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spk02: Good day and welcome to the Moog fourth quarter and year-end fiscal year 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ann Luhr. Please go ahead.
spk01: 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 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 4, 2022, our most recent Form 8-K filed on November 4, 2022, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, A copy of today's financial presentation is available on our investor relations webcast page at www.moog.com. John?
spk08: Thanks, Anne. Good morning. Thanks for joining us. This morning we'll report on the fourth quarter of fiscal 22 and reflect on our performance for the full year. We'll also provide our initial guidance for fiscal 23. As usual, I'll start with the financial highlights. Our fourth quarter sales were in line with our forecast from 90 days ago. Adjusted earnings per share of $1.36 were up 8% from last year, but at the lower end of our forecast as a result of 10 cents of program charges in our space business. Excluding these charges, our underlying operations were right on plan. Adjusted free cash flow of $19 million was positive, but weaker than we had anticipated as supply chain conditions continued to weigh on working capital. Overall, fiscal 22 was a strong year for the company. despite the challenges associated with COVID, supply chain, inflation, and labor attrition. Adjusting for acquisitions, divestitures, and foreign exchange movements, sales were up 9% from last year. Adjusted operating margins expanded 50 basis points, and adjusted earnings per share were up 14%. Looking back on the full year, the following headlines stand out. First, it was a year in which the world order was redefined for generations to come. The Russian invasion of Ukraine in February changed the geopolitical landscape in Europe for decades. In Asia, escalating tensions over Taiwan and the consolidation of power in China under Xi Jinping further eroded the relationship with the U.S. Combined, these events have redefined the global political landscape into an East-West divide. Deja vu for those of us over 40. From a Rome perspective, all activities with Russia have stopped, and we're taking a more cautious view of the future of business in China. While these global events are not necessarily positive for humanity, higher defense spending in the West represents a longer-term tailwind for our business. Second, despite the geopolitical uncertainty, it was a good year for the company overall. Our adjusted year-end results met the guidance we provided to the street 12 months ago in terms of sales, margins, and DPS. Our performance to plan was all the more impressive given the continued COVID restrictions, particularly in China, the deterioration in supply chain performance across all our markets, and the emergence of inflation over the course of the year. Free cash flow was lower than planned, but this was a consequence of deliberate decisions to prioritize customer commitments over inventory optimization. Third, organic growth led acquisitive growth as the engine for value creation. Our multi-year focus on innovation continued to bear real fruit in Cisco 22. Over the last few years, we've repeatedly described our three new growth vectors, our whip turret, integrated space vehicles, and our construction initiative. In fiscal 19, these three initiatives had total sales of less than $40 million. In fiscal 22, sales were over $160 million, a fourfold increase in three years. Fourth, our margin expansion journey continued in fiscal 22. It was a busy year for resizing our businesses and shaping the portfolios. During the course of the year, we divested three businesses with annual sales of about $60 million, completed restructurings in each of our operating segments, exited our operations in Russia, and closed or sold several facilities. These actions generated $71 million in net cash proceeds. Fifth, our prudent approach to capital allocation was unchanged from prior years. We spent $139 million on capital expenditures, $36 million on share repurchases, $33 million in dividends, and $15 million on one acquisition and several small investments in technology startups. We continued to look aggressively for larger acquisition opportunities, but could not find assets which met both our strategic and financial filter requirements. And finally, our strong results this year in the face of significant challenges are a great credit to the 13,000 MOGA employees around the world. I'd like to recognize their contribution and thank them for their continued dedication to serving our customers. Now let me provide some more details on the quarter and the year. Sales in the quarter of $768 million were 6% higher than last year. Adjusting for foreign exchange movements, underlying sales were up 9% on strong performance on the A&D side of the house. Taking a look at the P&L, our gross margin was down slightly on the charges in the space business. R&D was lower as we shifted resources to funded development programs. SG&A was in line, while interest expense was up on higher rates. The effective tax rate in the quarter was high at 31.6% as a result of non-deductible charges associated with divestitures. The result was net income of $29 million and EPS of $0.92. In the quarter, our portfolio shaping actions resulted in charges of $0.44. Excluding these charges, adjusted net income of $44 million and adjusted earnings per share of $1.36 were both up 8% from last year. Fiscal 22. Full-year sales of $3 billion were up 6% from fiscal 21. The main drivers of growth were the commercial aircraft business, both OEM and aftermarket, as well as increased sales on our RIP program in space and defense. Coast margin was in line with the previous year, while R&D was down. primarily in the aircraft segment. Over the last few years, we've continued to shift aircraft R&D resources onto paid development programs. SG&A was up in 2022 as travel and marketing expenses grew from the pandemic lows. Interest expense was up marginally on higher rates later in the year. A slightly higher tax rate resulted in adjusted earnings per share of $5.56 in fiscal 22, an increase of 14% from $4.88 in fiscal 21. Our gap results for the year included 73 cents of charges associated with various impairment charges and our portfolio shaping activities. Fiscal 23 outlook. The story for this coming year is sales growth, margin expansion, and improved free cash flow, with items below the operating profit line weighing on our EPS growth. For fiscal 23, we're projecting sales of $3.2 billion, an increase of 5% over fiscal 22. Adjusting for the stronger dollar and lots of sales from divestitures, underlying organic growth will be 7%. We anticipate growth in each of our operating segments, with the biggest gains in the commercial aircraft and space markets. Full-year margins of 11% will be up 80 basis points on stronger performance across all three operating segments. Significantly higher interest expense, a stronger dollar, and a higher tax rate will depress earnings per share by 74 cents relative to fiscal 22. For the full year 23, we're projecting EPS of $5.70 plus or minus 20 cents up 2%. Just for reference, if interest, taxes, and exchange rates in fiscal 23 were the same as fiscal 22, EPS would be $6.44, an increase of 16%. Full year cash flow next year will be $130 million, representing a conversion ratio of 70%. Now to the segments. I'd remind our listeners that we'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. It was a relatively quiet quarter in our aircraft markets. There was good news on the commercial front as Boeing resumed shipments of the 787, and there were early signs that China might restart flights of the 737 MAX. The C919 also achieved Chinese certification. We had the high lift system on this Chinese airplane, but a slow production ramp means our sales in the coming year are not material. On a less positive note, there was more uncertainty around the certification of the MAX 7 and 10 at the end of the quarter than at the start. On the military side, we've not yet seen any direct impact from the conflict in Ukraine. In October, we were disappointed to learn that the decision on the Flara contest will be moved out to the end of the calendar year. As we've described in the past, we're teamed with Bell on the V280 and do not have a position on the Sikorsky vehicle. Finally, supply chain constraints continue to weigh on the business, limiting our top-grind growth and pressuring our cash flow. Aircraft Q4. Sales in the quarter of $324 million were 9% higher than last year. All the growth came from our commercial business, up almost 40%. while the FEM sales were down 6% from the same quarter last year. We enjoyed strong growth in both the OEM and aftermarket segments of the commercial business. OEM sales to Boeing were up over 40%, with strength across the complete book of business. Airbus sales were only up marginally from last year. Business jet sales almost doubled, and higher sales from our Genesis acquisition completed the makeup of the growth. Commercial aftermarket sales were up almost 50% from last year. Growth was driven primarily by our wide-body programs, with strong performance on both the 787 and the A350. Even though international travel has been slower to recover, the utilization rates of the 787 and A350 fleets has increased much faster as airlines have brought their most efficient airplanes back into service first. On the military side, both the OEM and aftermarket were 6% lower than last year. Lower sales in the F-35 and B-22, combined with the loss of sales from our NAVAIDS divestiture, were the main drivers on the OEM side. In the aftermarket, many of our key programs were lower, including the F-15 and F-18. Despite the war in Ukraine, we've yet to see any material impact from higher defense spending filter through to our aircraft aftermarket. Aircraft fiscal 22. Full year sales at $1.26 billion were 8% higher than last year. The story was similar to the fourth quarter, with strong commercial performance compensating for a slightly weaker military performance. Commercial OEM sales were up on strong sales to both Boeing and Airbus, while sales into business jet applications doubled from fiscal 21. Commercial aftermarket was particularly strong this year, well ahead of our expectations 12 months ago. The primary driver was the faster recovery in the fleet usage of the wide-body platforms. In addition, we had several one-time items through the year, which generated about $20 million of sales. These items will not repeat next year. On the military side of the house, lower sales on the F-35 and on foreign fighter programs, combined with lost sales from our NAVAIDS divestiture, drove a 6% decline in the OEM top line. In the aftermarket, the good news is that our sales have stabilized after a big drop in fiscal 21. This year, stronger B22 sales mostly compensated for declines across much of the rest of the portfolio. Aircraft margins. Margins in the quarter were 10.7%, up almost 200 basis points from last year. Recovery in the commercial book, and in particular the strength of the commercial aftermarket, drove the increase. Lower R&D expense also contributed to the improvement as engineers transferred from internal developments to funded programs. Full year adjusted margins of 10.1%, we're up 180 basis points from fiscal 21, driven by the same factors as the quarter. Aircraft fiscal 23. We're projecting fiscal 23 sales of 1.33 billion, up 6% from fiscal 22. The strength is all on the commercial OEM side of the house, with strong sales growth at Boeing, Airbus, Gulfstream, and in our Genesis product lines. commercial aftermarket sales would be down slightly from 22. However, excluding the $20 million benefit from one-time items in fiscal 22, the aftermarket next year is actually up 9% organically. Military OEM sales will be up slightly year over year. Higher F-35 and foreign military sales will compensate for lower B-22 sales. Our forecast includes about $40 million in sales for the FLARA program. This assumes the B-280 is the platform of choice and that the decision is announced before the end of calendar 2022. The military aftermarket will be in line with fiscal 22. We're forecasting fiscal 23 margins of 10.3%, up slightly from fiscal 22 adjusted margins. The higher sales are a tailwind as factory utilization improves. However, two headwinds dampen margin expansion for the coming year. First, higher commercial OEM sales tend to dilute margins overall, and second, The one-time items in the commercial aftermarket in fiscal 22 drove an outsized margin performance. Relative to fiscal 21, aircraft margins in fiscal 23 will be up 200 basis points on the back of the commercial sales recovery. We anticipate continued margin expansion beyond fiscal 23. Turning now to space and defense. Our space and defense business continued its run of strong organic growth this quarter. The macroeconomic indicators for both markets remain very strong. In early October, our teams attended the AUSA show in Washington. It was clear from our discussions with both customers and the Army that air defense is becoming an ever more critical capability for ground forces, and that this trend offers many future opportunities for our riptors. Also, as part of our Agile Prime strategy, we exhibited a prototype hybrid electric UAV, which can be used for various defense missions, including cargo movement and weapons deployment. In space, our market position as a top-tier supplier of mission-critical components was again on display this quarter. On September 26th, NASA successfully intercepted Dimorphos, a small asteroid some 7 million miles from Earth, with the DART spacecraft, or the Double Asteroid Redirection Test spacecraft. The mission objective was to test if NASA could change the flight trajectory of an asteroid that might be on a collision course with Earth in the future. MOG provided various valves, actuators, and electronic components on this vehicle, all of which worked perfectly. We're looking forward to the upcoming first launch of the Artemis rocket in November. MOG provides the thrust vector control actuation on this next generation moon rocket, just like we provided the thrust vector control on Apollo 11 back in 1969. With the space market booming, we believe that MOG's heritage and demonstrated flight capability give us a distinct advantage over many of the new entrants. We're confident our ability to deliver reliable solutions will continue to fuel our growth in this market for years to come. In operational news, as part of our ongoing portfolio shaping, we divested our security business this quarter. This business was based in Chicago with about $20 million in annual sales. We entered this market after the 9-11 attacks almost 20 years ago. We believed that the burgeoning Homeland Security budget would provide opportunities for growth. The driver's vision enhanced our application with a real success during the Iraq conflict, but over the last few years, this business has struggled to meet our growth and margin expectations. Space and Defense Q4. Sales in the quarter of 217 million were 9% higher than last year. This quarter, the growth was all on the defense side, with sales into space applications down from last year. Defense sales were way up as the production of the RIP turrets for the M-SHORAD program continued to ramp. Beyond our RIP business, higher sales into missile applications and our components product line compensated for lower sales across other vehicle and naval programs. On the space side, we had lower sales into NASA applications and on hypersonic development activities as various programs wound down in advance of future production awards. Based on Defense Fiscal 22, Full-year sales of $872 million were 9% higher than last year. The growth was almost entirely in the defense market, driven by the MSHORAD program. On the space side, growth in our integrated space vehicles and avionics product lines compensated for low on NASA work. It's worthwhile noting that over the last six years, our space and defense segment has grown at an annual compound rate of 10%. Space and defense margins. Adjusted margins in the quarter of 9.4% were below our run rate for the year. Two factors contribute in about equal amounts to the disappointing margin performance. First, supply chain constraints for space-qualified components were particularly impactful this quarter. And second, our growing business in space vehicles experienced cost growth across several programs. Each of these factors individually depressed margins by about 200 basis points. Full year adjusted margins of 10.9% were down slightly from fiscal 21, driven mostly by the additional costs associated with supply chain challenges and labor inefficiencies, as well as the program charges we took in Q4. Based on defense fiscal 23, our forecast for fiscal 23 predicts another year of strong organic growth. Total sales will be up 7% to 930 million, a combination of 400 million in space and 530 million in defense. In contrast to fiscal 22, where all of the growth is on the defense side of the business, growth in fiscal 23 is all on the space side. Part of the story is an operational decision to realign the SADS product line from the defense sector over to the space sector in fiscal 23. This results in $25 million of sales moving from defense to space next year. In addition, in the fourth quarter, we divested our security product line. This results in the loss of $20 million in defense sales in fiscal 23. Including these two effects, defense sales will actually be up organically 7% next year. The growth is across much of the product line, including vehicles, naval, and components. Similarly, excluding the product line transfer, underlying space sales will be up 11% in fiscal 23. The increase is in our launch vehicles and integrated space vehicles product lines. We're projecting operating margins of 12.4% in fiscal 23. This is up 150 basis points from adjusted fiscal 22 margins on the higher sales and the absence of material charges on development roles. Industrial systems. The industrial markets remain strong this quarter with a book-to-bill of about one. This is a slight slowdown in bookings from our most recent quarters. It's a story of good news today and worries about tomorrow. As we enter fiscal 23, we have a very healthy backlog relative to our forecasted sales. Last year at this time, we had 42% of our projected fiscal 22 sales in backlog. Today, we have 57% of our projected 12-month sales in backlog. This gives us confidence in our forecast for the coming year. On the other hand, the backdrop of war in Ukraine and energy shortage in Europe and higher interest rates globally will create headwinds longer term. Our industrial product line shaping continued this quarter as we divested an offshore energy business based in Scotland. This business had annual sales of about $12 million. Looking to the future, our move into the construction equipment market also got a boost at the recent Bauma trade show in Germany. This is the largest show in the world for construction equipment. At this show, we were the chosen partner to provide electric solutions to three of the world's top construction equipment manufacturers. Bobcat, Ace New Holland International, and Komatsu. Industrial systems Q4. Sales in the quarter of $227 million were in line with last year. Adjusting for foreign exchange movements, underlying organic sales were up 6%. On an adjusted basis, real sales were up in three of our four markets with simulation and test marginally lower than last year. Both of the growth was in the industrial automation market. The majority of this business is outside the U.S. with over half in Europe. In local currencies, industrial automation was up over 10% from last year. Sales into our other three major markets were more or less in line with last year. We continue to see strong demand across our range of industrial products, while supply chain constraints have limited our sales growth. Full-year sales of $907 million were 2% higher than last year. Similar to the quarter, adjusting for foreign currency effects, underlying sales were up 5%. Increased demand for flight training simulators drove a double-digit increase in our simulation test market. On the other hand, we saw some softening in the demand for our medical products as conditions normalized post-COVID. Our energy and industrial automation markets were both up low to mid single digits. In the energy market, higher oil prices and increasing energy usage drove increased demand for both our exploration and generation products. In the industrial automation sector, we saw increased investment in capital equipment to expand factory capacities and alleviate supply chain bottlenecks. For the full year, our book to build remained above month one, with 12 months backlog up almost $140 million from the same time a year ago. Margins in the quarter of 6.6% include over 400 basis points of charges for portfolio shaping activities. In the quarter, we disposed of a UK-based business, incurred modest restructuring and impairment charges, and sold the building in the U.S. as we consolidated operations into existing facilities. Non-cash losses of about 18 million were partially compensated by a $9 million gain on the real estate sale. On a cash basis, net proceeds from these actions was $26 million in the quarter. Adjusted margins in the quarter of 10.8% resulted in full-year adjusted margins of 9.5%. Industrial systems fiscal 23. Our first look at fiscal 23. suggests a very small increase in sales, with strength and fight simulation and medical pumps compensating for slightly lower sales in both energy and industrial automation. Our energy market is down on the last sales from the divestiture in Q4, while our industrial automation sales are lower on the stronger dollar. We continue to worry about a potential global recession and an energy crisis this coming year. So despite our healthy backlog, we're forecasting sales conservatively as we enter the fiscal year. We're forecasting full-year margins next year of 10.5%, a 100 basis point expansion on adjusted margins in fiscal 22. Our portfolio shaping activities over the last couple of years are starting to have a positive impact on the bottom line. Summary guidance. This time last year, we planned for fiscal 22 with COVID receding and the world slowly returning to a pre-pandemic normal. We assumed commercial air travel would recover, defense spending in the U.S. might be pressured, and the industrial world would be strong. Instead, a war in Europe, growing tensions in Asia, extreme supply chain disruptions, and rising inflation made for a challenging environment. The performance of our commercial aircraft business exceeded our expectations with the aftermarket particularly strong. The invasion of Ukraine meant that the fence shifted from a potential headwind into a multi-year tailwind. The industrial markets remained strong, but our results were tempered by the availability of parts of the supply chain and by input cost pressures. Through the year, our teams worked hard to meet our customer commitments and reprice our products where possible to maintain margins. Our initial look at fiscal 23 suggests another strong year for the company with top-line growth, margin expansion, and healthy free cash flow. We continue investing in organic growth opportunities and deploying our capital to build a platform for long-term success. Our forecast for next year assumes that supply chain disruptions will continue all year but moderate as we get into the second half. We're also assuming no major impact from an energy disruption in Europe, nor a serious escalation of the war in Ukraine. We assume continued interest rate hikes and that we'd be able to raise prices selectively to combat inflation. As always, our forecast is our best attempts to balance all these factors and provide the market with a realistic outlook. Risks to the downside are mostly associated with an escalation of hostilities in Europe, heightened tensions in Korea, or a further deterioration of relations with China. Opportunities to do better include an earlier easing of the supply chain, a wild winter in Europe, and a potential end to the war in Ukraine. Longer term, we're more excited than ever about our business prospects. This optimism is based on both the external environment as well as our internal initiatives. Externally, we'll enjoy tailwinds from increasing defense spending, the commercial aircraft recovery, and continued investment in space. In the industrial world, spending on automation to bring production back to the West and technology shifts to tackle climate change will boost the need for our motion control products. Internally, our investments in new growth factors will continue to pay off. The addressable market for our ripped turrets, space vehicles, and construction solutions is measured in the billions. We believe our new Agile Prime initiative will create further large market opportunities. In parallel, our focus on providing world-class components in our chosen markets will give us the base for enduring success. Finally, the fundamentals of our strategy will remain constant. We'll continue to focus on solving our customers' most difficult technical challenges while building our IP and investing our capital prudently to create long-term value for our shareholders. In closing, we're very excited about the future. Our underlying businesses are performing well. Our diversity across end markets provides resiliency in the face of economic uncertainty and our internal initiatives are showing enormous promise for outsized growth over the coming years. We recognize the challenges we'll face in the coming year with ongoing supply chain issues, higher interest rates, and a potential recession in our industrial market. Despite these challenges, we're very optimistic about our business and see continued growth and margin expansion over the coming years. In fiscal 23, we anticipate sales of $3.2 billion, operating margins of 11%, and earnings per share of $5.70, plus or minus 20 cents. Similar to fiscal 22, the year would start slowly and then accelerate sequentially. For Q1, we anticipate earnings per share of $1.25 plus or minus 15 cents. Now let me pass it to Jennifer who will provide more color on our cash flow and balance sheet.
spk00: Thank you, John. Good morning, everyone. Today I'll start with some headlines and a reminder on our securitization program before shifting into Q4 and FY22 cash flow matters. I'll then share a first look at cash flow in FY23. Supply chain constraints continue to impact our free cash flow generation and we're projecting those pressures to remain as we head into the next year. We're continuing to purchase certain components in advance of requirements as we're concerned they might otherwise delay shipment. We're prioritizing meeting customer commitments over managing cash in the current environment while being mindful of an increasing interest rate environment. We're continuing to invest in our business, and we'll see that come through in capital expenditures. We just amended and extended our U.S. revolving credit facility, and we're in great shape to make these investments. We've made a couple of debustatures this year, which has generated cash that also helps to fund these activities. As a reminder, we amended our securitization facility in the first quarter. Our balance under this facility was $100 million at year end. Due to the structure of this facility, the associated receivables are not recognized on our balance sheet, which reduces our working capital levels. To provide a comparable look at our cash generation and financial position, I'll first share adjusted free cash flow and net working capital metrics without the effects of the securitization facility. I'll also include the metrics as calculated from our financial statements near the end of my comments for your reference. I'll now shift over to results in the quarter and all of FY22. Adjusted free cash flow generated in the quarter was $19 million. For the year, we generated $7 million of adjusted free cash flow. Supply chain constraints impacted our cash flow this year. We also decided to maintain a steady level of production on the 787 program to ensure our supply chain remains healthy and to keep our facilities operating efficiently. This level of production exceeds the rate at which Boeing is taking deliveries, which puts pressure on our working capital. The $19 million of adjusted free cash flow in Q4 compares with a $32 million decrease in our net debt, inclusive of the securitization facility. This past quarter, we received $36 million of cash related to the sales of two businesses and one building. On the cash outflow side, we paid $12 million for share repurchases, and $8 million for the quarterly dividend payment. For the year, we received $71 million of cash related to the sales of three businesses and one building. While these sources of cash are not included in our free cash flow numbers, we're able to use them to fund our capital expenditures that are currently higher than historical levels. We repurchased 487,000 shares this year for a total cost of $36 million, and paid $33 million on dividends. Adjusted net working capital, excluding cash and debt, as a percentage of trailing 12-month sales at the end of Q4 was 29.7%, down from 30.2% a quarter ago. About half of the decrease in the past quarter reflects the impact of divestitures. Inventories as a percentage of sales decreased for the seventh straight quarter, and we had favorable timing on liabilities. These benefits were partially offset by growth in receivables. Capital expenditures in the fourth quarter were $33 million, about the same as in the previous quarter. Our capital expenditures for the year were $139 million. Our focus continues to be on investment in facilities and infrastructure to support growth and investment in next-generation manufacturing capabilities to drive efficiency. At year end, our net debt was $719 million, including $119 million cash. The major components of our debt were $500 million of senior notes and $341 million of borrowings on our U.S. revolving credit facilities. In addition, we had $100 million associated with the securitization facility that does not show up on our balance sheet. At year end, we had $762 million of unused borrowing capacity on our U.S. revolving credit facility. 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 $664 million of net debt as of the end of the year. We are confident that our existing facilities provide us with flexibility to invest in our future. A week ago, we amended and restated our U.S. revolving credit facility. It remains a $1.1 billion facility and matures in five years. Our team did an incredible job securing this deal in today's environment, in which banks are facing challenges achieving appropriate returns for capital deployment. Our terms are largely the same, with our pricing grid being the same or better at various leverage levels. We're glad to have completed this transaction with a term given the current environment. Our leverage ratio calculated on a net debt basis was 2.2 times as of the end of 2022, down from 2.3 times a year ago. Our leverage ratio continues to be around the low end of our target range of 2.25 times to 2.75 times. Global retirement plan contributions and expense in the fourth quarter were relatively flat with the same quarter a year ago. Cash contributions to our global retirement plan totaled $16 million for the quarter, while expense was $21 million. For the year, contributions of $65 million and expenses of $83 million were up due to higher levels of participation on the U.S. defined contribution plan. Expenses were also higher as last year included a $6 million curtailment gain resulting from the termination of our defined benefit plan in the Netherlands. Our effective tax rate was 31.6% in the fourth quarter, compared to 19.0% in the same period a year ago. The relatively high tax rate this quarter is a result of the loss of the sale of an offshore energy business based in Scotland. This loss includes a write-off of the cumulative foreign currency loss that has no associated tax benefit. Without this impact, our effective tax rate was 23.4%. Last year's fourth quarter tax rate had a favorable tax impact associated with a pension curtailment gain. For FY22, our effective tax rate was 23.6%, up modestly from FY21's 22.8% rate. Both years benefited from provision to return adjustments. Next year, in FY23, we're expecting an effective tax rate of 25.0%. I'll now turn to cash flow for next year. In FY23, we expect growth in sales of 5%, which at current working capital levels would drive $40 million of working capital growth. Our capital expenditures are projected to be $150 million, while depreciation and amortization is just over $90 million, creating another $60 million of pressure on cash flow. Those two factors, sales growth and capital expenditures in excess of depreciation and amortization, get us to a starting point of about $80 million for free cash flow generation, or 45% conversion. The good news is that we're projecting free cash flow generation for FY23 to be much stronger at $130 million, or about 70% conversion. We'll see nice improvement in working capital that will help us achieve the $130 million of free cash flow generation. We have assumed that the inactive tax law associated with R&D expense amortization will be repealed, given bipartisan support for innovation. I'd also like to share some of the metrics and amounts you'll be able to calculate from our financial statements. These reflect GAAP accounting for the securitization facility. Free cash and flow in the quarter was $30 million, and free cash flow generation for the year was $107 million. which is about 60% conversion on adjusted net earnings. Networking capital was 26.4% of sales at the end of the year. Going forward, I'll no longer report on the impact of securitization on free cash flow generation unless there's a material change in our securitization balance. Networking capital will continue to include a benefit of about 300 basis points. Our financial position remains strong. We're effectively managing through the current supply chain environment. We're looking to invest to further support growth and capitalize on efficiencies, and we've got the liquidity to do so. We're maintaining leverage where we'd like to see it, and our financial position is solid. With that, we'll turn it back to John for any questions you may have. John?
spk08: Thanks, Jennifer. Cynthia, we're happy to take questions now from our audience.
spk02: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press star one. We will take our first question from Michael Cermoli with Truist Securities. Please go ahead.
spk07: Hey, good morning. This is Pete Osterlendon for Mike this morning. Thanks for taking our questions.
spk08: Good morning.
spk07: So first, just wanted to ask... With the growth inflection you're expecting in commercial aero in the upcoming year, I was just wondering if we could get a little more color there on which platforms you're expecting to be the largest contributors to your growth and if you expect to be fully aligned with the underlying production rates at Boeing and Airbus or if there are any platforms where you're producing at a different rate.
spk08: So the growth is actually across pretty much all of the platform next year. It's across the Boeing book of business. It's across the Airbus book of business. It's on the BizJet book of business. And then there's some other kind of component stuff. And we also mentioned the Genesis acquisition that we'll see grow next year. So it's actually pretty spread across all of those. We'll see some growth on the A737. We'll see growth A350, you know, the usual programs. And, of course, on the Gulfstream book of business. So it's a broad-based growth. I don't know that I described next year's inflection. I think 21 into 22 was the inflection, and we're just continuing that performance on the OE side next year. The only program where we essentially have a kind of a misalignment between ourselves and our customer is the 8-7, which, of course, we've described in some detail. And so for the last year, we have on average done about three and a half ship sets a month. We said we kind of moved to four in the second half, but earlier in the year, we had a little bit of a slower start. And for next year, we're forecasting that we will continue at that level of four shipsets per month throughout fiscal 23. Now, I think Boeing is viewing that, you know, they're lower at the moment and then they start to ramp. But we think, you know, we have already built some inventory of our stuff. They have built some inventory. So we don't anticipate a ramp in our 787 production until we probably get into fiscal 24. So that's the only one where... you know, we may see the OE move up, but we'll probably remain flat through all of next year. Otherwise, we're matched with the OE demand.
spk07: That's helpful color. Thank you. And then just as a follow-up, I was wondering if we could get some color on what you're seeing just on the labor front. Do you have all the hires in place that you need for the upcoming year? And are you seeing any meaningful pressure either from elevated attrition or productivity level?
spk08: So... So the situation really hasn't changed much in the last quarter, and there's a constant challenge to try and recruit the number of people in two areas in particular. One is really high-end machining capabilities, and the other is the really specialized engineering, controls engineering, systems engineering folks that we want. The way I would describe it is I'd say we're holding our own just like everybody else, but if you go back a decade or so, we typically ran attrition in the mid-single digits. We felt that we were pretty good at that. We've been running for the last year in the mid-teens, but as has almost everybody else, I think, in a similar situation. So that remains a challenge. I think it will continue to be a challenge next year. Hiring slowdown in the U.S., some of the tech guys releasing folks, it's not that those people are directly applicable to us, but perhaps it suggests that there may be a little bit of a slowdown and that might free some stuff up. But in general, for the types of skills that we're looking for, it's a constant battle to try and make sure we get them. One measure that I kind of use as to whether or not the supply chain and the labor issues are loosening up is whether or not we're seeing our past due to customer commitments growing or shrinking. And over the last year and even in the last quarter, that has continued to tick off, which says to me it continues to be a challenge to get the product out to the customer that they want and that we're trying to meet their demand for. And that's a combination of component availability on the supply chain and the labor challenges. It's an ongoing battle. I'd say we're holding our own, but it's a daily fight to try and get both the parts and the folks that you need to meet commitments.
spk04: That's very helpful. Thank you. Thank you.
spk03: We will take our next question from Kai Von Rumer with Cowan. Please go ahead.
spk04: Morning, Kai. Hey, guys. This is actually Jack on for Kai today. How's it going?
spk06: Good. I actually wanted to talk about the 23 guide, just kind of, you know, just sort of below the line items with interest expense and FAS. I would think, you know, going higher here, how do we think about that? What are you assuming in regards to, you know, like are you baking in, you know, future interest rate increases here in 23? Just kind of square that for us. And then just the second question, in regards to supply chain, if you can kind of actually quantify the past dues. I know you mentioned, you know, it's a component of, you know, components and labor. I just, you know, I'm just curious if you've been able to actually quantify those past dues. Thanks.
spk00: Okay. I'll start with interest expense. So, for interest expense, We're looking to see a sizable increase next year. This year we had 36.8 million dollars of expense. Next year we're looking for 53 million dollars worth of expense. Over the past year there's been 300 basis points of interest rate hikes and so some of that happened, you know, as early as March, but the biggest impact was really felt in our fourth quarter and We have assumed the hike that just came through just a few days ago of 75 basis points, and we're assuming another 150 basis point hike after that. So that's really the driver of our interest expense expansion. We've got about half of our interest or half of our debt that is subject to variable rates. So what we do is we apply it on that. and that's where we get that significant growth to $53 million next year.
spk08: Let me offer something on the past due. So, you know, we don't quantify past due. I don't think that's necessarily a helpful metric, but I put it into context for you. It's probably running twice what it would normally run. You know, in any particular time, there's always some issues with past due. It's a technical issue. It's a supply chain issue in what I call normal circumstances. And in the present circumstances, I would say it's running twice but that would have normally been. So we're seeing pressure on it. It's not that it's, you know, as I say, we're still meeting our original forecast, so we get better in some stuff. Some other stuff is challenged. But it's just a disruption for both ourselves and our customers, and of course our suppliers are working hard. So it's additional friction costs in delivering the business. So it's up, but it's not something that's, I would say, out of the norm with others in the industry. I think we're just seeing exactly the same as others. And maybe, Ronan, that's twice what you might say if the whole world was functioning the way it was, you know, four, five, six years ago.
spk04: Yeah, totally understand. Thanks so much. Yep, you're welcome.
spk03: As a reminder, if you would like to ask a question at this time, please press star 1, and we will pause for just a moment. We will take our next question from Christine Leeweg with Morgan Stanley. Please go ahead.
spk07: Hi, this is Justin on for Christine. Hey, good morning. This is Justin. Just a quick one on FLORA. For the program's impact that you've baked into the 2023 guide, I think you mentioned it was something like $40 million. Is that a hedge number, or what would you fully expect if a war did materialize by the end of the year?
spk08: No, it's not a hedge number. It's kind of an on or off number. If we win, that's what we think we'll get, you know, because it'll be development. So it's engineered. So it's not that there's a huge upside. There's no production in it. So it's really just putting engineers on it to do the development. So there's not, you know, is it 40? Is it 35? Is it 42? I'm not sure. It's either 40 or it's nothing. That's the thing. If Bell wins and it's contracted, again, assuming we get under contract by the end of the calendar year, it's 40. If that gets delayed, Obviously, it drops off, and if Bell doesn't win, the party goes to zero. So I don't think that's a hedge number. It's kind of that's what we're anticipating, assuming a win.
spk07: Okay, helpful. And have you heard anything incremental from the customer on timing? We've seen this kind of slip to the right a few times. Anything new that gives you confidence?
spk08: No, we're not privy to any of that, of course. I mean, we stay connected with Bell. We were all anticipating at the AUSA that within a couple of days it was going to be announced, and it just suddenly got postponed. That was a surprise to the whole industry. So I don't know if anybody has that insight, apart from the government folks that are working in it, but we definitely don't have any additional insight.
spk04: Okay, thanks. Yeah, sure.
spk03: And it appears there are no further questions at this time.
spk02: Mr. Scannell, I will turn the conference back to you for any additional or closing remarks.
spk08: Thank you very much indeed, Cynthia. Thank you to all our listeners. We feel like we had a solid fiscal 22, and we're looking forward to an exciting fiscal 23. We look forward to reporting out again on our first quarter in 90 days. Thank you.
spk02: This concludes today's call. Thank you for your participation, and you may now disconnect.
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