And so we're monitoring those on a weekly basis. And right now, it dropped to about half. That's kind of probably better than if you look at flight ops that you might say are down 75% or 80%. But as I mentioned, we had a reasonably good backlog coming into the quarter, and the freight folks held up. and I think even if you're parking airplanes there's some amount of maintenance that you need to make sure you're doing if you're bringing them back on on the flight controls and so we're anticipating that you know I would have said a quarter ago we were hoping that the fourth quarter would be better and the first would be better again right now I'm not sure that I have any grounds to say that so we're thinking maybe the fourth will be similar to the third maybe there's a little bit of an uptick but hard to predict at this stage.

Okay and then just on the defense margins we're you know The decline that we saw, does this reflect COVID disruption? Is it development? Is it mix? And do these come back as COVID improves? I know it's a modest decline.

Yeah, so I think when you say defense, I think because the only margin that I think we provide is the space and defense margin. So as you know, defense over half of our aircraft is defense now as well. If you look at the margins year to date, actually they're exactly flat with last year. They're in the kind of high 12, 12.7, 12.8. And so I think it's just a reflection of a side shift in mix. We get margins move up and down. A very strong book of business on funded development. And there's no doubt there's some inefficiencies associated with the COVID activities that are going on that's probably pushed them down a little bit. but it's within the normals, what I'd call noise in that business. And as I say, year to date margins are holding pretty strong, pretty stable with last year.

Okay, and then just lastly for Jennifer on cashflow, you mentioned the strength in the quarter, receivables sounded like they played a big role there. How do we think about, is there any reversal from a working capital standpoint? Because I imagine some of your receivables benefit was not just collections, but lower new business. and so how do we think about that going forward and what is your CapEx for Q4?

So, yeah, we definitely had a very strong quarter from a working capital standpoint. Strong collections certainly led the pack. We also had customer advances that were really strong as well. In both of those areas, we will see that strength reverse as we go into the next quarter. However, we're still projecting to be cash flow positive into our fourth quarter. It will be moderating off the high level and the strength that we saw in Q3. We're going to continue to monitor the situation as we go on a very regular basis, and that'll be our guide for the spending patterns that we wind up choosing, and that goes for our capital expenditures as well. As I mentioned earlier, we held back on our capital expenditures to some very critical and necessary activities in the third quarter. We will selectively look to start reinvesting in some areas so that may increase a little bit. And again, it's going to be the guide of how our business is performing as to how quickly we're able to do that.

Okay. Thank you both.

Thanks, Rob. Thanks.

Thank you. And now we take our next question from Ken Herbert from Conaccord. Please go ahead.

Hi, good morning, John and Jennifer. Hey, John, I just wanted to first start off the restructuring charges you took in the quarter. I know obviously visibility is a challenge, but do you feel like you've effectively captured most of what you're going to have to do? And I know most of these are obviously in aircraft controls, but or should we expect further adjustments here maybe in the fourth quarter and into 21?

So we're hopeful that we've captured everything. Jennifer did mention in her text that we have the word provisional on our filings today and that's because one of the pieces is evaluation of the business and we're still going through the final elements of that before we file the queue. So there may be a marginal adjustment on that over the next week or so. And then as we look into the next quarter, we believe that we've got the commercial resized. Now, having said that, some of our customers are still looking at potentially adjusting their rates. So if the customers were to stay on some of the big programs, the A350, the A7, you know, that rate that we gave you a quarter ago, we're now adjusting it again. Perhaps that might precipitate something, but by and large, we think we've done everything we need to do on the commercial side. The industrial side, there's still a lot of volatility there. We described the energy business. Oil is not looking particularly strong, so that may continue to weaken. Our industrial automation business may weaken. And so we may continue to have what I call small adjustments in some of our facilities around the world. There was a little bit of restructuring in our industrial business this quarter. Some of that may continue into next quarter. but we're not anticipating a big number again in the fourth quarter or into next year like we saw in the third quarter. So I think it will be at the margin. There will be adjustments here and there to try and reflect more local conditions.

Okay, and as I think about the actions you've taken from a cost standpoint, how do we think about those in terms of just sort of running still to stay in place versus how much can actually contribute to sort of margin improvement as we start to think about coming off the trough in 21 and beyond?

Yeah, I think the way I would describe it is the adjustments that we've made, all of the things being equal, you know, our commercial business is down, well, let me do the commercial low east side. So the commercial low east side of it is down this quarter by 60%. On a run rate basis at the, you know, the March, the end, volumes that the OEs are predicting a year out it should be down 50% on a volume basis from what it was pre-19 back in 2019. And so our adjustments are designed to when you get to that stability that you recover the margins that we would have had prior to what's happened with COVID. So you get to margins that were equivalent to when you had production rates that were much higher back in 2019. Underlying margin improvement across the aircraft business is tied to the overall operational improvement program that we've described and that's continuing. But of course, in the course of the last quarter, that's taken somewhat of a backseat to liquidity issues and average issues. So that's where we would see fundamental margin improvements. What I'd say is the actions that we've taken when the production rate stabilized to get us back to margins pre-COVID and then the underlying set of activities that we've got to improve margins will continue in parallel.

Okay, that's helpful. And if I could, just finally, within space and defense, the defense sales were, if I remember well, just down slightly, maybe mid-single digits there. Was there anything in particular driving that or anything that maybe just slipped to the right? I know you called out maybe timing around some of the foreign military sales, but anything else you'd call out within defense that's non-aero related?

No, some of the missile programs were a little bit lower. but nothing of significance. I think it was, you know, over the last year we've seen significant growth in that business. Some of it is you've had some pretty high comps. So no, nothing unusual, nothing that we're concerned about at this stage. We still have good, strong hypersonics activity both on the space side and the defense side. and there was just some lower rates on some of the component shipments. So I don't think at this stage there's any trend. If it were to continue for a few quarters, I think we might want to discuss it a little bit more. But for the moment, I'd call it normal noise and that business has been very strong and so it's perhaps just coming off a little bit of a peak.

Great. All right. Well, thanks for the cover. I'll pass it back there. Thank you.

Thank you.

Once again, ladies and gentlemen, to ask a question, please press star 1. And now we take our next question from Michael Caramoli from SunTrust. Please go ahead.

Hey, good morning, guys. Thanks for taking questions here. John, maybe just quickly for some more clarification. The charges that you took in the aircraft control segment, I think it was almost $19 million of inventory write down. Could you maybe elaborate, you know, what specific, you know, just more details there, any specific programs, and then even the write down of the asset impairment, what that was tied to?

So, I offer some thoughts and I invite Jennifer to perhaps add additional color. So, both the inventory and the asset impairments are looking at the future size of the business, the future volumes in the business, and taking a look at the inventory and the assets that you have and then revaluating them, revaluing them on that basis. And so part of the inventory processes that we have, of course, is as inventory ages, you start to take some obsolescence charges on the inventory. And given the reduction in demand, inventory is going to age, if 8.7 is half of what it was and 3.50 is half of what it was, inventory is just going to age into that obsolescence process and so you get some inventory right down through that. and the assets, we have machines, we have lots of test equipment and stuff where we had assumptions around the utilization of that over the coming years. And again, if the business is dropped to half, the value of those assets is reduced accordingly. Jennifer, is there anything else you'd add to that?

Maybe just a little color on those on the inventory side as we take our review for charges there. We look at various things that can include design changes that can happen in a certain amount of time before we can no longer use that inventory. And customers have different requirements as far as some of the ages of the inventory that we're using on their products. So those are some of the things that get into our calculation when there is a delay in or a shift out in requirements from a customer demand standpoint. Got it. Yeah, and on the long-life assets, we certainly are looking at the recoverability. It really follows the accounting rules that we need to take into consideration from a recoverability standpoint. So we do that. We look at the future cash flows of these businesses over a certain amount of time that's prescribed by the literature to make those determinations on those charges.

Got it. And then maybe just segueing in with keeping the inventory in mind and sort of the aftermarket trends. You know, obviously you guys were a little bit more wide body exposed. We're seeing, you know, certainly some of the older legacy wide bodies, you know, just totally get scrapped. But we're also seeing dramatically reduced flying hours again with the international travel restrictions still in place. You know, how are you guys thinking about you know, sort of inventory obsolescence tied to some of those older planes, you know, even if there's parting out used and serviceable, does that keep your aftermarket, you know, maybe tamped down even more until we really see a big recovery in international travel and more utilization on those larger platforms?

Well, I mean, we hope that, you know, so we did our aftermarket is down 50% this quarter. I think most of us are hoping that this quarter was the nadir in terms of flight operations and if anything you know flights have been there's some more flights happening now not a lot more but a little bit more the freight business has continued and so we're feeling like the 50% that we did in Q3 we think that's sustainable into Q4 but and part of that is we've already assumed I mean all of those old triple sevens, four sevens, three eighties. I mean, they're already pretty much parked. And so we've, you know, that's already baked into what we're thinking. So we believe we've captured it, but it's, you know, it's somewhat of an unpredictable time right now, but we're watching it week to week and the third quarter played out like we thought. I'd have to say 90 days ago, I would have said, and we had this conversation internally, you know, multiple times with our aftermarket folks on the commercial side, I'd have been doing that. Why wouldn't we be down 80%, 75%, 80%? That seems like nobody's flying airplanes. But they went through it detail by detail with each of their customers line by line, and they were pretty confident we'd be down maybe 50% to 60%, and in the end, we were down just about 50%. So it's that same process that we're looking at as we go into the fourth quarter, and right now, we're feeling pretty comfortable that it should be somewhat similar to the third. but hopefully not significantly worse. I think site ops in the fourth quarter, at least at the moment, look like they're a little bit better than the third quarter. So that's what we're thinking.

Got it. And then just the last one, can you just give us an update on where you are with the Macs? I know you don't have a significant amount of content, but I think, you know, last call you were talking about, you know, kind of keeping that, you know, that production line, you know, a little bit warmer.

you know and you had some safety stock there you expected to drop off but you know where do you think that does that really you know drop off significantly now in the coming months well you know it's been down significantly over the last several quarters and I think as we look into the fourth quarter it's immaterial let me put it that way the sales on the max are immaterial in the fourth quarter so okay got it I'll jump I'll jump back in the queue thanks guys

Thanks.

Thank you. And now we take our next question from Kai Von Rumor from Calvin. Please go ahead.

Morning, Kai. Yes. Good morning, guys. So start with a green eye shade question. You know, the individual comments you made on commercial, excuse me, on aircraft add up to $281 million and basically you reported $249 million, so a difference of $32 million. but the other ones were pretty much spot on. How come the difference?

Okay, you're going to have to do those numbers for me again because I didn't catch all of those.

Well, if we do the bottoms up, you know, what you gave us about where commercial OE was, where military was, it looks like it adds up to 280 million and yet you reported 249. Is that right? Is this part of this? The inventory is a revenue reduction?

So you're saying the 280 number, Kai, where are you getting the 280 number?

From adding it up individually, what individual comments you made about commercial and military?

I apologize. Are you talking about the comments that we made last quarter or the comments that I made just now?

The comments you made just now. If this doesn't ring a bell, let's deal with it offline.

You talked about sales being better in the fourth quarter.

When you made those comments about the individual items, were you talking relative to the third? Yes. Okay. And then specifically on industrial, you know, I was kind of surprised that, you know, that the industrial, that the automation didn't look a little worse. And basically, given that there are no, you know, I mean, I know, you know, Textron, for example, in simulation closed a plant. You know, and energy, you know, even with GATT, I mean, the numbers look good. The last downturn, you got totally smashed. What kind of risk is there in those three businesses? Because you said, I mean, I think the guy, you know, the comment was you expected industrial to be a little bit weaker. You know, is down a bit 10%? Because, you know, any color you could give would be great.

Okay, Kai, your voice is very faint, so I think I heard it all, but let me try to answer it, and if I missed something, maybe you could repeat it. I think your question is, so you might have expected a more precipitous drop in our industrial markets on the automation side, on the energy side, and on the simulation test. I think you mentioned the Textron folks getting out of some of the simulation business. Yeah, so the industrial automation is down 17% from a year ago. That business, as we've kind of described in the past, typically it lags the consumer and then it takes more time, but it's kind of a slow lag into a reduction. We were already anticipating a reduction coming into the quarter, but most of our customers continue to take product. So a 17% reduction is pretty large. Is it likely to continue to weaken? I think that's what we are feeling. Our book to bill was slightly below one as I mentioned. But it's not a precipitous drop in terms of the book to bill. So coming into the quarter, we had a reasonable backlog, we had a reasonable book to bill in the quarter north of 90%. And so that's really where we start to do, that's the best predictor of what the next quarter looks like. Beyond that, how long it will continue to soften versus when we might see a recovery is always hard to predict. I think it will continue to soften for two, three, four, maybe four quarters yet to come before we start to see a recovery. That's the industrial automation. The simulation and test, clearly that's down. We had anticipated a couple of quarters ago, simulation might be an upper this quarter with additional training for the MAX, but that's down. The big guys at CAE and flight safety, though, continue to be reasonably predictable. And at the end, the true business at Textron, that was not a big player. plus the assumption is that you know the other guys pick up whatever they might have done so the fact that one of the small players exits hasn't affected the market and given the fact that we have pretty much the vast majority of the market it doesn't affect our volumes to a large extent it just reallocates them across some of the other customers so that's down and we you know again we don't think that that's going to get better in the next quarter or two and then the the energy business we had a little bit of acquired sales and I'd say the energy business just isn't going to get any better. I mean, it's been down for quite a while and you're right, we got slammed, it's a long time ago now, it's 2014-15, but at that time we had an energy business that if I rolled it all together in terms of exploration stuff, was in the 80 to 100 million dollar range and it dropped to 30. As we're here today, we're in that 30 to 40 million dollar range. We were in the mid-30s and so it never recovered. Even though oil kind of crept back up into the 60, 70 dollars a barrel range, we started to see little bits of recovery, but nothing significant. And so we're still very close to what I'd call the low point of the crash that we had back in 15 and 16. And that's why I don't think it can get better, but we're feeling like it's got some level of stability associated with it.

Very helpful. And then going to the balance sheet, is there any opportunity, the inventories were up particularly with the with the write-off. Is there any opportunity to destock your own inventories in the fourth quarter? And what about payables?

Yes. So as we're looking at inventories, that actually does present an opportunity. So I mentioned before the receivables and customer advances that were strong that will have some pressure into next quarter. We will see some opportunities in inventory. So as we've worked through this past quarter, we have had success in slowing our incoming inventories down. And that happened over the quarter. So earlier on, as you might imagine, there's a lag as we're waiting for clarity from our customers as far as demand goes. And then there's a further lag when we push it through our supply chain. So throughout the quarter, we did see some improvements in slowing the build of inventory. That should start to turn as we look into the next couple of quarters, and that'll push some of the pressure into the receivables as we're able to move some of that inventory.

Yeah, there was a big refocus of most of the purchasing supply chain folks onto trying to push inventory out. But what happened, Ty, is that as fast as we're trying to push it out with our customers, demand from our suppliers, demand from our customers was dropping even faster. and so our folks were chasing it, you know, they were running down a hill and they just couldn't run fast enough and so we're going to continue with that but we think, you know, it may take another quarter or two before we actually turn that tight. Our incoming receipts were down fairly significantly in the third relative to the run rate of the first half but not sufficiently down just to get ahead of the lower demand on the customer side and we have to be a little bit careful because, you know, we've got a lot of suppliers, some of them are smaller suppliers and we want to make sure that we're honoring contracts and we're working with our suppliers so that over the long term they continue to be partners for us. And so we want to, it's not just a matter of tell them, please don't deliver and we won't pay you. It's something that you have to work with them. So we're working very hard. There's a lot of effort going into it, but it's trying to get, we're not ahead of the drop in demand yet. That would probably take another quarter or two.

Terrific. And the last one, Operation 2.0 in the aircraft sector. where are you in that?

Well the way I would describe it Kai is it's taken a pause over the last quarter because the focus was on liquidity so for instance a big part of that effort is to work more with our supply chain improve our supply chain processes we talked all about that a year ago when we had some quality issues with suppliers and the last quarter has been focused on reschedules to try and conserve cash and so the underlying process improvements that we've been working on, they essentially took a backseat to get everybody trying to reschedule deliveries so that we can conserve cash and make sure we're not building excessive amounts of inventory. As we stabilize, which is I think what we described in the call, our focus will gradually shift back to those underlying structural improvements that we had been engaged in so I would say we've taken a pause for a quarter or we've stalled in terms of our ability to move it forward also with a lot of people working from home and as we get into the fourth and the first we're starting to fire that up again but it's going to be at a slower pace than we thought so all in all we'll have probably missed one to two quarters in terms of the improvement that we would have anticipated had we not hit this COVID issue.

Thank you very much.

Thank you. Thank you. Anisha, are there further questions in the queue?

Anisha?

We'll take the next question at this time.

Mr. Herbert, Mr. Herbert, your line is open. Please go ahead.

Yeah. Hi, John. Just one quick follow up. You've obviously talked about and we've got the build rates from Boeing and Airbus. As you look at your wide body portfolio, where do you see still the most incremental maybe further downside risk and are there any beyond what Boeing and Airbus have talked about and are there any particular programs that you're notably worried about?

I think you know I think at the moment everybody's worried about the whole commercial side of the business let me do let me just walk through the program so the 87 I think Boeing has said we'll drop from 14 to 10 to 7. I hope that we could do 10 for the next 12 months. I'm not sure whether that's all going to play out. I could imagine that that might come under some pressure just given the additional COVID cases around the world and perhaps the lack of a resurgence in international flying. That could take another, I don't know, six to 12 months before we all get back on international airplanes. So I could see that perhaps that would pressure eight, seven volumes 350, they're already dropping to six. Maybe that's, I don't know, again, maybe they'd see an incremental drop down. 37, we're not planning for a lot. It's not a big program. We hope that that would come back, but that's probably into next year based on everything I read and I'm sure Ken knew even more insights than we do. And then beyond that, those are by far the biggest programs for us. They're the ones that really drive our book of business. We've got some 777 stuff. Maybe there's a little bit of extra 777. I think the 777X looks like it may be delayed a little bit. But those are the big programs for us. We don't have much of anything. We've got nothing left on the 380, so that was already done. So I think it's more a kind of a macro worry that I think we would all share, which is, are the wide body production rates going to sustain even at the lower levels that the OEMs are now predicting? How long will it take for international flights to come back and really start to see the utilization pick up on those?

Great, thank you, John.

Yeah, you're welcome.

Thank you. And now we take our next question from Ron Epstein from Bank of America.

Please go ahead. Good morning, Ron. Hey, guys. Good morning. How, you know, in the crisis that we're in now, the pandemic situation, how has it gone with the OEs, right? I mean, there was, you know, There was partnering for success one and then partnering for success two. Has there been any back off of that in terms of helping suppliers out through the major disruptions that we've gone through? And how has the messaging been from the OEs down to you in terms of rates? And you just highlighted the probable and reasonable risk to 787 numbers probably being a bit lower than what we thought. or maybe what Boeing communicated. Has there been any communication on those fronts?

So let me be really clear. I said possible, I think. I didn't say probable, Ron. And that's just based on what I read in the headline newspapers, you know, and the folks in your business you publish in terms of international flights. So there is no insight behind that. It's purely one man's opinion and as such is of very dubious value, I would suggest. but I think there's always the risk of how the airplane is going to come back. That's not a reflection of anything that we have got from our customers. It's just when asked the question, you know, do you see downside risk, they'd say the answer is yes. I'd say the communication with the OEMs has been, you know, it differs by OEM. Again, there's only two major players right now and there's nuances to the way they communicate but I think both have been going through, of course, an incredibly difficult time themselves over the last quarters and from our perspective, because The commercial business, I mean, as we looked at the third quarter, it's under 20% of our business. We have a very strong defense space medical business. It's, you know, this is not a life or death business for us. Clearly the drop in rates has a negative impact on us from the term margins. But even at that, our aircraft business was still on an adjusted basis at a positive operating margin. We're generating cash. And so we're not in the type of critical situation that I think some of the other and other suppliers to the major OEMs may be in because they're so dominated by commercial. And I'm guessing that that's where the Boeings and the Airbuses have spent more of their time when they assess the risks to the supply chain. They're probably looking at which companies are really at risk and they're probably spending more time working with them and changing the way they do business with them. For us, it's a big part of our business, but it's not a life or death part of our business. And so I would say the relationship with the OEMs has been a lot of communication, a lot of working together, So that's fundamentally different in terms of providing additional funding or anything like that.

And then maybe just as a follow-on to that, given the resilience that you've seen because of the diversity of the portfolio or the businesses that you have, longer term, do you see any tweak to your strategy to diversify even more? Because I guess clearly having that diversity today really has been a blessing. So when you start to selectively invest in stuff that you guys have said that you'll start doing at some point, are there new areas you want to go into? Space looks like it's doing just fantastic for you. Is there more to do in space, particularly with the emerging and quickly growing commercial space markets? How are you thinking about that?

Yeah, I think, actually, Ron, interestingly enough, we've always been diversified. And actually, I think if you go back through decades and you look at how much, you know, how much of our business was aerospace, how much was kind of space, defense, and industrial, you know, it actually has always been somewhat similar. The one area, of course, that we did get into, which was a significant diversification just over a decade ago, was the medical business. And now it's doing great. But, of course, you know, as you know, we had our challenges, and for many, many years, we were The question was, well, why are we in that business, both from the analyst community, but also ourselves, we were asking ourselves. So I think we've always been diversified, but this, I think, is really important. We are diversified across markets. We are incredibly focused in our technologies. And so we take our technologies, which is high-end, high-performance motion fluid control systems, and we will take them to any customer that actually needs that type of capability. and what happens is as we find new customers, eventually those customers kind of turn into a market because they've got similar needs. But what we provide to downhole exploration is actuators that are not the same but somewhat similar to the actuators that go on military vehicles, on industrial equipment and to some extent it's the same technology that goes on flight controls with airplanes. So we are incredibly focused on our technology and so if you said will you diversify out of the technology niche you're in I'd say no that's what we do you know there's add-on pieces and you broaden your product portfolio over time but we're focused there does that if there's new opportunities emerge in markets that are need you know that need that then we will find our way into those markets through working with customers and then maybe at some stage we call it a market another it looks like we've diversified further but but it's not a strategy to say well let's look at a new market and let's jump into that. So I think we're nicely diversified as it is. I like diversification. I've always liked it. I think right now, of course, it's nice for the market. Sometimes the market wants you not to diversify. The market will tell you, we can diversify for you, just you be a pure play. But if you're running a business, diversification is really helpful and we continue to remain diversified and if the right opportunities come up because they fit with what we do and the capabilities we have, we jump into them. but it has to fit with who we are and what we do. We are, you know, just jump into a new market. I don't think it would be very successful for us.

Great. Thanks, John.

You're welcome. Thank you.

Thank you. And now we take our next question from Michael Caramoli from SunTrust. Please go ahead.

Hey, thanks for taking the follow-up, guys. Do you happen, Jennifer, John, do you have the bookings by segment at the quarter end?

No, we don't provide that, Michael. Sorry. We provide a total backlog, but we don't provide detailed bookings by segments. Total backlog is consolidated 12-month backlog at the end of the quarter was $1.7 billion, which was unchanged from a year ago. Got it.

Got it. All right. Thanks, guys.

Thank you, we have no further questions at this time This concludes today's call. Thank you for your participation. You may now disconnect