Moog Inc

NYSE:MOG.A

Earnings Call Transcript 2022-Q1

[Operator]

Good day and welcome to the Moog First Quarter FY2022 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Ann Luhr. Please go ahead.

[Ann Luhr, Head of IR]

Good morning. Before we begin, we call your attention to the fact 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 January 28, 2022 and most recent Form AK, filed on January 28th, 2022, and in certain of our other public filings with the FEC. We've provided some financial schedules to help our listeners better follow along with the prepared remarks. For those of you who do not already have a copy of the document, a copy of today's financial presentation is available on our Investor Relations webcast page via www. moog.com. Josh.

[John Scannell, Chairman & CEO]

Thanks, Ann. Good morning. Thanks for joining us. This morning we report on the first quarter of fiscal '22 and provide color on what we're thinking for the remainder of the year. Let me start with the key financials. Earnings per share of $1.44 included a $0.33 net gain from our portfolio-shaping activities. Adjusted earnings per share of a $1.11 were in line with our guidance from last quarter. Omicron made this quarter more challenging than we had projected 90 days ago. It further exacerbated the difficulties associated with labor availability, supply chain constraints, and inflationary pressures. Despite these additional headlines, we achieved our plans -- oh, sorry, additional headwinds, we achieved our plans. Adjusted free cash flow in the quarter, excluding the impact of our securitization facility, was $ 31 million, a conversion ratio of 86% on adjusted net earnings. There's no change to our guidance for the full year.

Full year sales will be $3 billion, with adjusted earnings per share of $5.50 plus or minus $0.20. Now let me move to the headlines. There were several exciting product announcements since we last reported, including a major production when a strategic collaboration and the technology demonstrator. First, we reached agreement on the full order for our ripped Truist for the shore out program. Over the last years, we have been working on the initial order for 30 units, including non-recurring developments. The full order for 124 units, including NRE and options, totals almost $250 million in sales, and is our largest defense booking ever outside our aircraft business.

MOG.A is just the first major win for our re-configurable tourists and we anticipate further wins in the future. Second, in early January, we formerly launched our moat construction initiative. With the announcements at the Consumer Electronics Show in Las Vegas, of a strategic collaboration with Doosan Bobcat. Moog will supply all the controls, and actuation on the world's first all-electric track loader to T7X. Our controls platform, opens the future opportunity to augment the operator’s capabilities through automation, and eventually for the autonomous operations. Bobcat's launch customer is Sunbelt(ph) rentals. We want to build at least of all electric vehicles. We look forward to getting the first units into the fields over the next few months. Converting professional equipment from diesel and hydraulics to electrics is a significant challenge. The type of challenge our company has solved in other industries in the past. The electric construction vehicle markets is in its infancy, and autonomous vehicle operation is still experimental. However, the longer-term market potential for Moog is enormous.

Third, Moog hardware played a critical role in the DARPA Gremlins program this quarter. In early October, the military ran a successful test to recover an unmanned Air Vehicle into a conventional airplane. Moog provided flight controls technology for both the Air Vehicle and the recovery system, demonstrating again our capability to solve our customers ' most challenging technical problems. These programs demonstrate our commitment to organic investments that fuel long-term growth. Over the last few years, we've continued to look for strategic acquisitions but have struggles to justify the price levels that others are paying. We therefore decided to double-down on internal investments that would create significant long-term value. These investments come in two categories: First, investments in new markets, products and technology to drive the top line. We've already described some of our growth investments, including our rip tourist, which is now in full production; our space vehicles, which are starting to ramp production; and our construction equipment initiative, which is in the pre -production phase.

Second, investments in infrastructure, facilities, advanced manufacturing systems, and portfolio shaping to build the platform for longer-term growth at higher margins. Notes that our forecast for Fiscal '22 already includes these investments. Now let me move to the details, starting with the first-quarter results. Sales in the quarter of $724 million were 6% higher than last year. Sales were up in each of our three operating groups with particular strength in the commercial aircraft and space markets. Taking in the P&L, our gross margin was down on operational inefficiencies attributable to the pandemic. R&D is in line with last year, selling and admin expenses are up on increased customer directions. But in line with our plans for the year, interest was slightly lower, on lower debt levels. This quarter includes the benefits from the sale of our navigation aids business. The effective tax rate was 24.7%, resulting in net income of $46 million and earnings per share of a$1.44, excluding the impact of our portfolio actions in the quarter adjusted net income was $36 million and adjusted earnings per share [Indiscernible] fiscal 22 outlook. Our first-quarter was in-line with our guidance from 90 days ago.

We anticipated a slow start to the year with increasing sales and earnings as we move through the quarters, our outlook remains unchanged. And therefore, we are affirming our full-year guidance of $3 billion in sales, up 6% from last year and adjusted earnings per share of $5.50 plus or minus $0.20. That's the segments. I'd remind our listeners that we provided a supplemental data package posted on our webcast sites, which provides all the detailed numbers for your models. We suggest you follow this entire level of the text. Starting with our aircraft group. The underlying market dynamics in our aircraft business, are somewhat mixed this last quarter. Global political tensions with Russia and China continued to mount, and their strong support for defense spending across, across both sides of the aisle.

On the other hand the continuing resolution, and a slower level of activity in the military aftermarket are causes for caution. The recovery in the commercial aircraft markets, was partially interrupted this quarter by the Omicron variant, but should resume as the virus wanes. China through the 737 MAX, which hopefully means return to full service sometime in the near future. However, that's positive is the fact that the 787 continues to have challenges and deliveries to airlines are not forecasted to resume for several more months. Aircraft Q1: sales in the quarter of $303 million or 6% higher than last year. This quarter, the commercial sales were way off with military sales down from a year-ago. We saw a strong growth in both the commercial OEM and commercial aftermarket portfolios. On the OEMs sites, we experienced higher sales across most of our portfolio programs. We had particular strength from the A350 and in business jets.

The 787 was also up from a year-ago. We had $3 million of additional sales from our Genesys acquisition, which we completed in the last month of Q1 last year. Growth of the commercial aftermarket was driven primarily by the 787, with more modest sales increases on the A350, and then our business jets portfolio. On the military side, we saw decreases in both the OEM book and in the aftermarkets. OEM sales on the F-35 were down over 20% as a result of supply chain challenges. In addition, we saw a sharply lower sales on some foreign military programs, as a result of timing issues. Partially compensating for these reductions were increases in our helicopter product line, higher funded developments, and additional sales from Genesys. In the military aftermarket, we saw decreases across much of the portfolio with the exception of the V-22.

As part of a wider portfolio shaping program, we completed the divestiture of our Navaids business in the first quarter. We received $39 million in cash and booked a gain of $60 million on the sale. This gain contributed over 500 basis points of operating margins to the aircraft business in the quarter. Sales of our Navaids business in fiscal 21 were $25 million. Aircraft margins. Excluding the gain from the sale of the Navaids business, adjusted margins in the quarter were 8.5%.

These margins were ahead of our average for Fiscal '21. However, they were down from the same quarter a year-ago. Last year you may remember, we had a particularly positive mix in the first quarter as a result of unusually strong sales on some of our foreign military programs. Aircraft fiscal '22. We're keeping our full-year sales forecast unchanged from 90 days ago at 1.25 billion up 7% from fiscal '21. We're also keeping the mix between military and commercial unchanged. Our full-year forecast assumes some acceleration on the military side, from the run rates of the first quarter. Easing supply chain bottlenecks on the F-35, and a modest pickup in the military aftermarket will drive the growth. On the commercial side, we're already slightly ahead of our projected runways coming over to the first quarter. We had some favorable timing of material receipts in Q1, which drove the rates. We anticipate this will level out over the coming three quarters.

As we go through the remainder of the year, we anticipate margins was strengthened to yields full-year adjusted margins up 10.1%, unchanged from our forecasted margin earnings. Turning now to Space and Defense. Underlying demand for our legacy components across both the space and defense markets remain strong. Global investment in space, or commercial and military continues to create opportunities for growth in our business. In particular, our growth is being fueled by our newer, more integrated product offerings in both markets. The vehicles for space and the reconfigurable Tara's in defense. Sales in the first quarter of $208 million were 10% higher than last year. This quarter we enjoyed nice growth in both the Space and Defense portfolios. On the Space side, sales were up over 10% on continued growth in our Space Vehicles product line. Sales in this product line more than doubles to over $20 million in the first quarter this year.

Increases in our avionics and legacy valves business made up for lower sales on hypersonic development programs. Several of our hypersonic development programs are winding down, and we will now have to wait to see which move to the next stage of early production. On the defense side, the growth was driven by our vast values on the total program value. As I mentioned in my opening, this quarter we agreed the remaining stages of our contracts with DRS, and celebrate a total program value over several years of almost $250 million. We saw some slowdown in our tactical missile business this quarter, but this was compensated by higher component sales. Over the last few years in both the Space and Defense markets, we followed a strategy of combining our components into more integrated solutions to address the needs of the end customer, primarily the Defense Department.

We called this strategy agile prime. Our major growth drivers this year, space vehicles, and our target offerings are examples of the success of this strategy. Going forward, we will continue to offer world class components as a sub-tier supplier to all the major primes. In parallel, we will look to partner with the primes to offer more cost-effective and flexible solutions that address some of the challenges of their customers. Similar to our aircraft business, our portfolio shaping continued in Space and Defense this quarter. We took a $2 million charge associated with exiting of product line in our security business. Space and Defense margins: adjusting for the portfolio shaping charge, underlying margins in the quarter were 11%. These margins were down from a few years ago for a combination of reasons. First, as in all our businesses, COVID is putting operational pressure on our facilities both in terms of labor efficiencies, as well as supply chain disruption. Second, our new growth vectors of turrets and space vehicles are in the early stages of production and are at lower margins than our more mature businesses.

We expect the margins on these new businesses to improve over the coming years. Space and Defense fiscal 2022: there's no change for our forecasted sales for the year. Full-year space sales will be $350 million, in line with the run rate of the first quarter, full-year defense sales will be $530 million. An acceleration from the first quarter as to assure our program continues to grow. For the full year, we're keeping our adjusted margin forecast unchanged at 11.5%. Now to Industrial Systems, the major global economies are showing real strength despite the ongoing pandemic. We see this strength reflected in our Industrial bookings. across every market from cars to materials, to electronics demand is volumes while the supply chain is struggling to keep up. Capital spending is up driving strong demand for our automation equipment (ph). With oil prices firming, and flight training on the increase, we're feeling positive about the remainder of our fiscal year. It's too early to tell at the presence high level of demand is transitory as a result of constrained supply chain, or whether it is stable longer-term. Sales in the quarter of $213 million were marginally higher than last year.

Sales were up in three of our sub-markets, energy, industrial automation, and Semi-test sales into medical applications were down from the year-ago. Energy sales were up across much of the portfolio as oil prices continue to edge upwards. Industrial automation sales were up, reflecting the increasing confidence in the global recovery. Sales into sim and test application grew up as we delivered on some large tech programs in China. Sales of flight simulation systems remained muted again this quarter, actually down from a year-ago. However, on a more positive note, we are starting to see stronger demand for flight simulation systems as the airline market recovers. Finally, sales into medical applications were down in the quarter and the underlying business continues to settle after the COVID surge. Industrial Systems margins. Margins in the quarter of 8.1% were down from a year-ago, but in line with expectations.

This quarter, we incurred moving expenses and production disruption as we continue to refine our footprints and consolidate facilities in both Europe and the U.S. We also increased our investments in future growth factors. In particular, our electric construction vehicle initiatives. We're confident that these investments will pay off on both the top-line and the bottom-line, over the coming years. In the shorter term, our strong backlog gives us confidence for the remainder of this fiscal year, we'd see a pickup in both sales and margins. Industrial Systems fiscal '22. There's no change to our sales forecast from last quarter. For the full year, we anticipate sales of $910 million with an acceleration as we move through the quarters, the risks to meeting this plan will not be on the demand side. We already have the backlog. Our primary concern remains the supply chain's ability to meet this increased level of activity. We're forecasting full year margins of 9.5%. Summary guidance. Overall, it was a solid quarter in line with our guidance despite the unexpected arrival of the Omicron variant.

Business sentiments remains positive across all our markets, while supply challenges are tempering our growth on both the top and bottom lines. It was an exciting quarter for product announcements with a short outage production program, the Bobcat strategic collaboration, and the Gremlins technology demonstration. We continued to generate healthy free cash flow, and return some of that cash to our investors through our dividends and share buyback programs. Growth on the top and bottom lines remains our focus. Our search for strategic acquisitions is ongoing. But the last few years have taught us to be wary of overpaid. In addition, our portfolio review has showed that internal investments have often created more long-term value than some of our acquisitions. As a result, we're accelerating the pace of internal investments this year, both in terms of capital expenditures, as well as investments in new market opportunities.

We're very excited about the long-term opportunity for our business. Climate change is opening opportunities for us in construction vehicles and Democratic shifts are creating the need for additional elevation. The availability of ever lower past sensors and advanced computing platforms, is enabling transformational change. At our core, we are in engineering and technology Company. Our greatest strength is working with our customers, to solve their most difficult technical challenges. We have both the components technology, and the systems integration capability to make things work. Our collaboration with Bobcat came from demonstrating this capability. Within 6 months of our first conversation, we had a fully operational vehicle. For the second quarter, we anticipate earnings per share of a $1.30 plus or minus $0.15. Our range is relatively wide again, as we remain unsure about the evolution of the virus and the potential impact of vaccine mandates and further supply chain issues on our business. However, these are transitory issues and they will resolve, we believe over the coming quarters. Our underlying business remains strong and we're very optimistic about the longer-term. Now, let me pass you to Jennifer who will provide more color on our cash flow and balance sheet.

[Jennifer Walter, VP & CFO]

Thank you, John. Good morning, everyone. Inflation and interest rates are getting a lot of attention these days. We're feeling the effects of inflation now. We're seeing the economic growth that comes with inflation. It's also impacting the cost of labor and purchase materials. With the FeD likely to hike interest rates soon when we see the tapering, the effects of inflation. We can expect higher interest costs. But since we're not highly levered, we are well-positioned to take advantage of acquisition opportunities, should prices moderate. Workforce and ability and labor shortages are also affecting us, both directly and through the supply chain. It's an interesting backdrop for everyone these days. Moving to most specific activity, we just announced a 4% increase in our dividend to $0.26 per share for our upcoming quarterly dividend payments. This quarter, we also amended our securitization facility. This facility provides us with lower interest costs compared to those that we would incur with borrowings under our revolving credit facility. We essentially sell receivables of up to a $100 million on the amended securitization facility, such as those receivables are derecognized from our balance sheet. This new structure reduces our working capital and debt levels.

To provide a comparable look at our cash generation and financial position with previous periods, I'll first show -- I'll first share free cash flow, networking capital metrics, and debt balances without the benefit of the new securitization facility. I'll also include the metrics as calculated off of our financial statements near the end of my comments for your reference. Free cash flow continues to be a good story. We averaged 100% free cash flow conversion since the beginning of last year. In our first-quarter this year, free cash flow was $31 million or 86% conversion on adjusted net earnings. Customer advances were particularly strong but driven by large advances on military programs. In addition, we continue to inventories as a source of cash. But $31 million of free cash flow in Q1 compares with a $44 million decrease in our net debt. During the first quarter, we received $9 million of proceeds from the sale of the navigation aids business. Partially offsetting these proceeds were $13 million of share repurchases, and $8 million for the quarterly dividend payments. Net working capital excluding cash and debt, also showed nice improvement this quarter. As a percentage of sales, networking capital was 27.6% at the end of the first quarter, down from 29.1% a quarter ago.

Cash advance from defense customers were very strong and drove this improvement. Partially offsetting this with the growth in receivables. Capital expenditures in the first quarter were $37 million, in line with our spend over the past couple of quarters. We're recapitalizing for next-generation manufacturing capabilities that will provide us with a strong platform for growth. We're also consolidating some of our operations into new facilities. We're in a solid financial position to comfortably -- in making these investments. At quarter-end, our net debt was $759 million, including $107 million of cash. The major components of our debt were $500 million of senior notes, and $272 million of borrowings on our U.S revolving credit facilities, as well as $90 million associated with the securitization facility that does not show up on our balance sheet. We have $797 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 0.4 times on a net debt basis. Based on our leverage, we could have incurred an additional $635 million of net debt, as of the end of our first quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future. We're in a good shape from a leverage perspective, our leverage ratio was 2.2 times on a net debt basis, as of the end of the first quarter, compared to 2.6 times a year ago.

Strong cash-generation drove this improvement. Our target zone as between 2.25 time, and 2.75 times. So we're just below that. We're comfortable with our leverage falling below that range for a few quarters or even midyear. We have the full spectrum of options available to us for capital deployment. Currently, we're very focused on internal investments that will serve to provide growth opportunities, as well as efficiency gains. We continue to explore acquisition targets while remaining disciplined on pricing, that's still generally quite high. In addition, we may return capital to shareholders by buying back shares. We also have our dividend policy in place. Shifting to global retirement plans, cash contributions totaled $16 million in the quarter, compared to $13 million in the first quarter of 2021. Contributions have increased for our defined contribution plans as participation growth in our U.S. plan.

Global retirement plan expense in the first quarter was $21 million, up from $18 million in the first quarter of 2021, also driven by our contribution -- our defined contribution plan. Our effective tax rate was 24.7% in the first quarter, compared to 24.9% in the same period a year ago. Adjusting for divestiture activities, our effective tax rate was 24.0% in the first quarter. The lower effective tax rate this quarter was largely the result of a more favorable earnings mix. We expect free cash flow conversion in 2022 to be about 45% on adjusted net earnings. Customer advances and inventories will be sources of cash, while receivables and payables will be uses of cash. We expect $160 million of capital expenditures in 2022 with a slight uptick in spend from our first-quarter spending level. Capital expenditures reflect investments in facilities and infrastructure to support future growth and operational improvements in the business.

Depreciation and amortization are forecast to be $97 million. While free cash flow moderates this year, we're also generating cash through our portfolio reshaping activities, such as cash generated from the sale of the Navaids business this past quarter. Before I wrap up, I'd like to share some of the metrics and amounts you'll be able to calculate from our financial statements, which reflect U.S GAAP accounting for the securitization facility. Free cash flow in the quarter was $120 million, and is projected to be $179 million for the year, which is about 100% conversion on adjusted net earnings. Networking capital was 24.5% of sales at the end of the quarter, and net debt was $669 million. In summary, our financial position is strong, we're generating cash to fund investments that will provide for our long-term sales growth and margin objectives. We remain optimistic in our future. With that, we'll turn it back to John for any questions you may have.

[John Scannell, Chairman & CEO]

Thanks, Jennifer. Genevieve we would be happy to take questions now from some of our listeners, please.

[Operator]

If you would like to ask a question [Operator Instructions]. We will take our first question from Kristine Liwag with Morgan Stanley. Please go ahead.

[John Scannell, Chairman & CEO]

Morning, Kristine.

[Kristine Liwag, Morgan Stanley]

Good morning, everyone. How are you guys doing?

[John Scannell, Chairman & CEO]

We were doing better last week before the bills; last half of the we're doing okay.

[Jennifer Walter, VP & CFO]

I hope that will be better.

[Kristine Liwag, Morgan Stanley]

Yes, me too. I will touch base with you about the F-35. I mean, we've heard some of the prime struggled with their F-35 program, with labor constraints. What's the pace of slowdown you're seeing from the programs? And how has that affected you, if any, at all?

[John Scannell, Chairman & CEO]

So in the quarter Kristine, we had what I call, there is clearly COVID this quarter with the Omicron variant. Also the vaccine mandates which created quite a lot of disruption -- not that they went through yet, but just on rest. That really put pressure on I'd say labor productivity in the quarter, which would have affected the F-35. But the bigger issue was, we had some idiosyncratic supply chain issues, some specific component related issues that we were struggling with this quarter, that we anticipate that will recover as we go through the next few quarters. For the full year though, our sales on the F-35 will be down about 10% from what we saw in 21 and, kind of, in line with what we saw in '20. So that's kind of we saw that ramp up into '21 and we're back down a little bit about 10% from what we saw in '21 in '22. And that's what -- we haven't changed that forecast for the year. We were just a little bit slower over the gauge in the first quarter because of obviously the labor issue, but more particularly some particular issues on the supply chain.

[Kristine Liwag, Morgan Stanley]

And supply chain point, John. Can you elaborate more on exactly what you're experiencing, what actions you've taken to mitigate the risks? And also going forward, are these things starting to get better or worse?

[John Scannell, Chairman & CEO]

And so we're seeing -- I mean -- the problem with the supply chain Kristine, is it's all over the place. On the F-35 we had some specific issues with a couple of components, some of our suppliers have had some challenges. Keep in mind that our supply chain issue could be reflected as labor availability issue at some of our sub-suppliers. So it all kind of ripples through, but it's across a range of components. It's not just electronic components, it can be mechanical components, it can be a whole variety of stuff. One of the things that we're struggling with right now is lock ties nothing to do with our aircraft business, in one of our other businesses, but we can't get lock ties. So it's across the board Kristine and it's almost impossible to predict what's going to be the next issue that comes up. In terms of mitigating against that. When you're in the storm, all you can do is you can batten down the hatches and do the very best you can to maneuver. And so what it is it's putting a significant amount of additional efforts into chasing down, alternative sources of supply.

We can't of course the much the of aerospace stuff, we can't get alternative sources of supply. So we're spending a lot of time with our suppliers, working with them directly, trying to solve whatever problems that they may have, looking for if its commodity self, is there another supplier that we can get that knock tight from? Is there a vendor or trader that you can get from? So same as every other company, just spending a lot more time and a lot more efforts doing what, a year or two ago would be just placing the appeal. So it's a drag in terms of efficiency, but there's no solving it in the short-term. Building inventory, which is one of the concerns I mentioned on the industrial side, is you get this huge pickup in demand because supply is constrained. And that the question that always remains is that just -- would that unwind as we go forward because people are over-ordering because they can't get the stuff or not? But there's no simple solution because we don't know tomorrow what the new issue will be on the supply chain. So it's a continuous vice. And you asked a third piece that I'm trying to remember what your third piece was.

[Kristine Liwag, Morgan Stanley]

I mean, are there any parts that are actually getting better and not worse?

[John Scannell, Chairman & CEO]

Yes. I mean, what happens is you have an issue with a part, you work it really hard and that part gets better. And then something else comes up. So is the supply chain in total getting better? I don't think it's getting better, yet, I know on the F-35 the team there would say well we had these three or four components that where real issues, and we think we've pretty much solved those, so that will get better in the next quarter. But that's not to say that something new is not going to turn up at a different part of the business. So I wouldn't say at this stage that it's getting better, yes. In aggregates, I think that's still to play out. And if you think of China's zero COVID policy and the spread of Omicron, the potential for China to shutdown large parts of their supply chain for weeks at a time could further make for difficulties in the future. So it's still a mixed bag, Kristine, we're still in the middle of the storm. It's not better, yes. And that's one of the cautions I would say about Q2 and Q3 is, these things are very hard to estimate, and they can have a significant impact. Which is why we have a much wider range on the quarters at the moment than we would normally have, if we had more stable conditions.

[Kristine Liwag, Morgan Stanley]

Thank you, John. Thank you for all the color, and best of luck.

[John Scannell, Chairman & CEO]

Thank you.

[Operator]

We'll take our next question from Mike Ciarmoli with Truist Securities, please go ahead.

[Mike Ciarmoli, Truist]

Hey, good morning guys. Thanks for taking the questions here. Hey John, not to pick on the margins. I know obviously, commercial aerospace, everyone's had a tough go that. Okay. We're certainly seeing some good expansion across the sector as we come out of this. But can you just give us an update. I guess it was right a couple of years ago, you uncovered all the inefficiencies in the aircraft controls segment. And I think there were a lot of changes in process improvements and just a broader operational improvement plan put in place. Can you give us a sense of what's happening there and I mean, obviously some of the Omicron supply chain inflation probably impacting those potential gains, but maybe just an update on what's been happening in aircraft under the hood with the overall operations?

[John Scannell, Chairman & CEO]

Yes. We have continued down that path Mike. We talked about investing, whether that's more in CAPEX. We're investing in more modern equipment. We're investing in new facilities. So we continue to invest in improving our operational capability, staffing, talent, etc. so onto that has continued. But it's completely masked by a 50% or 60% drop in the demand for the commercial side, which devastated our facility in the Philippines. In terms of our already throughput, we are down. We're under recovery this year, and yet the hours through that facility are down by 50%, from what they were in Fiscal '19. You get that type of impact which is enormous, as you say, you've got the labor availability because of COVID, you've got the supply chain issues. So all of those mask what I would say is underlying improvement. Having said that, we're forecasting margins in the aircraft business to go from 8.3% last year to 10.1% this year, and if commercially continues to strengthen, we should see that increase over the coming years. So we are seeing that margin improvements. But it's, as I say, it took a real hit when COVID came on us.

[Mike Ciarmoli, Truist]

Yeah. Assuming we continue to get volume recoveries on narrow-body, certainly wide-bodies, I guess will be challenged, but you guys have been bouncing around a 10% for the past seven or eight years. You think there's -- after you see the volumes come back, you think there's runaway to finally regather that channel if you would?

[John Scannell, Chairman & CEO]

Absolutely. Although I would caution, like, the narrow bodies are very small parse -- part of our business, it really is the wide bodies that drives our business. Yes. So the 737, if they start taking them again at 40 or 40 a month, it'll be a bit of a pickup for us, but it's not like the 87 getting back to 10 a month.

[Mike Ciarmoli, Truist]

Yeah. Got you. Just quickly on that H7 and I think you said the revenues were up year-over-year, which maybe a bit surprising, given the production's been stalled. What drove the revenues up on the 87 in the quarter?

[John Scannell, Chairman & CEO]

Yeah, so what we've been doing Michael, a year ago, as you know, a year ago, 18 months ago, Boeing and Airbus were oscillating up and down dramatically on their production rates. And it was kind of month-to-month there was a new production and schedule, which was typically dropping further and further with an outlook in six months’ time, we've got to get it back up. Eventually we got to the point where we said, look, we have to just stabilize our production rates at a level that we think will be in line with Boeing's demand over the next 12 months, and then we'd be prepared to move up from there. But our supply chain, we can't go from no deliveries to four deliveries, from no deliveries to six deliveries. We can't do that; it would shut down all of our supply chain. So several quarters ago we said we're just going to lever loads in that low to mid-single-digits for both the A350 and the 787. We will make sure that we will absolutely meets Boeing's requirements and Airbus requirements.

It may mean in the short term, as you can imagine, we'd have a little bit of an inventory build as we go with that, we'll be receivables and that will be pressure on cash. But in terms of keeping the supply chain going, making sure it remains efficient, it's much better to continue at two, three, four every month and have that stable than go from 0-4 to 0-5. It's just a much more sensible thing. And so we settled that down over the last 6-9 months. And as a result, our 87 sales are reasonably constant on a run-rate basis now, and that just happens to be a little bit off from what we did a year ago. It will oscillate up and down a little bit based on material receipts and stuff. But it should be reasonably stable as we go through the next year and then hopefully as Boeing starts to get back into shipping and inching up. We've inched it up gradually with them over the following 12 months.

[Mike Ciarmoli, Truist]

Got it. That's helpful. Last one I had just on the kind of inflationary environment. Can you give us a sense of what you can pass through? If it is aircraft content to Boeing and Airbus. Obviously there's a lot tied up under their master contract agreements. Can you pass through pricing to -- if it is directly to Boeing or if it's helped to, you're delivering product to other tear ones? I'm sure you have to eat some of the costs, whether it might be labor or just consumables, or other types of materials you need around shop floors. But what's the general sense on the ability to pass through pricing? And what percent do you think you guys have to eat that might weigh on margins?

[John Scannell, Chairman & CEO]

On the commercial side, there is relatively little opportunities that's through pricing. Typically you're engaged in long-term contracts with the OEMs. There is sometimes a CPI flaws, but it's limited at much, much lower levels than what we're running right now. If we say we're not running 7%. So there is very little opportunity on the commercial side. On the military side, of course there is an opportunity, but it probably takes 12 months before it sets us through. So take the F35 as an example. All contracts for this year, were already set, so it's the next negotiation that you have that opportunity to reflect price. So the risk is clearly longer-term, the opportunity on the military side of the business to readjust pricing based on inflationary impacts. But as I say, it doesn't happen one quarter to the next. It typically happens over probably 12 or longer period of time. And then on the industrial side, there is more opportunity there. We have more opportunity to adjust prices there based on inflationary costs.

[Mike Ciarmoli, Truist]

Okay. What about on the Aero Aftermarket, the opportunity to drive price higher?

[John Scannell, Chairman & CEO]

No, we'll typically the Aero Aftermarket it's governed by a contract that is a that's based off of the IPO prices. It's obviously different pricing, but it's based on the OE pricing levels. It's not independently adjusted.

[Mike Ciarmoli, Truist]

Okay. Got it. I'll jump back in the queue. Thanks, guys.

[John Scannell, Chairman & CEO]

Thanks. Michael.

[Operator]

[Operator Instructions]. We will take our next question from Cai Von Rumohr with Cowen. Please go ahead.

[Cai Von Rumohr]

Yes. Thanks so much. Portfolio shaping, John, maybe walk us through, quickly, any sort of hits you had, where you had them, from moving facilities, because you mentioned that was a factor. And then, how much longer -- is this process now done or is there more to do?

[John Scannell, Chairman & CEO]

So in terms of -- we took a charge we -- I mentioned in the techs, Cai. It was about a $2 million charge associated with an inventory write-down as we get out of a product in our security business. We did not include anything in terms of what I call inefficiency, disruption charges associated with building. So that's not -- we didn't put it in any number for that. But that clearly impacted us in terms of production output, and it's a margin headwind in the quarter. What -- we didn't call it out separately, because that -- we didn't feel that that was appropriate to do that. It is an ongoing process, Cai I mean, I guess to some extent you'd say you want to be doing this all the time. We continue -- it will be an ongoing process I would say that we've already identified over this year and next year, and we'll continue to look at pieces of the business. From the time if you decide that the piece of business that we don't we've decided that we've exhausted the internal opportunities.

We just don't think that fits until you've actually sold it. It's a 12-month process. If I take the Navaids (ph) from the time you said, seem like it's got a long term fit to actually till it's typically 12 to 18 months. So it's an ongoing process that then has a quite a long lead time before it goes out. The moves and the consolidations, we've been doing those step-by-step as well. Again, there is building new consolidating facilities is a 12 to 18-month program, and we're trying to make sure as we do at there's not major disruptions to the supply chain. Of course, COVID has made it more difficult to do some of those types of things. So I would describe this as ongoing. I don't know that we'll ever end, but I think we are in the more intense period of a last couple of years and probably the next year or two and then I would hope we would settle down after that. But there'll always be some amount of our business I think that at any time we'd invest more than one and perhaps decide that we want to get out of a different one.

[Cai Von Rumohr]

Got it. And then on the balance sheet, the customer advances were up substantially, I guess you mentioned defense. Are those going to burn down because that's the biggest step-up I think I've seen in long time?

[John Scannell, Chairman & CEO]

Yes. Will be huge step-ups in -- it was on defense programs that we had, particularly in our Space and Defense segment, were the largest ones that we've got. I'd probably say 75% or so of that down net this year.

[Cai Von Rumohr]

Okay. Okay. And so mix in aircraft, was the margin impacted by the fact, I mean, my understanding is you make more money on your military business than on your commercial business. And so the FMS business was down, the F-35 business was down. So mix was really going against you, even though commercial aftermarket was up on a net basis in the first quarter, is that correct or not?

[John Scannell, Chairman & CEO]

Yes. And if you go back to the first quarter of last year, Cai, you may remember that we specifically said it was a pretty good quarter, particularly coming up with COVID and lower levels on the portion size, and it was because we had an unusually strong mix up, particularly in the middle of the OE side, and that that wouldn't repeat which it didn't. So that really was the difference.

[Cai Von Rumohr]

Got it. And if you look at your commercial aftermarket sales, this is the fourth sequential quarter in which it's been up. So -- and your full-year guide of I think 120 basically assumes that it's going to slow down. Is there any evidence that it will or is this basically a number that could continue to move up as traffic comes back?

[John Scannell, Chairman & CEO]

It could continue to move up, Cai. As you say, if traffic comes back, it could do. However, maybe we're just being a little bit cautious where $31 million, $32 million in the quarter, so we're a little bit ahead of the run rate for the year, but not much. Last year, we did it for the full year on the commercial apps market, we did it at 105. So it's still at 12% increase from last year. And I guess maybe we're just being a little bit cautious, but you're right. It has been ticking up nicely over the last quarters. Perhaps, there's a little bit of upside there as we look through the end of the year. Omicron, 87 getting back into production. Now, not that that affects it's so much because of course there is warranty for a few years, but at international travel is not yet lowering back, as you know so still, maybe we're just being a little bit cautious.

[Cai Von Rumohr]

Terrific. Thank you very much.

[John Scannell, Chairman & CEO]

Thanks, Cai.

[Operator]

And that concludes today's question-and-answer session.

[John Scannell, Chairman & CEO]

Genevieve, thank you very much indeed for your help. Thank you to all our listeners for your interest. Unfortunately, I wanted to say go [Indiscernible], but we can't say that. But we do look forward to next year. It's always new year for the [Indiscernible]. In the meantime, we will continue to do our very best and we look forward to talking to you again in 90 days. Thank you for your time. Bye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.