Moog Inc

NYSE:MOG.A

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Moog Fiscal Year 2022 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to hand the conference to Ann Luhr. Please go ahead.

[Ann Luhr, Head, IR]

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 April 29, 2022, our most recent Form 8-K filed on April 29, 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 a copy of the document, a copy of today's financial presentation is available on our Investor Relations webcast page at www.moog.com. John?

[John Scannell, Chairman and CEO]

Thanks, Ann. Good morning. Thanks for joining us. This morning, we report on the second quarter of fiscal '22 and affirm our guidance for the remainder of the year. Let me start with the key financials. It was a strong quarter with adjusted earnings per share of $1.49, 12% higher than the adjusted $1.33 we recorded in Q2 fiscal '21.

Adjusted EPS this quarter was also slightly above the high end of our guidance from 90 days ago. The situation around COVID and supply chain disruption continued to present challenges during the quarter, but our teams managed these well. Adjusted free cash flow in the quarter, excluding the impact of our securitization facility, was negative $24 million. Finally, 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. First, the world has changed considerably since we reported our Q1 earnings at the end of January. The Russian invasion of Ukraine has reset expectations around long-term defense spending, particularly in Europe. At this stage, the impact on our overall defense business is difficult to estimate. We think, however, that there will be no material change over the next 6 months with potential tailwinds in future fiscal years.

Second, COVID supply chain, labor attrition and inflation continue to weigh on economic activity and make short-term financial forecasting difficult. To date, we've managed well through these challenges as evidenced by our results this quarter. However, there will continue to be major distractions to normal business operations throughout the remainder of this fiscal year.

Third, we took charges this quarter across our segments tied to the delayed recovery in the commercial aircraft business, the Russian actions in Ukraine and further refinements in our portfolio. The total charges had an adverse impact on earnings per share of $0.59 in the quarter. I'll provide more details on each of the charges as I move through the segment discussions.

And finally, we're pleased with the results of our second quarter, which came in ahead of forecast. 90 days ago, our plan for the year included a considerable ramp up in earnings in the second half. The underlying outlook for the year has not changed. Rather, some of the forecasted Q3 and Q4 earnings increase actually accelerated into the second quarter. As a result of the stronger Q2, we're now forecasting Q3 and Q4 to be pretty much in line with Q2, both in terms of sales and earnings.

Now let me move to the details, starting with the second quarter results. Sales in the quarter of $771 million were 5% higher than last year. We saw increases in each of our 3 operating groups. Taking a look at the P&L, we incurred a $2 million charge as we wrote down some inventory and receivables associated with exiting our activities with Russia. Despite this charge, our gross margin was up slightly on the higher sales and a better mix.

R&D and SG&A expenses were more or less in line with last year as a percentage of sales. We incurred restructuring costs of $8 million in the quarter as well as an impairment charge of $15 million. Both charges were associated with resizing the business and continuing our portfolio-shaping activities.

Interest expense was slightly lower than last year. The effective tax rate this quarter was 24.9%, resulting in GAAP net earnings of $29 million and GAAP earnings per share of $0.91. In order to compare the underlying operating performance with Q2 last year, there are adjustments we need to make to each quarter. In Q2 fiscal '21, we recorded an $0.18 gain on a pension curtailment in Europe. Excluding this gain, the adjusted net earnings last year were $43 million and the adjusted EPS was $1.33. This year, in Q2, we incurred the inventory write-down, restructuring and impairment charge in the quarter. Excluding the impact of these onetime charges in Q2 fiscal '22, our net earnings this year were $48 million and our earnings per share were $1.49.

On an adjusted basis, net earnings and earnings per share were both up 12% over the same quarter last year. Fiscal '22 outlook. Our full year outlook remains unchanged from 90 days ago. We're forecasting sales of $3 billion, up 6% from last year and adjusted earnings per share of $5.50, up 13%. We anticipate a slight acceleration in earnings in the second half. We're keeping our full year EPS range unchanged at plus or minus $0.20 to reflect the continued uncertainty in the global economic climate particularly in relation to the supply chain.

Now to the segments. I'd remind our listeners that we provided a 4-page supplemental data package posted on our webcast site, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text.

Beginning with Aircraft. Our aircraft business provides flight control products to 2 very distinct markets each with their own macroeconomic drivers. On the military side, the Russian invasion of Ukraine has changed the narrative around defense spending. In the U.S., both sides of the aisle are aligned on the importance of strong defense spending, but the European nations are redefining their level of commitment to defense budgets. The impact of these shifts in our business will play out over many years to come, although we don't believe there will be any material impact in the present fiscal year.

On the commercial side, the overall atmosphere continues to improve, with U.S. airlines showing stronger results and projecting further growth over the coming months. Aftermarket activity is on the rise, and we're seeing this filter through in our numbers. On the other hand, the recent crash of a 737 in China, the continued delay in resuming 787 deliveries and the decision by Airbus to temper the future ramp on the A350 are weighing on the longer-term outlook for our business.

China's new front in their battle with COVID and the risk of recession in Europe arising from the Ukrainian conflict are also items we're watching. On balance, we remain bullish about the commercial business but believe the recovery to pre-pandemic activities continues to move to the right.

This shift in our longer-term view of the commercial OEM recovery drove us to take further actions in the second quarter to resize the business. Back in 2020, we made a significant adjustment to our commercial workforce and incurred impairment charges as a result of the pandemic. At that time, the level of adjustment was based on our internal model of when we would see a recovery in the commercial business.

Our intention was to ensure we had sufficient labor and capital to respond to the increase in production rates the OEMs were forecasting. The delays in expected volume recovery at our major customers made it clear that we needed to make further adjustments to our staffing and asset base this quarter. As a result, we incurred $15 million of impairment charges and $4 million of restructuring charges in the quarter.

Aircraft Q2. Sales in the quarter of $311 million were 2% higher than last year. This quarter, our growth came from the aftermarket, both on the military and commercial side. Military aftermarket sales were up nicely with growth across a broad range of programs. We saw particular strength on the V-22 and F-15 platforms. In contrast, our military OEM sales were down from a year ago. The largest component of this drop was lower F-35 sales, driven mostly by the timing of material receipts. We also saw lower foreign military sales compensated by higher V-22 activity. In last year's second quarter, we had $5 million of sales from our Navigation Aids business. You may remember, we divested this business in Q1 this year, further driving the negative sales comparison with a year ago.

On the commercial side, OEM sales were about flat with last year. Lower 787 sales were compensated primarily by higher business jet sales as well as slightly higher activity on the 737 and A350 programs. We are keeping the OEM production rates on our major programs fairly steady internally in order to maintain the health of our supply chain and the efficiency of our plants. Therefore, the fluctuation in sales numbers from quarter-to-quarter is less a reflection of internal production volatility and more the impact of the timing of material receipts.

Commercial aftermarket sales were way up this quarter. This is a combination of 2 items: underlying strength in the book of business and some onetime activities that booked this quarter. Each of these items contributed about half of the growth in the quarter. The underlying business continues to surprise to the upside with increases across all major platforms. The 787 continue to lead the way as international travel recovers. We also benefited from several onetime items in the quarter, including some test equipment sales. These items will not repeat in future quarters.

Aircraft margins. GAAP operating margins in the quarter of 4% included 600 basis points of headwind from the resizing activities I've described. Adjusted operating margins of 10.0% were up nicely from the same quarter a year ago and also from our first quarter. The strength in the aftermarket on both the military and commercial sides of the house drove the margin gain.

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. However, we're adjusting the mix between military and commercial based on the experience of the first half. In total, military sales will be marginally lower than our previous forecast, while commercial sales will be marginally higher. We're keeping our full year adjusted margin forecast unchanged at 10.1%. This implies a strengthening from the run rate of the first half. We've already seen a nice margin pickup in the second quarter. I believe we will see some further improvements as we move through the next 2 quarters.

Turning now to Space and Defense. Similar to last quarter, underlying demand in both our space and defense markets remain strong. The shift in the global defense posture over the last 90 days should ensure our business in both markets remains strong for years to come. While our space portfolio has growth opportunities in both commercial and defense-related markets, our present book of business is dominated by U.S. government contracts. Therefore, increases in future defense spending and the emphasis on space as the next frontier in any future conflict bode well for our business. In other news, we concluded some portfolio refinement this quarter and incurred a $2 million charge.

Space and Defense Q2. Sales in the quarter of $223 million were 8% higher than last year. Both the space and defense portfolios are driving growth in this business with the lead passing from one market to the other from one quarter to the next. This quarter, it was the defense side of the house that drove the growth. Defense sales were up 15%, driven by strong growth on our RIwP SHORAD program. Sales of missile applications were down marginally compensated by slightly higher component sales.

On the space side, growth in our space vehicles business compensated for lower hypersonic activity and slightly softer sales across a range of our heritage components businesses. As I mentioned last quarter, our hypersonic development activity is winding down, and we will have a period of lower activity as the government decides which programs to move forward to the next phase of development and production.

Space and Defense margins. GAAP margins of 10.8% included 80 basis points of portfolio refinement charges. Adjusted margins of 11.6% were up from our first quarter results and are in line with our forecast for the full year.

Space and Defense fiscal '22. There's no change to our sales forecast for the full year. Full year space sales of $350 million assume a second half in line with the first. Full year defense sales of $530 million assume a slight acceleration in the run rate as both our missile and components portfolios grow. For the full year, we're keeping our adjusted margin forecast unchanged at 11.5%, slightly better than the performance of the first half.

Turning now to our Industrial Systems business. Underlying demand for our industrial products was strong over the last quarter. Higher energy prices, increased pilot training and the general demand for automation equipment to expand production capacity bode well for continued strength in our business over the next few quarters.

Growth across the industrial world remains healthy. Although COVID spikes, particularly in China and geopolitical events in Europe have increased the risk of an economic slowdown next year. The direct impact of the Russian actions in Ukraine show up in our industrial segment. Very soon after the invasion, we made the decision to cease all business with Russia. Our ongoing sales into Russia were small, so there's no material impact to our outlook for the year. However, this decision, combined with some minor portfolio refinements across the footprint resulted in a $4 million hit to earnings in the quarter, just over half associated with Russian charges and the remainder with portfolio shaping.

Industrial Systems Q2. Sales in the quarter of $236 million were 5% higher than last year. Excluding the impact of foreign exchange movements and lost sales from portfolio shaping activities. Underlying sales were up over 10% organically. Simulation test sales were way up on increased flight simulation activity. Sales into the submarket almost doubled from a year ago. It would appear that flight training activity is finally recovering from the pandemic slowdown.

Energy sales were up on higher generation and exploration activity. Industrial automation sales were about flat, but adjusting for portfolio shaping and our organic sales into this market were up mid-single digits over last year. Finally, sales into medical markets were down slightly on lower component sales for ventilator applications. On a positive note, across the portfolio, our bookings continue to be strong and our backlog is growing. Our challenge is meeting the demand from our customers, given the supply chain constraints.

Industrial margins. GAAP margins in the quarter of 8.8% includes 170 basis points of restructuring and impairment charges. Adjusted margins of 10.5% were in line with last year and up nicely from the first quarter. In Q1, we incurred some production disruption and moving expenses as we consolidated facilities in Europe and the U.S.

Industrial fiscal '22. There's no change to our sales forecast from last quarter. For the full year, we anticipate sales of $910 million. This total assumes a modest pickup in the second half as we work to accelerate shipments to meet customer demand. Our full year forecast for adjusted margins is also unchanged at 9.5%. This margin is slightly ahead of the run rate of the first half.

So in summary, it was a good quarter overall, with adjusted earnings per share above our forecast from 90 days ago. We saw an acceleration of some planned earnings upside later in the year into the second quarter so that our overall forecast for the year remains unchanged at $5.50, plus or minus $0.20. This full year forecast assumes a second half performance slightly ahead of the first half, but in line with the second quarter, both in terms of sales and margins.

Cash flow in the quarter was soft, but this should recover in the second half. As we look to the next 6 months, there are both risks to our plan as well as opportunities to do better. On the risk side, an escalation of hostilities in Ukraine are spread to other parts of Europe could materially change the outlook.

Also, further aggressive lockdowns in China as they fight the Omicron variant could exacerbate the supply chain challenges and slow overall economic growth. On the opportunity side, the rebound in global travel could drive further commercial aircraft aftermarket upside, and an easing of supply chain constraints could provide the opportunity to accelerate sales in each of our operating groups to meet customer demand.

As always, we try to weigh the possibilities in both upside opportunities and downside risks and provide the markets with our best estimate of the outcome. Overall, our business remains very healthy, and we believe there are many opportunities to see continued growth in both sales and margins over the years to come.

For the third quarter, we anticipate earnings per share of $1.45, plus or minus $0.15. Our range continues to be relatively wide due to the uncertainties in global economic conditions. Despite these uncertainties, our backlog is strong and our outlook remains bullish. Now let me pass it to Jennifer, who'll provide more color on our cash flow and balance sheet.

[Jennifer Walter, VP and CFO]

Thank you, John. Good morning, everyone. As a reminder, we amended our securitization facility in the first quarter. Under the facility, a receivables financing subsidiary may sell receivables to a financial institution up to $100 million. We reached that level at the end of our second quarter, and we were at $90 million at the end of our first quarter. Due to the structure of this facility, the associated receivables are not recognized on our balance sheet. The new structure reduces our working capital levels.

To provide a comparable look at our cash generation and financial position, I'll first share free cash flow and net working capital metrics without the benefit of the new facility. I'll also include the metrics as calculated off of our financial statements near the end of my comments for your reference.

We're keeping our forecast for free cash flow unchanged for the year. Free cash flow in the quarter was negative $24 million. We saw pressures this quarter on working capital, most notably as we work down significant customer advances that we received in the first quarter. Receivables also grew in the second quarter. We continued investing in capital expenditures at a similar rate to the past few quarters. We're able to make these investments from the strong financial position we're in. Over the past 8 quarters, our free cash flow conversion on an adjusted net earnings has been over 100%. The negative $24 million of free cash flow in Q2 compares with an increase in our net debt adding in debt related to the securitization of $52 million.

During the second quarter, we acquired TEAM Accessories for $12 million. TEAM Accessories is based in Ireland and specializes in the maintenance, repair and overhaul of engine and airframe components. This business will be part of our commercial aftermarket service offering. We also had cash outlays of $8 million for the quarterly dividend and $4 million for share repurchases.

Net working capital, excluding cash and debt, as a percentage of sales at the end of Q2 was 29.0%, up from 27.6% a quarter ago, but in line with the levels we saw in 2021. The increase during the quarter largely resulted from an expected work-down of significant customer advances on military programs that we received in the first quarter. We also saw growth in receivables. We experienced growth in receivables on commercial aircraft programs where our production level is higher than the rate at which customers are taking deliveries. We're maintaining steady production levels to ensure a healthy supply chain and efficiencies in our facilities.

Timing of invoicing from strong sales late in the quarter also drove higher levels of receivables. In addition, an advance that builds up from pandemic relief on the defense business on this quarter. This growth in receivables as a percentage of sales was offset by a growth in payables. On the inventory front, this quarter marks our fifth straight quarter of decreasing inventories as a percentage of sales. We continue to make progress on our initiatives to reduce inventory levels while being very mindful of ensuring sufficient inventory levels on hand in the supply chain constrained environment. Capital expenditures in the second quarter were $37 million, in line with our spend over the last -- past few quarters. This level of capital expenditures reflects our investment in facilities to support growth and provide next-generation manufacturing capabilities.

At quarter end, our net debt was $711 million, including $122 million of cash. The major components of our debt were $500 million of senior notes, and $320 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. We have $756 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 4.0x on a net debt basis. Based on our leverage, we could have incurred an additional $581 million of net debt as of the end of our second quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future.

Our leverage ratio was 2.3x on a net debt basis as of the end of our second quarter compared to 2.7x a year ago. Strong cash generation and earnings drove this improvement. Our leverage ratio is at the low end of our target range of 2.25x to 2.75x. Cash contributions to our global retirement plan totaled $17 million in the quarter, compared to $14 million in the second 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 second quarter was $21 million, up from $13 million in the same quarter a year ago. In the second quarter of 2021, we recorded a $6 million curtailment gain associated with terminating our defined benefit pension plan in the Netherlands, which reduced our pension expense last year. The remaining increase in global retirement plan expense relates to the growth in our defined contribution plan.

Our effective tax rate was 24.9% in the second quarter, compared to 21.6% in the same period a year ago. Adjusting for impairment charges and restructuring activities in the second quarter this year, our effective tax rate was 24.4%. In the second quarter of 2021, there was no tax expense associated with the curtailment gain on the termination of the Netherlands defined benefit pension plan. Excluding this benefit, the effective tax rate in the second quarter of 2021 was 23.9%. The increase in our adjusted effective tax rate is due to the relative mix of earnings.

In the second quarter, we incurred $0.59 of impairment and restructuring charges, of which 2/3 were noncash charges. We're keeping our forecast for free cash flow the same as our forecast from 90 days ago. We expect free cash flow generation, excluding the benefit from our securitization facility to be $78 million in 2022 or about 45% on an adjusted net earnings. Working capital, more specifically receivables, will consume cash this year. Both customer advances, inventory and payables will all be sources of cash and will partially offset the consumption of cash by receivables. We expect capital expenditures in 2022 to be $150 million.

Depreciation and amortization are expected to be $94 million. 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 flow in the quarter was negative $14 million and free cash flow generation for the year is projected to be $178 million, which is about 100% conversion on adjusted net earnings. Net working capital was 25.6% of sales at the end of the quarter. Our financial situation continues to be strong. We're positioned nicely to fund organic growth and make investments in our operations that will serve us well for years to come.

With that, I'll turn it back to John for any questions you may have. John?

[John Scannell, Chairman and CEO]

Thanks, Jennifer. Ally, we would be happy to take any questions we have now from our listeners.

[Operator]

[Operator Instructions] And we'll go ahead and take our first question from Kristine Liwag with Morgan Stanley.

[Kristine Liwag, Morgan Stanley]

On inflation, John, can you provide more details in terms of how much you're able to pass through to customers? And then on the supply side, how much of your raw materials do you have long-term agreements with and are those suppliers honoring your contracts?

[John Scannell, Chairman and CEO]

So let me break it down between A&D and industrial, Kristine. Typically, on the industrial side, we have a lot more ability to pass through inflationary cost pressures or price adjustments. So I would say on the industrial side, we have been very active to try and make sure that we don't get caught in the squeeze. But the timing is never perfect, of course. But I would say, in general, on the industrial side, we're pretty well covered. We typically don't have long-term pricing agreements with any of our customers.

On the aerospace and defense side, on the commercial side, as you're aware, with the OEMs, typically, we have long contracts, long pricing duration contracts. But typically, there also, we have worked very hard over the years to try and lock our suppliers into a similar time frame. It doesn't always work, but we're probably covered for a reasonable percentage of the prices on the commercial OE side.

And then on the military side, typically, we'll also try to do the same. If military -- if our input costs increase, if we -- most of the time, we've got 1 year, maybe 2- to 3-year, multiyear contracts on some of the major military OEM programs. So the opportunity to reprice comes up. It just doesn't come up quite as quickly as I say on the industrial side.

So inflation is definitely a concern. It's something we're watching, Kristine. But it's not the case that every -- we've got a lot of fixed price from some of our suppliers. And on the industrial side, we have the opportunity to adjust prices relatively quickly. On the defense side, the price adjustment takes maybe a little bit longer before you can work through some of the major programs.

[Kristine Liwag, Morgan Stanley]

That's really helpful. And then on the restructuring charges that you took in the quarter, how should we think about incremental margins going forward as volume recovers presumably now you've got a better cost footprint. So how much higher should we expect that incremental margins to come?

[John Scannell, Chairman and CEO]

Well, the way I would -- I'd put it slightly differently, Kristine, because the vast majority of it, of the $25 million we took, about $3 million is associated with Russia and then there's $3 million of what I call portfolio shaping. But the vast majority of it, $19 million of it was in the aircraft business. And that really was us taking a step back and saying, look, we had projected OEM recovery rates, by now, of 2020 -- in 2022, 2023, higher than what they are now seeing. And of course, our projections were based on what both Boeing and Airbus back in 2020. And so we've made an adjustment to the size of the business, both the capital base and the employees to reflect on an ongoing basis, maintaining profitability rather than it's going to be more profitable next year or the year after.

In the year we're in, we're saying there's no adjustment one way or another, Kristine. But it's more about we were over facilitized and overstaffed given what we're now seeing in the recovery on the OEM rates. So there's no real incremental margin in that sense. What I would do is I'd say is the actions that we have taken are to secure the margin profile that we were going to anticipate over the coming few years.

[Kristine Liwag, Morgan Stanley]

Great, John. And if I could squeeze one more, and I'll pass on to the next analyst. When you mentioned about the labor adjustment, what does that mean in terms of your preparation for when OE production rates actually do come up? And how do you balance between that lower cost structure and that flexibility to ramp up? It seems like the 737 MAX is actually at 31 per month now. And if Boeing is able to get the FAA approval for the 787, come second half of this year, it seems like then you'll have upward pressure there. And the rest of the industry, we're seeing labor shortage really be an issue. Like how do you balance it to -- just to make sure that when you do need the labor, you can get it back and meet those production rate increases?

[John Scannell, Chairman and CEO]

Yes. That's a good question to ask Kristine. So the way -- here's what I think of it. Let me just use the 87 as an example. We've described that we have maintained our production level on the 87 over the last year or so, and we are maintaining a production level in the kind of the 3 to 4 shifts at a month level. And the reason we're doing that is because we want efficiency in the factory, and we want to make sure that our suppliers are not -- we don't cut them off and then try to restart them.

You're aware of -- Boeing is not shipping any at the moment. So what's happening is we're building inventory of finished product. Of course, that's part of the receivable story that Jennifer was telling as well. And so when Boeing -- now, of course, Boeing is aware of this, we've agreed with them about this whole process. But when they start shipping again, they have a lot of them in inventory, then they're going to wrap up to -- I'm not sure what the number is 3 a month, 4 a month, 5 a month. But it would be quite a while before their rates and the reduction in their inventory means that we would have to actually increase our production level.

And that will give us sufficient lead time, I believe, more than sufficient lead time, probably a year or 2 to put the necessary labor in place to do it. So we have -- they've got lots of inventory sitting on the tarmac. We're building inventory to keep the supply chain running efficiently. And therefore, I'm not concerned about our ability to respond. We -- that will not be a problem. We will be able to respond quickly enough to meet any demand increase that we see.

[Operator]

And next, we'll go ahead and take our question from Michael Ciarmoli with Truth Securities.

[Michael Ciarmoli, Truth Securities]

I guess John, just to maybe stay on Kristine's line of thinking. I mean you guys implemented a significant restructuring plan in Aircraft Controls in 2019. And I think you've said the rates at this point now weren't really where you're thinking they would be. I mean it seems like the 787s, the only one that would be a big difference. I mean how aggressive was your planning in terms of OE production rates at this point in '22? I mean it certainly seemed like we all knew the wide-bodies weren't going to recover for some time. So I'm just trying to further understand what was driving that impairment and restructuring when you guys seemingly started this process and probably had a good opportunity to even do more when rates and volumes were pretty low in the COVID downturn.

[John Scannell, Chairman and CEO]

Yes. So the previous restructuring, Mike, was in 2020. It was -- I think it was a quarter after the whole downturn. And keep in mind at that time, there was -- nobody knew what was going to happen. And so we are on the side of -- in response to kind of Kristine's question of making sure that if the if the OEMs were going to come back sooner then we had both the necessary capital and the people in place to do that. So we try to cut as deep as possible but recognizing that the OEMs were going to do that.

If you look at what happened this quarter, well, the E2, the 195 got pushed out by several years. That was a big production program that we were planning for. And Airbus tempered their ramp from 6 a month to 5 a month. So -- and that's been kind of an ongoing process. I think if you go back into the early 2020s of our fiscal year, I think they were all projecting 6, 7 a month on their rates, and it's just not happening. So this was -- it was what I would call a refinement. Majority of it was a noncash charge, but it was a refinement based on what we are now seeing and how long it's going to take for that OEM recovery to happen.

[Michael Ciarmoli, Truth Securities]

Okay. And what was specifically the impairment charge related to?

[John Scannell, Chairman and CEO]

Mostly equipment, machines that were building this type of stuff. [indiscernible] machines.

[Michael Ciarmoli, Truth Securities]

Okay. And then just on this building ahead on specifically, I guess, the 787 and the receivables what are the mechanics there in terms of inflation, raw materials? I mean, it sounds like you've worked this out with Boeing, but I'm just trying to think about, I guess, the value of that inventory you're holding. Are you able to effectively pass that on to Boeing as you're building ahead? Or just, I guess, the mechanics there? I mean you kind of mentioned OEM long-term pricing, but any differences or color there? I mean, it seems like as you're holding inventory, that inventory could maybe potentially keep going up in value here just given the tightness on raw materials and inflation.

[John Scannell, Chairman and CEO]

Well, our pricing to Boeing is not -- I mean, we renegotiated pricing with Boeing a year or 2 ago, Mike. So that's fixed for the foreseeable future. So the value of that inventory is not going to change. I mean because it's part of 787 and we have been agreed upon price with Boeing. So that doesn't change. We are -- we have -- we've obviously done this in collaboration with Boeing to say we need to keep our production facilities going and we need to keep our supply chain going because it costs to all of us in the potential disruption, if you get a line break it would be much more difficult to restart than going from 4 a month to 5 a month to 6 a month.

And so we have discussions with that. But there is definitely a growth on our receivables associated with this because we are clearly building inventory. Now one thing that's nice about airplane programs is that they -- we don't change this hardware hardly ever, if ever, given the type of product it is. So it doesn't age out in any way. But it is also, the value won't change because of inflation, the value on our books won't change because of inflation over the foreseeable future. So I don't -- we don't worry about any of that.

[Michael Ciarmoli, Truth Securities]

Okay. I mean, has your margin -- your negotiated margin with Boeing then on that specifically gotten squeezed. I mean especially in this environment. I mean, it sounds like you're going to have some pretty sharp headwinds on the 787 from a margin standpoint.

[John Scannell, Chairman and CEO]

Yes. We don't go into the margin detail, Mike, at the program level, I'm afraid.

[Michael Ciarmoli, Truth Securities]

Okay. But safe to say you can't -- the pricing has been locked in over a year ago, you said. I mean is it same -- same hold true for -- you talked about the aftermarket. I mean is -- we were just at the MRO show hearing broadly, suppliers getting 5% to 10% pricing. I mean are you still locked in on the aftermarket with 787 in terms of pricing with Boeing?

[John Scannell, Chairman and CEO]

Typically, Mike, the way our contracts, with all of the OEMs, work is that there is a factor between OEM pricing and aftermarket pricing. Typically on the aftermarket, there's also escalation clauses that are different from the OEM side. So it's -- they are linked to the OEM price and the aftermarket price earnings, but typically, the contracts around adjustments, inflationary adjustments, our escalation clauses are different in the aftermarket, but I can't get into any more details than that.

[Operator]

We'll take our next question from Cai von Rumohr with Cowen.

[Cai von Rumohr, Cowen]

So I'm a little confused about the 787. How come, if you're building the inventory, and I assume you're not shipping it, how come it doesn't appear in inventory going up as opposed to appearing in receivables going up?

[John Scannell, Chairman and CEO]

Because we have a long-term contract with Boeing, a long-term supply contract with Boeing, Cai, and so therefore, it becomes an unbilled.

[Cai von Rumohr, Cowen]

Okay. So basically, been booked as you say, it goes through the sales, but then it's there as -- okay. So that's why the receivables...

[John Scannell, Chairman and CEO]

That's why -- if -- when we look at our sales on the 87, they're fairly steady despite the fact that Boeing isn't shipping anything.

[Cai von Rumohr, Cowen]

Right, right. But so many other suppliers or most of them are going at 2 a month. And if you're going at 3 to 4 a month, you've basically -- like how many of these things do you have sitting around? I mean, I would think it's going to be like a pretty big number.

[John Scannell, Chairman and CEO]

Well, Boeing is taking some of them because they're still building airplanes, as you know, they're not shipping airplanes, but they are still building airplanes. And then we are -- obviously, there are conversations about who holds what and where, Cai, as you might imagine. I would say we don't have as many of them as Boeing has sitting on the tarmac. But there is a certain build of finished products, which is, as I say, we have done this in agreement with Boeing.

We visited the Boeing factory in Charleston about a couple of months ago. And their only question was, are you sure you can get to 7 a month when we tell you, like soon. And so they were not -- they're like, you got to be able to ramp up. You've got to be able to ramp up. So their focus at least a couple of months ago was you got to be able to respond because once we get this going, we're going to be ramping up pretty quickly.

So we -- the level we've chosen in consultation with them, we feel is the ideal level for the type of product we make to keep the equipment and the facilities going, not to overbuild and to be able to respond then appropriately if and when they see their rates go up.

[Cai von Rumohr, Cowen]

Do you have a guarantee? Well, I guess my concern would be that they have 100 in inventory, you've got quite a few, not 100, but quite a few that, in fact, if it takes longer, that you will then have to -- do you have any guarantees that they will pay you? And if you don't have to bring your rate down to 2 or pause for a while?

[John Scannell, Chairman and CEO]

We have a long-term supply agreement with Boeing. We're obviously the only people that make this stuff. If you say like if the airplane program went away, would you have an inventory problem. Then, of course, the answer is yes...

[Cai von Rumohr, Cowen]

No, no, no. I'm just saying if it takes them longer that you would have to go down to a lower rate.

[John Scannell, Chairman and CEO]

Yes. And if -- and I think that would be something. So what we tried to do, Cai, is rather than adjusting the rate quarter-to-quarter based on the latest news, we've said, why don't we lock it in at the rate we're now at. And we review that each quarter. And we might decide in 3 months or 6 months or 9 months again in consultation with what Boeing is seeing to say, well, let's go down half a ship set a month or a ship set a month. And so we would try to throttle this in a way that's controlled and that also allows us to make sure the supply chain continues to function appropriately and ensures that we can ramp up again at the rate that we need.

So yes, we would adjust, but we -- our objective is to adjust slowly and deliberately rather than saying, well, let's stop now for the next 2 quarters and not make anything and then let's go back to making 4 a month after that or 3 a month. So we think about trying to level -- lower the facility at a level that we and Boeing think is a sensible level for the type of product we're doing.

[Cai von Rumohr, Cowen]

So Boeing has said that nobody is going to be going at 5 a month -- they're going to be at 5 a month or less through the end of '23. So the most favorable case for you is that they start actually taking these and paying them, but -- so until then, just so I understand it, until they really start taking the 3 to 4, so that your inventory doesn't continue to build or your receivables don't continue to build up, your -- that number is going to go up. And once it comes down, if it ever gets to, I don't know, 5 or 10 in inventory, you're going to have a big cash flow gusher at some point, but you going negative until then. Is that fair way to think about it?

[John Scannell, Chairman and CEO]

It will be a drag on cash until they start to take built ships more than we're actually making. That is true, Cai. But as we start to look into the next fiscal year, I think we should start to see that equation change.

[Cai von Rumohr, Cowen]

Right. And do you have any similar situations like on the A350 or any other important programs?

[John Scannell, Chairman and CEO]

No, no. And I would also add, Cai, we have been in conversations that -- we are in continuing conversations with Boeing about the cash implications of building ahead essentially what they're doing. And so there are conversations around that. So we're making sure that we're managing that effectively with Boeing to make sure that the overall situation is as best as it can be.

[Cai von Rumohr, Cowen]

Great. I don't -- we've spent a lot of time on this. Just one last one. The advances they came down this quarter, but they have spiked up substantially. So where should we expect that the advances go as we move forward?

[Jennifer Walter, VP and CFO]

Yes. So Cai, the advances that we've had are activity largely on military customers. As you mentioned, in the first quarter, we had very significant. It went up about $100 million. We did work it down. I would say looking forward for the rest of the year, we're going to continue to work down, but I think it's probably going to be a net positive of maybe $10 million or so from where we are right now. We do anticipate getting some more advances again on the military side of the business. So we'll see a little bit of benefit.

[Cai von Rumohr, Cowen]

So I mean, net-net, they will go up from where they are or they will go down?

[Jennifer Walter, VP and CFO]

Sorry, they will go probably up just a little bit from where they are right now.

[Cai von Rumohr, Cowen]

Got it. And last one, so as we think ahead, they seem to be at an abnormally high level. I mean going forward, is this kind of a normal level? So they might fluctuate $5 million, $10 million, $15 million but they stay more or less at this level? Or is there a lot of room for them to either go up or risk that they go down?

[Jennifer Walter, VP and CFO]

I wouldn't say that there's -- as you mentioned, we're at a very high level right now compared to our historical norm. Right now, we're seeing strength in that business as it relates to the military and the willingness on the funding of that. So I would expect it to stay at these elevated levels for some time.

[Operator]

[Operator Instructions] It appears we have no further questions at this time.

[John Scannell, Chairman and CEO]

Ally, thank you very much, indeed, for helping us with the call. Thank you to all our listeners. We look forward to reporting out again in 90 days' time. Thank you.

[Operator]

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.