Moog Inc.

Good day and welcome to the Moog fourth quarter and year-end FY 2021 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ann Lurr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of November 5th, 2021, our most recent form 8K filed on November 5th, 2021, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the documents, A copy of today's financial presentation is available on our Investor Relations webcast page at www.mob.com. John?

Thanks, Anne. Good morning. Thanks for joining us. This morning we'll report on the fourth quarter of Fiscal 21 and reflect on our performance for the full year. We'll also provide our initial guidance for Fiscal 22. As usual, I've organized my headlines into three broad categories, first macroeconomics, Second, microeconomic, focused on our end markets. And third, some Mooc-specific topics. Starting with the macro outlook. The macro trends which affect our business have continued to evolve this quarter. Vaccines versus Delta continues to dominate the COVID news, with reopenings around the world shifting the balance of power between these competing drivers. More folks are returning to the office, while embracing a new world of hybrid work. Businesses are seeing surging orders but constrained by labor availability and the effects of the newly coined grace resignation. The description of inflation has evolved beyond transitory to longer lasting with an uncertain timeline for aversion to the norm. And finally, challenges in the supply chain have moved well beyond electronic components and new car deliveries to impact almost every element of global trade. Turning to our major end markets, Defense and space remain strong on continued government spending. The Chinese demonstrated the hypersonic missile capability in August, which has been described as a Sputnik moment by some in the military. Given this great power rivalry, it would seem that defense and space spending should remain elevated for the foreseeable future. Our industrial markets continue to strengthen, although it's hard to distinguish between panic ordering and real underlying demands. Commercial air traffic is improving, and global travel is starting to open up. Balancing this optimism, Boeing continues to face hurdles as they await 737 approval from the Chinese authorities and work with the FAA to get 787 deliveries back on track. Finally, our medical markets are humming along nicely. Mode Q4. Coming into the quarter, we forecast an EPS of $1.20, just a minus 15 cents. Our headline results of $1.07 include $0.18 of charges, compensated by $0.08 of tax benefit. The $0.08 of charges were results of our continuing portfolio refinance. They included $0.09 associated with product line exits, with the remainder mostly restructuring charges at various sites around the globe. Our adjusted results of $1.17 was slightly below our midpoint, but well within our range. Last quarter we described supply chain constraints and labor challenges as watch items for the future. This quarter we started to feel the impact more directly on our business. Cash in the quarter brought our total for the year to over 100% conversion. Looking back on the full year, the following headlines stand out. First, the year turned out much better than we had anticipated 12 months ago. Last year at this time, we projected that COVID would be with us throughout fiscal 21, and therefore we were anticipating a year similar to the second half of fiscal 20. That projection would have resulted in fiscal 21 sales of $2.73 billion and earnings per share of about $3.50. We finished the year with sales of $2.85 billion, $120 million higher, and earnings per share of $4.87. COVID was with us throughout the year, but despite this, Each of our core markets did a little better than forecast, and we maintained a tight lead on expenses. Second, strong cash flow this year funded our balanced capital allocation spend. We spent approximately $130 million on capital expenditures, $80 million on acquisitions, $32 million on dividends, and $30 million on share repurchases. We finished the year with our balance sheet in great shape, providing us with all the flexibility we need to continue to invest next year. Third, we continue to refine our product portfolio throughout the year, exiting businesses and consolidating operations. This activity cuts across all three of our operating segments and included exiting four product lines. We also closed five sites and consolidated production into larger operations. We anticipate that this portfolio journey will accelerate over the coming year. Fourth, a new administration in Washington has shifted the debate from tax reductions to spending increases. Defence spending continues to be well supported on both sides of the aisle, and new opportunities in green initiatives are starting to emerge. Fifth, as the year progressed, it became clear that COVID was not going away with the arrival of a vaccine, and that the supply chain and labour shortages were new challenges we would need to contend with. The discussion around working from home versus in the office shifted to hybrid working arrangements, and we introduced a new flexible working policy to our workforce. This is perhaps the most dramatic shift in working conditions for a generation. Finally, as I do every time of this year, I'd like to recognize the contribution of all our employees around the world for their continued dedication to serving our customers. Now let me provide some more details on the quarter. Sales in the quarter of $724 million were 2% higher than last year. Excluding the impact of foreign exchange and acquired sales, Underlying organic sales were flat. Sales were up in aircraft controls, about flat in industrial systems, and down marginally in space and defense. Taking a look at the P&L, our gross margin was up significantly on improved mix, particularly in aircraft. Our lead was also up on higher investment in new technologies and the additional engineers at our Genesis acquisition. SG&A expenses were up as we returned to a more normal operating environment after the crisis management last year. Interest expense was down marginally on lower rates. Our effective tax rate of 19% this quarter was unusually low on some special items. The overall result was net income of $35 million, up from an adjusted net income last year of $26 million, an earnings per share of $1.07, up 32% from the adjusted EPS last year. Looking at the full year fiscal 21, in comparing full year fiscal 21 with fiscal 20, We need to remember that fiscal 20 included only two quarters of COVID conditions, whereas fiscal 21 was a full year of COVID conditions. With that backdrop, fiscal 21 turned out much better than we had anticipated 12 months ago. Full year sales of 2.85 billion were just 1% lower than last year. We had no single digit sales changes in each of our three operating groups, with sales up in space and defense, but down slightly in aircraft and industrial systems. Gross margin for the year was higher on strength in the aircraft business. R&D and SG&A were both higher, reflecting the same story as we saw in the quarter. Increased investments and a move away from crisis management. Interest expense was lower on lower rates. Last year, we incurred significant restructuring charges as we resized the business. We also incurred a pension settlement charge as we annuitized half of our defined benefits plan. Adjusting for these charges last year, This year's net income was up slightly, and diluted earnings per share were 1% higher. Fiscal 22 outlook. For next year, we're projecting sales of $3 billion, an increase of 6% over fiscal 21. We anticipate growth in each of our operating groups, with the strongest gains in commercial aircraft and in military ground vehicles. Full year margins of 10.3% will be up about 80 basis points, and earnings per share of $5.50 plus or minus 20 cents will be 13% higher than fiscal 21. We forecast that cash flow next year will moderate from the very strong performance of the last couple of years as we invest more in growth. Now to the segments. I'd remind our listeners that we've provided a three-page supplemental data package posted on our website, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Starting with aircraft, sales in the fourth quarter of 298 million were 8% higher than last year. This quarter, the commercial business drove the increase. Commercial OEM sales were up on the acquired sales of Genesis. Lower OEM sales to Boeing on the A7 were compensated by higher A350 sales to Airbus. Sales into the commercial aftermarket customers were up 25%, driven primarily by higher 787 activities. Sales on business jets doubled to $7 million, but from a low point 12 months ago. On the military OEM side, higher funded development and the acquired sales from Genesis more than compensated for lower F-35 sales, yielding a 12% increase in total. The military aftermarket was down 16% from a very strong Q4 last year. Aftermarket sales were lower across most of our major platforms, including the F-35, F-18 and the B-22. On a more positive note, the military aftermarket showed a modest recovery from the low points of Q2 and Q3 this year. Aircraft fiscal 21. Full year sales of 1.16 billion were down 4% from last year. Sales of the military applications were up 8% for the year, while sales to commercial customers were down over 20%. On the military side of the house, strong OEM sales compensated for a weaker aftermarket. OEM sales were up across a range of programs, including the F-35 and some foreign military platforms. Higher funded developments and the acquired sales of Genesis also contributed to the growth. Sales into the military aftermarket went down across a broad range of programs, with the biggest reductions in the F-35 and B-22. Turning to the commercial side, OEM sales were 26% lower than last year, while aftermarket sales were down a more modest 7%. Comparing our commercial sales to fiscal 19 before COVID hit, we see the dramatic impact of the pandemic on our business. Sales to OEM customers were down 50% from 2019, from 540 million to just over 270 million in 21. Aftermarket sales fared better, down from 141 million in 19 to 106 million in 2021, a drop of 25%. Aircraft margins. Margins in the quarter were 8.8%, up from an adjusted margin of 2.7% last year. The higher sales and improving commercial aftermarket more than compensated for weaker military aftermarket sales. Full-year margins of 8.3% were up from adjusted margins of 7.6% last year. This year's margins included almost 100 basis points of additional R&D spending as we invested in the next generation of military platforms. Aircraft fiscal 22. We're projecting fiscal 22 sales of 1.25 billion, up 7% from this year. The strength is on the commercial platforms, with OEM sales up on the 737, business jets, the E2, and a full year of Genesis. We're also anticipating that the commercial aftermarket will continue to strengthen across our portfolio of platforms. In contrast, military OEM sales will be more or less in line with this year, with higher helicopter sales compensating for lower F-35 sales. We anticipate military aftermarket sales will be up on higher F-35 and B-22 activity. We're encouraged by the uptick in the fourth quarter in the military aftermarket and are modeling that this run rate will continue through fiscal 22. With stronger sales and an improving mix, we're forecasting full-year margins in fiscal 22 of 10.1%, up 180 basis points from fiscal 21. Turning down to space and defense, sales in the fourth quarter of $200 million were 3% lower than last year. This is the first time in five years that we've had a down quarter year over year. This quarter, sales were marginally lower in both our space and our defense markets. On the space side, lower revenue on launch vehicles, hypersonics, and satellite engines was partially compensated by increased activity on our integrated space vehicles product line. Defense sales were down on lower tactical missile production and continued challenges in our security business. On the plus side, sales on missile defense, turret systems, and its naval applications were slightly higher. Base and defense fiscal 21. Full year sales of $799 million were 4% higher than last year. Over the last six years, sales in this business have more than doubled. The growth in fiscal 21 was all in the space market. The biggest driver was our new integrated space vehicles business, which more than doubled from a year ago to $60 million. We also saw double-digit growth in our avionics product line to over $50 million. Defense sales were down 2% in the year, driven by lower tactical missile warps and challenges in the security business. Space and defense margins. Margins in the quarter of 8.6% were disappointing. Our space and defense sector has had a tough second half of this fiscal year, after several years of strong margin performance. Similar to the third quarter, we saw some cost growth in several of our fixed price development contracts across both end markets. In addition, we incurred $2.5 million of impairment charges as we exited certain products and contracts arrangements. Taking together these pressures depressed margins by 300 basis points in the quarter. As is always the case, we believe we've captured the impact of all future cost increases within the quarter. Full year fiscal 21 margins of 11.1% were lower than prior years as a result of the second half impacts described above. Based on defense fiscal 22, our forecast for fiscal 22 projects another year of double digit sales growth. Defense will lead the way with sales up 14% from fiscal 21. The growth is primarily in our vehicles product line across both US and foreign programs. We also anticipate stronger component sales for our slipperless. Space sales will be up 5% as a result of the continued growth in our integrated space vehicles product line. We're predicting operating margins of 11.5% in fiscal 22. This is up from fiscal 21, but not back to the level we enjoyed a few years ago. There are two reasons for this. First, we're cautious after the experience of the last six months. Second, we're seeing a mixed shift in the business to newer, more integrated product offerings. On the defense side, it's our turret business, and on the space side, it's our satellite bus offerings. Combined, these new product lines are delivering most of the sales growth in fiscal 22, but as with many new business endeavors, they are at slightly lower margins than our legacy business. Turning out industrial systems, sales in the fourth quarter of 226 million were more or less in line with last year after adjusting for foreign exchange movements. Sales were up in industrial automation, energy, and simulation tests, but sharply lower in medical. Industrial automation sales were up 11% on strength across the portfolio. We see the nice rebound in this business over the last six months as the global economies have started to recover from COVID. Energy sales were up on increased offshore production activity. Simulation and test sales were up slightly on some project work in the material test area. Core flight simulation sales were down slightly from a year ago. Our medical pump business was marginally lower, but the aftereffects of the COVID surge slowly worked their way out of the supply chain. In addition, sales of components into sleep therapy and medical imaging were lower. Industrial systems fiscal 21. Full-year sales of $892 million were 2% lower than last year. Adjusting to the impact of foreign currency gains, underlying sales were down almost 5% on the year. Three of our four major markets were weaker, with industrial automation being the exception with modest growth. Industrial automation makes up half our segment sales. Sales into this industrial automation market dropped significantly with the onset of COVID in our third quarter last year. They remained depressed for about nine months, and since the second quarter this year, we've seen a recovery as investment in capital goods has ramped up to niche surging demand. This quarter, our core hydraulics and electric components business was up across most of the portfolio at end markets. Energy sales for the year were down as oil prices remained subdued. Simulation and test sales were depressed, all attributable to flight simulation, where our annual sales for full flight simulators were down almost 30% from the prior year. Finally, medical sales were lower, as anticipated, as the COVID surge we enjoyed in fiscal 20 waned. On a more positive note, fiscal 21 sales into medical applications were 12% higher than our pre-COVID fiscal 19 sales. Industrial margins. Margins in the quarter of 8.5% included almost 200 basis points of restructuring and impairment charges. In the quarter, we continued our portfolio refinements, selling a small product line and closing a site in Asia. Full year margins of 9.6% were down from fiscal 20 on the lower sales volume and inefficiencies associated with 12 months managing through COVID. Industrial systems fiscal 22. Our first look at fiscal 22 suggests modest sales growth over last year. We anticipate that our industrial automation and energy markets will be flat with this year, while both simulation tests and medicals should be higher. Industrial automation sales will remain flat as modest underlying growth is negated by the portfolio refinements we're going through. Our growth in this market is primarily limited by our ability to ramp production rather than a shortfall in demand. Both supply chain and labor constraints are impacting our ability to grow sales. Our energy market has been pretty stable over the last few years as the price of oil has remained muted. The recent surge in oil prices may have a longer-term impact on our business if prices remain elevated. However, given the long cycle in this industry, we're not anticipating any material impact in our fiscal 22. Simulation and test sales will be higher on additional auto test work and a modest recovery in flight simulator violence. We continue to anticipate a very slow recovery in the flight simulator market over several years. Finally, sales into medical applications will be higher on additional component sales with the biggest increase in motors for sleep therapy products. We're forecasting full year margins next year of 9.5% in line with fiscal 21. Investments in new electric vehicle applications and our continued journey to refine our portfolio are suppressing margin expansion this coming year. These activities should start to pay dividends as we get into fiscal 23 and beyond. Summary guidance. In fiscal 21, we learned to live with the pandemic through a full 12 months and delivered much better results than we had imagined going into the year. Looking forward to fiscal 22, we're optimistic that the pandemic will continue to recede. However, we anticipate we will be living with the effects of the pandemic on both the supply chain and labour market for all of this coming 12 months. Based on what we know today, we're optimistic about our business and are forecasting both top and bottom line growth. Looking at our five major markets in fiscal 22, we believe defence and space will remain strong industrial markets will continue to improve, commercial aircraft will show nice recovery, and medical will return to modest growth. In normal circumstances, we believe our projection for the coming year accurately balances the risks and opportunities we're seeing. However, we're living through extraordinary circumstances, and it is very difficult to quantify the potential impact of supply chain disruptions and labor challenges. Our forecast assumes some level of continued disruption in line with the trends we've seen in the last two quarters. Additional risks include rising inflation and the impact of the vaccine mandate on our ability to deliver products to our customers. On the positive side, should COVID continue to recede and the supply chain constraints start to unwind, we could see upside in our industrial and commercial aircraft businesses. After 18 months of the pandemic, our strategy remains unchanged from pre-pandemic times. We're a technology company focused on solving our customers' most difficult technical challenges. Customer intimacy is at the core of our strategy, and we believe long-term relationships with our customers drive long-term value. We focus on our core technologies of motion and fluid control while serving a wide range of end markets which benefit from our expertise. Capital allocation is focused first and foremost on growth, both organic and via acquisitions. We believe this is the best way to generate long-term shareholder value. We will also return capital to shareholders through our dividend policy and use our share buyback program opportunistically. Finally, our culture of trust and collaboration has stood the test of time and carried us through the extraordinary challenges of the last 18 months. We're optimistic about our future while remaining realistic about the challenges. In fiscal 22, we anticipate sales of just over 3 billion and earnings per share of 550 plus or minus 20 cents. These results represent an increase of 6% on the top line and 13% on the bottom line. We believe the year will start slowly and accelerate sequentially. For Q1, we anticipate earnings per share of $1.10 plus or minus 15 cents. Now, let me pass it to Jennifer to provide more color on our cash flow and balance sheet.

Thank you, John. Good morning, everyone. Free cash flow in the quarter was $22 million for 65% conversion. We had another strong year for free cash flow, coming in at $164 million and topping 100% conversion. That compares to free cash flow of $73 million in the same quarter a year ago and $191 million for all of last year. Free cash flow has been especially strong since the start of the pandemic six quarters ago. In the first few quarters of the pandemic, we were focused on preserving cash to ensure we had sufficient liquidity to manage through the uncertain times ahead. We've since begun to increasingly invest in our business as the markets we serve have stabilized. Over this 18-month period, we've generated $328 million of free cash flow, which is just over 150% conversion on an adjusted basis. The $22 million of free cash flow in Q4 compares with a decrease in our net debt of $23 million. During the fourth quarter, we paid our quarterly dividends and repurchased some shares. These outflows were partially offset by proceeds from the divestiture of a small product line in our industrial motors business. For the year, $164 million of free cash flow compares with a decrease in our net debt of $42 million. During the year, we acquired Genesis for $78 million, paid dividends of $32 million, and repurchased 400,000 shares for $30 million. These outflows are partially offset by divestitures. Networking capital, including cash and debt, as a percentage of sales at the end of Q4 was 29.1%, about the same as a quarter ago. We've continued our trend in reducing inventories. We also benefited from the timing of payments. Growth in receivables offset these benefits. Receivables increased due to billings late in the quarter, certain customers not taking deliveries, and supply chain issues that delayed shipments. Capital expenditures in the fourth quarter were $40 million. We increased our investments in capital expenditures beginning in the second quarter this year, once the level of uncertainties from the pandemic subsided. We continue to catch up on capital investments that we had previously delayed. In addition, we are consolidating some of our operations into new facilities to reduce our footprint over time and recapitalizing for next generation manufacturing capabilities to increase production efficiencies through automation. At quarter end, our net debt was $803 million, including $101 million of cash. The major components of our debt were $500 million of senior notes, $322 million of borrowings on our U.S. revolving credit facilities, and $80 million outstanding on our securitization facility. We have $746 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0 times on a net debt basis. Based on our leverage, we could have incurred an additional $609 million of net debt as of the end of our fourth quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future. Our leverage ratio was 2.3 times on a net debt basis as of the end of our fourth quarter, comparing to 2.4 times a year ago. Strong cash generation was offset by the pressures on EBITDA from the impact of the pandemic, as well as capital allocated towards acquisitions and share repurchases. Our leverage ratio continues to be within our target zone of 2.25 times to 2.75 times. Cash contributions to our global retirement plans totaled $16 million in the quarter, compared to $12 million in the fourth quarter of 2020. Contributions have increased for our defined contribution plans. In the U.S., participation has increased in our defined contribution plans, as our defined benefit plan remains closed to new participants. Global retirement plan expense in the fourth quarter was $20 million, down from $21 million in the fourth quarter of 2020, excluding the settlement loss from last year. For the year, expense was $71 million, down from $79 million without the settlement loss in 2020. Defined benefit plan expense is down due to the settlement about half of the liability of our largest plan, with defined contribution expense up related to increased plan participation. Our effective tax rate was 19.0% in the fourth quarter compared to 28.3% including charges associated with a pandemic in the same period a year ago. The lower tax rate this quarter is attributable to the release of valuation reserves. For the full year, our effective tax rate was 22.8% compared to 29% adjusted rate in 2020. This year's rate includes charges associated with the revaluation of deferred tax liabilities in the UK, mostly offset by adjustments to last year's provision in the U.S. We amended our securitization facility yesterday. Under the facility, a receivables financing subsidiary may sell receivables to a financial institution in an amount up to $100 million. These transfers are treated as sales, and accordingly the receivables are de-recognized from our balance sheet. The new structure reduces our working capital levels. We expect free cash flow generation in 2022, including the benefit of $100 million from the securitization facility, to be in line with our long-term target of 100% conversion. Receivables will be the greatest source of cash due to the securitization facility. We also expect inventories to continue to be a source of cash, while customer advances get worked down. We expect capital expenditures in 2022 to increase to $160 million as we invest in facilities and infrastructure to support future growth and operational improvements in the business. Depreciation and amortization are expected to be $96 million. Our financial situation is strong. We are well-positioned to invest and deploy our capital. Our priority at this point is to invest in our business and fund organic growth. We continue to explore M&A opportunities, so pricing remains high on that front. We may also complement our growth strategy with returning capital for shareholders. With that, we'll turn it back to John for any questions you may have. John?

Thanks, Jennifer. Stephanie, we would like to request questions from our listeners, please, at this time.

Thank you. If you'd like to ask a question, please signal by pressing star 1 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 our equipment. Again, that is star 1 to ask a question. Our first question comes from Ron Epstein with Bank of America.

Hi, good morning. It's actually Elizabeth on for Ron this morning.

Hello, Elizabeth.

Hi, Elizabeth. Good morning. The first question we had was just around the supply chain and the headwinds that you're seeing there. How far stretched out are you actually seeing procurement specifically for the moving pieces?

I'll just see if I can understand your question. I'm not sure I like one.

Yes. So just how much, you know, what kind of a difference you're seeing in lead time today versus where they were, call it, six months ago?

Yeah, so that's, you know, it's anecdotal. It's the best you can do with that, Elizabeth, because, you know, we buy thousands and thousands of different parts. But I think we're seeing lead times doubling and trebling. You know, it's dramatic changes when you go to reorder something. And the challenge can be that in this system, you know, in your ERP system, you have a reorder lead time of, pick a time, 12 weeks for something. and you're running with that, and then when you go to reorder, the supplier tells you, oh, it's not 12 weeks, it's actually 30 weeks now. And so you have this shock, and then, of course, the response to that. Hopefully, inventory, which used to be a very bad thing, now is a really good thing, and so if you've got sufficient inventory to cover you through some of those long lead times, that helps. So far, we have seen challenges which have prevented us shipping some amount of product to our customers, but not to the point yet where it's completely held us up, not like the auto companies. But it's got more difficult, I would say, over the last quarter and there's a lot more effort from our supply chain organizations in chasing parts, working with our suppliers, trying to make sure we can keep the production going. So it's significant changes and it's in everything. It's not, you know, it used to be electronic components and processors. It's everything from plastic parts to all kinds of metal parts. It's across the board. And on the flip side, I would say one of the things I mentioned in my text is on the industrial automation side of our industrial systems business, Our challenge there is more based on our ability to supply rather than the demand issue. And we've seen our own lead times for products on the type of products we make go out from four, six weeks to 12, 14, 16 weeks. So more than a doubling of our own lead times to our customers. So we're kind of seeing it on both sides.

Okay. And then how should we think? I mean, you gave fiscal year 22 guidance, but how should we think maybe a little longer term in the medium to long term, where you think growth rates will end up?

Well, I don't know about long-term growth rates, but I'll offer you this perspective. You know, half of our business, if you take the defense and space, and the vast majority of our space business is government-funded business, that's over half of our business. And as I said on the call, it would seem that despite the fact that, you know, we've moved from a Republican to a Democratic administration, There seems to be across the aisle support for the idea that we're back into a near-peer kind of major power type rivalry, particularly with China. And the recent Chinese demonstration of a hypersonic weapon, I think, has only accelerated that thinking. And so we're optimistic that defense and space will remain strong for the coming years. I'm not sure how long that is, but that there will be growth opportunities. F-35 is being toned down, of course. But we have a broad portfolio of offerings there that we're feeling very comfortable about, And as I mentioned at the call, some of the growth, all of the growth actually we're seeing in our space and defense business next year is really around new product areas, integrated turrets, a business that we weren't in three or four years ago, and integrated space buses, and also a business that, if you go back three or four years, we weren't in. So new products, new technologies, I think, and the underlying budget levels should stay strong. We all have to be optimistic about the commercial recovery. both on the OE side. I mean, Boeing at the 8-7 and the 350 are the two big problems for us. And as you know, Boeing is now talking about two a month, and that's down from 14 a month two years ago. And 350 is maybe at four or five a month. So hopefully, you get out a few years, that will come back strong. And with it, the aftermarket will come with it. And then industrial, you know, right now, we're seeing a surge in demand. We're constrained in terms of our growth by our ability to get products to our customer. Hard to know if that's underlying demand or if it's a little bit of... reaction to supply chain and lead times going out. The industrial business tends to move up and down over a multi-year cycle. So hopefully that cycle, I would imagine it will at least continue in terms of the upright for the next two or three years. Beyond that, I think it will be a cyclical business. And our efforts there are to focus on new growth factors, like in the electric vehicle and green initiatives that we think there might be opportunities in the future. And then medical, I see that growing with the underlying medical business, which seems to have nice single-digit, high single-digit growth opportunities, just given demographics. and healthcare costs. So I'm optimistic, definitely optimistic about the long-term. The portfolio is diversified across end markets, which also really helps. But right now, the signs, I think, are positive for the longer-term growth beyond 22.

Thank you very much.

Thank you.

Thank you. Our next question comes from Carzong Rumor with Calwin.

Morning, guys.

Yes. Good morning, guys. Thanks so much. So it looks like the charges, the 18 cents works out to roundly seven, eight million. Can you give us some color where they are by each of the three groups? And then I think you mentioned more, you know, product rationalization this year, approximately what are you talking about? Where is it? And sort of, you know, maybe from 20,000 feet, the whole idea here, you know, is this, that some products have become less profitable or it's a new strategic initiative to kind of cull the less profitable.

Yeah. So let me see if I can answer the question. So in the quarter, Kai, you're right, 18 cents, you can call it $8 million-ish. About half of it was probably in the space and defense side, the other half of what was in industrial give or take. And it was exiting from a variety of small businesses, impairment charges associated with getting out of a product line, with exiting some customer relationships. So it was that type of thing. And they were all a couple, three, four cents here, three, four cents there. So it wasn't, it all added up to 18 cents, but it wasn't a big enough issue to call out on the front of the financial statements. So that was what happened. As I say, across space and defense, And our industrial business is really where we saw that impact in the quarter. In terms of, you know, what the scope of it was this year, and we mentioned that it would be more next year, we think, this year it's probably about 1% of sales that we, you know, ended up kind of finding our way out of. Next year it will probably be closer to 2% of sales, we're thinking. It doesn't sound like a big number on the total sales, but it's continuing to accelerate. And you may remember that we did announce that we had an agreement, although it's not closed yet, for the sale of our Navigation Aids business about a quarter ago. That's not closed. Once it closes, perhaps this quarter, we'll obviously report on that then. But that's just an example of it. And if I look at what we think will happen next year, I think that'll probably be, it'll be split pretty much across the three groups. In each of the groups, there are product lines that we are not, we don't see a long-term future in. And to your question, so why are you doing this? It really is about focusing the business on Those product lines where we believe there is, either we have the best, you know, they're the most profitable product lines, and if it's something that's underperforming, if we have a clear strategy that says it's got a lot of future growth potential and will become a great business, we, of course, will stick with it and take the time. On the other hand, after a while, if we find we're in a business where it's not performing particularly well and we don't see that it has any real future potentials, we usually determine that it's probably best in the hands of somebody else. So it's really around refining the product line to drive long-term margin improvement.

And, John, you know, if you're going to have, you know, sort of some of these adjustments in all three groups, what's the rough number in terms – is it another $8 million? Is it $12 million? Is it $3 million? Can you give us a range in terms of what we're sort of looking at in terms of P&L impact?

You mean in the coming year?

Dan, 22, yes.

Yeah, so in our forecast for next year, Kai, we have not fixed that in, either plus or minus. And so, because some of them, you know, you never know when it's going to happen, and you never know, you know, at what price, particularly if you're selling a business. Some of them will be closed downs where we could make an estimate of the cost. Some of them are sales, and so much of that depends on the price that you get and the carrying cost of it on the books. And so the sales of businesses – They could have a material swing, but most of the time it will be a cash positive or neutral. But there may be, you know, if we're writing off goodwill or asset impairments, then we could see some bigger numbers. But all of it, I would say, is one time, and I would factor it out of the underlying operating performance of the business. But at this stage, I can't or I won't give you an estimate of it because I'm not sure exactly what will happen and when, and I'm also not sure exactly what type of price we might realize for some of the businesses. Sometimes, oftentimes if you're faced with exiting, particularly a smaller product line, we do the analysis between can we sell it, do we want to wind it down, do we want to exit it, is it a month a year, you know, find your way out of it. And those conversations are ongoing and it's never quite clear until you get to that point as to what you'll actually do. So for that reason, we're cautious about putting a number on it.

And then is the idea that you will be through all of these initiatives in fiscal 22, so 23, 24 should be better. And secondly, you know, to the question that came before me, where are the margins? I mean, I think we've talked, you know, over the years of mid-teens targets for most all of the businesses. You're quite a ways away from that. So is that still the target? And if so, about when could you reach it?

So, yes, that is still the target, Kai, and a lot of it, it'll happen in 22, but some of this stuff takes actually longer than we might imagine. And so, we'll probably continue into 23. And, of course, on an ongoing basis, when you've got lots of different product lines, it's a constant thing. But most of the adjustments, I'd say, have been 21, 22, and 23. Part of what we're also doing, Kai, I called it out in the text, is we exited five small sites and so we're consolidating sites. And typically what goes with that is there's additional cost as we consolidate into our larger sites and get out of some of the smaller sites. And typically a product move like that is a 12-month process by the time you organize it, make sure it's moved enough and going in the next location. So that will also continue into 22 and to some extent also into 23. And in terms of building the base for margin expansion, that's exactly what this is doing. It's making sure that we're in the products that we need to be in to get our margins into the teams over the next few years. And I won't provide you with a definite timeline because I've done that in the past and then I've eaten my words. But I can tell you that there is a continued focus on that and the whole portfolio refinement is about making sure we find ourselves in the businesses that we can be most successful in as measured by our ability to generate strong returns.

Excellent. Thank you. Thank you.

Thank you. Again, that is star one. If you'd like to ask a question, our next question comes from Mike Ciaramoli with Truist.

Hey, good morning, guys. Thanks for taking the questions. Maybe just to stay on where Kai was there, just so we're clear, industrial, you've got some sales. I think you said it might be a 2% headwind to sales next year. So as we look at the the industrial segment guide, you know, for next year? Should we assume that there's about a 2% divestiture headwind in there? Or how should we be thinking about, you know, kind of the, I guess, all the segments? Should we be thinking about a 2% headwind across all the segments? It sounded like there were going to be some puts and takes just to try and get an apples to apples of where the underlying organic growth is going to be next year. So the total growth, the top-line growth, Mike, that we're talking about for next year is about 6%.

And what we said is that we may be looking at a portfolio refinement that might be at 2%. So you'd have to take that off because, as I said, our forecast is not taking in the impact of the portfolio refinements in what we're doing. So 6% organic, but perhaps if we manage to get through the refinement that we're talking about and maybe sell off some businesses, you maybe have a 2% headwind moving in the other direction. And as I also said, that 2% is kind of spread across the three businesses. So if I take industrial right now, we're forecasting a 2% growth. And if you said, well, if you did the portfolio refinements, that might be a 2% head when you get a little bit of that. What is happening, though, is over the last year and into next year as well, is we have been transferring sales between our industrial business and our space and defense business. It's a small number, you know, 1%, 2% of sales. But what has happened is that we've had, over the years, mixed facilities. If you remember back a few years ago, we had our components group. And the components group served both industrial and aerospace and defense markets. It was a products business, slip rings and motors. It was a business that we bought from Lytton Polyscientific way back in the early 2000s. When we took the components business and the gentleman running it retired, We decided we would split it into the A&D side and the industrial side, and we'd align those with our other two businesses. But what came with that, of course, is that they had mixed facilities. They had facilities that did both military work and industrial work. And over the last few years, we have been systematically focusing on we have either all our facilities are either all industrial or all aerospace and defense because we believe that that's a much cleaner way of running the business. And so we have been moving product around, and part of that is that came on the industrial side is we've been moving some of the sales that were in our industrial business that are A&D related, moving those product lines and in some cases closing a facility or two into the space and defense group. So there's a little bit of growth in the space and defense group, a couple of percent, that's actually a transfer from our industrial business. And so there's a little bit of that going on as well, Michael, in the background. But overall for next year, you know, industrial, we're not seeing any growth in the energy business. That's kind of been flat for the last few years. Recent spike in oil, I don't think that plays through. Industrial automation, as I mentioned, some of that is not growing, but that's mostly the product transfer out into space and defense. And it's the underlying, our ability to just get more product out. We're supply constrained rather than demand constrained. And then we're seeing a little bit of an uptick in both simulation and medical.

Got it. And then just sticking on kind of the restructuring theme, I guess, where are we with, I guess you were calling it at the time, in aircraft operations 2.0? I mean, that's been, I think, the two-year mark maybe in July. I would have thought, I mean, you're guiding for some margin expansion. I would have thought we would have started to see a bit more of an impact there. And then can you maybe just say what the R&D, you know, spend is going to be and if that's a headwind year over year in aircraft?

So, Mike, under normal circumstances, I would agree completely with you. But as I mentioned, in fiscal 21, our commercial aircraft business is 50% down on the 19 levels when we started this program, and our commercial aftermarket is 25% down. And our facilities around the commercial are commercially dedicated. A lot of our commercial OE production is in the Philippines. And so next year we're showing margins, we're talking about margins of over 10% in our aircraft business at a time when the commercial business is still highly depressed. And so I think if we could factor that out and go back to the same level of utilization and efficiencies that we had in 19 on the same production levels, I think we would be seeing a significant improvement in our, I know we would be seeing a significant improvement in our operational underlying business in 2022 versus what we saw in 19. But there's, as I say, there's labor, vaccine mandates, supply chain constraints, all of these that are swamping the impact of our internal efficiency activities. So we've continued down that path. We continue to invest. We continue to do better. But there are just macro forces that are dramatic. We're like a sailboat, and we've managed to trim the sails, but we've had to move it into a huge storm at the same time. So I think that's what's swamping it, Mike.

Okay, last one for me, and I'll jump back in the queue. You know, I think by market defense growth next year, up 7% looks fantastic, especially in light of what we're seeing with the peers. Just given all your customers, you know, guiding flat, low single digits, a lot of programs coming under pressure. You know, what gives you the confidence there, and what's the F-35 headwind? I mean, I would imagine you're going to have some excess capacity there with the rates flatlining at 156 versus, you know, potentially pushing over 200 at one point.

Yeah, so there's clearly the F-35 top line is down about 10% next year. And in our forecast from what we saw this year, actually back to what we saw at the level of 2020, And so that plays through in that. But we are seeing a nice pickup on the helicopter side, and particularly on the FLARA, and that's just based on development work. It's not based on Exron or Bell winning. If they do, that would be wonderful, but that would probably be an FY23 impact, not an FY22. So you've got F-25 down, but increased helicopter activity, increased development work, all of that. means that if we look at the OEM side, we're, you know, up just a tiny little bit, and we got some additional Genesis sales. So you could call the OE side flat, F-35 down, compensated by helicopters, and we're seeing on the military aftermarket up a little bit, significantly down from 20, but hopefully the run rate that we saw in the fourth quarter. We had a kind of a very soft Q2 and Q3. Not much in the aircraft side. Actually, you know, sales pretty much in line with what we saw in fiscal 21. But then on the space and defense side, it's on the defense side, Mike, and it's the turret business. I mean, we've won the SHORAD program, and that'll just be a much bigger program next year. And then all other things kind of, you know, put some takes here and there. A little bit more, you know, hypersonic work, maybe a little bit less taxed on missile work, a little bit more Navy, a little bit less security. But overall, that all kind of balances out, and we see the growth in the integrated, the turret business that we have. And it's the same on the space side. The growth is on satellite buses. And so what this is, is it's showing the investments that we've made over the last six to eight years in getting into more integrated products. It's showing that starting to flow through on the sales line. So it's a product-related and an innovation-related growth rather than an underlying market growth. We are also seeing strong sales, though, and uptake on the slippery side of our business, on the component side. So that's good, too. So I agree. I think the primes are seen. more pressure, but we have specific product lines or areas that we anticipate growth coming into next year. Got it. Got it. Perfect. Thanks, guys. I'll jump back in with you. Thanks, Mike.

Thank you. Again, that is star one if you'd like to ask a question.

Do you have any more questions, Stephanie, at this time?

There are no additional questions at this time.

Well, if there's no additional questions, I'd like to thank everybody for their attention. Thank you for staying with us through Fiscal 21. We look forward to growth and increased earnings in Fiscal 22. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.