Moog Inc

NYSE:MOG.A

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and welcome to the Moog Fourth Quarter and Year-end FY 2021 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ann Luhr. Please go ahead.

[Ann Luhr, Head of 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 November 5, 2021, and most recent Form 8-K filed on November 5, 2021, and in certain of our other public filings with the SEC.

We've provided some financial schedules to help our listeners better follow along with the prepared comments.

For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations webcast page at www.moog.com. John?

[John Scannell, Chairman & CEO]

Thanks, Ann. Good morning. Thanks for joining us. This morning, we'll report on the fourth quarter of fiscal '21 and reflect on our performance for the full year. We'll also provide our initial guidance for fiscal '22. As usual, I've organized my headlines into 3 broad categories: first, macroeconomic; second, microeconomic focused on our end markets; and third, some Moog's specific topics.

Starting with the macro outlook. The macro trends which affect our business have continued to evolve this quarter. Vaccines versus Delta continues to dominate the COVID news with reopenings around the world shifting the balance of power between these competing drivers. More folks are returning to the office, while embracing a new world of hybrid work. Businesses are seeing surging orders but constrained by labor availability and the effects of the newly coined [Grace] resignation.

The description of inflation has evolved beyond transitory to longer-lasting with an uncertain time line for a version to the norm. And finally, changes, challenges in the supply chain have moved well beyond electronic components and new car deliveries to impact almost every element of global trade.

Turning to our major end markets. Defense and space remains strong on continued government spending. The Chinese demonstrated the hypersonic missile capability in August, which has been described as a sputnik moment by some in the military. Given this great power rivalry, it would seem that defense and space spending should remain elevated for the foreseeable future. Our industrial markets continue to strengthen, although it's hard to distinguish between panic ordering and real underlying demand.

Commercial air traffic is improving and global travel is starting to open up. Balancing this optimism, Boeing continues to face hurdles as they await 737 approval from the Chinese authorities and work with the FAA to get 787 deliveries back on track.

Finally, our medical markets are humming along nicely. Moog, Q4. Coming into the quarter, we forecasted EPS of $1.20 plus or minus $0.15.

Our headline results of $1.07 includes $0.18 of charges, compensated by $0.08 of tax benefit. The $0.08 of charges result of our continuing portfolio refinements. They included $0.09 associated with product line exits with the remainder mostly restructuring charges at various sites around the globe. Our adjusted results of $1.17 was slightly below our midpoint but well within our range. Last quarter, we described supply chain constraints and labor challenges as watch items for the future.

This quarter, we started to feel the impact more directly on our business. Cash in the quarter brought our total for the year to over 100% conversion. Looking back on the full year, the following headline standouts. First, the year turned out much better than we had anticipated 12 months ago. Last year, at this time, we projected that COVID will be with us throughout fiscal '21. And therefore, we were anticipating a year similar to the second half of fiscal '20.

That projection would have resulted in fiscal '21 sales of $2.73 billion and earnings per share of about $3.50. We fished the year with sales of $2.85 billion, $120 million higher and earnings per share of $4.87. COVID was with us throughout the year. But despite this, each of our core markets is a little better than forecast, and we maintained a tight lid on expenses; second, strong cash flow this year funded our balanced capital allocation spend.

We spent approximately $130 million in capital expenditures, $80 million on acquisitions, $32 million on dividends and $30 million in share repurchases. We finished the year with our balance sheet in great shape, providing us with all the flexibility we need to continue to invest next year; third, we continue to refine our product portfolio throughout the year, exiting businesses and consolidating operations.

This activity cuts across all 3 of our operating segments and included exiting 4 product lines. We also closed 5 sites and consolidated production into larger operations. We anticipate that this portfolio journey will accelerate over the coming year; fourth, a new administration in Washington has shifted the debate from tax reductions to spending increases. Despite defense spending continues to be well supported on both sides of the aisle and new opportunities in green initiatives are starting to emerge; fifth, as the year progressed, it became clear that COVID was not going away with the arrival of a vaccine and that the supply chain and labor shortages were new challenges we would need to contain with.

The discussion around working from home versus in the office shifted to hybrid-working arrangements, and we introduced a new flexible working policy to our workforce. This is perhaps the most dramatic shift in working conditions for a generation. And finally, as I do every time of this year, I'd like to recognize the contribution of all our employees around the world for their continued dedication to serving our customers.

Now let me provide some more details on the quarter. Sales in the quarter of $724 million were 2% higher than last year. Excluding the impact of foreign exchange and acquired sales, underlying organic sales were flat. Sales were up in aircraft controls, about flat in industrial systems and down marginally in space and defense.

Taking a look at the P&L, our gross margin was up significantly on improved mix, particularly in aircraft. R&D was also up on higher investment in new technologies and the additional engineers at our Genesys acquisition. SG&A expenses were up as we returned to a more normal operating environment after the crisis management last year. Interest expense was down marginally on lower rates. Our effective tax rate of 19% this quarter was unusually low on some special items. The overall result was net income of $35 million, up from an adjusted net income last year of $26 million and earnings per share of $1.07, up 32% from the adjusted EPS last year.

Looking at the full year of fiscal '21. In comparing full year fiscal '21 with fiscal '20, we need to remember that fiscal '20 included only 2 quarters of COVID conditions, whereas fiscal '21 was a full year of COVID conditions. With that backdrop, fiscal '21 turned out much better than we had anticipated 12 months ago.

Full year sales of $2.85 billion were just 1% lower than last year. We had low single-digit sales changes in each of our 3 operating groups with sales up in space and defense, but down slightly in aircraft and industrial systems.

Gross margin for the year was higher on strength in the aircraft business. R&D and SG&A were both higher, reflecting the same story as we saw in the quarter, increased investments and a move away from crisis management. Interest expense was lower on lower rates.

Last year, we incurred significant restructuring charges as we resize the business. We also incurred a pension settlement charge as we annuitized half of our defined benefits plan. Adjusting for these charges last year, this year's net income was up slightly and diluted earnings per share were 1% higher.

Fiscal '22 outlook. For next year, we're projecting sales of $3 billion, an increase of 6% over fiscal '21. We anticipate growth in each of our operating groups, with the strongest gains in commercial aircraft and in military ground vehicles.

Full year margins of 10.3% will be up about 80 basis points and earnings per share of $5.50, plus or minus $0.20, will be 13% higher than fiscal '21. We forecast that cash flow next year will moderate from the very strong performance of the last couple of years as we invest more in growth.

Now to the segments. I'd remind our listeners that we provided a 3-page supplemental data package posted on our website, which provides all the detailed numbers for your models.

We suggest you follow this in parallel with the text. Starting with aircraft. Sales in the fourth quarter of $298 million were 8% higher than last year. This quarter, the commercial business drove the increase. Commercial OEM sales were up on the acquired sales of Genesys. Lower OEM sales to Boeing on the 787 were compensated by higher A350 sales to Airbus. Sales into the commercial aftermarket customers were up 25%, driven primarily by higher 787 activity.

Sales of business jets doubled to $7 million, but from a low point 12 months ago. On the military OEM side, higher funded development and the acquired sales from Genesys more than compensated for lower F-35 sales, yielding a 12% increase in total. The military aftermarket was down 16% from a very strong Q4 last year. Aftermarket sales were lower across most of our major platforms, including the F-35, F-18 and the V-22. On a more positive note, the military aftermarket showed a modest recovery from the low point of Q2 and Q3 this year.

Aircraft fiscal '21. Full year sales of $1.16 billion were down 4% from last year. Sales of the military applications were up 8% for the year, while sales to commercial customers were down over 20%. On the military side of the house, strong OEM sales compensated for a weaker aftermarket. OEM sales were up across a range of programs, including the F-35 and some foreign military platforms. Higher funded developments and the acquired sale of Genesys also contributed to the growth. Sales into the military aftermarket went down across a broad range of programs with the biggest reductions in the F-35 and V-22.

Turning to the commercial side, OEM sales were 26% lower than last year, while aftermarket sales were down a more modest 7%. Comparing our commercial sales to fiscal '19 before COVID hit, we see the dramatic impact of the pandemic on our business. Sales to OEM customers were down 50% from 2019 from $540 million to just over $270 million in '21. Aftermarket sales fared better, down from $141 million in '19 to $106 million in 2021, a drop of 25%.

Aircraft margins. Margins in the quarter were 8.8%, up from an adjusted margin of 2.7% last year. The higher sales and improving commercial aftermarket more than compensated for weaker military aftermarket sales. Full year margins of 8.3% were up from adjusted margins up 7.6% last year. This year's margins included almost 100 basis points of additional R&D spending as we invested in the next generation of military platforms.

Aircraft fiscal '22. We're projecting fiscal '22 sales of $1.25 billion, up 7% from this year. The strength is on the commercial platforms with OEM sales up on the 737, business jets, the E2 and the full year of Genesys. We're also anticipating that the commercial aftermarket will continue to strengthen across our portfolio of platforms.

In contrast, military OEM sales will be more or less in line with this year with higher helicopter sales compensating for lower F-35 sales. We anticipate military aftermarket sales will be up on higher F-35 and V-22 activity. We're encouraged by the uptick in the fourth quarter in the military aftermarket and our modeling that this run rate will continue through fiscal '22. With stronger sales and an improving mix, we're forecasting full year margins in fiscal '22 of 10.1%, up 180 basis points from fiscal '21.

Turning now to space And Defense. Sales in the fourth quarter of $200 million were 3% lower than last year. This is the first time in 5 years that we've had a down quarter year-over-year. This quarter, sales were marginally lower in both our space and our defense markets. On the space side, lower revenue on launch vehicles, hypersonics and satellite engines was partially compensated by increased activity on our integrated space vehicles product line.

Defense sales were down on lower tactical missile production and continued challenges in our security business. On the plus side, sales on missile defense, turret systems and into naval applications were slightly higher.

Space and Defense fiscal '21. Full year sales of $799 million were 4% higher than last year. Over the last 6 years, sales in this business have more than doubled. The growth in fiscal '21 was all in the space market. The biggest driver was our new integrated space vehicles business, which more than doubled from a year ago to $60 million. We also saw double-digit growth in our avionics product line to over $50 million. Defense sales were down 2% in the year, driven by lower tactical missile work and challenges in the security business.

Space and defense margins. Margins in the quarter of 8.6% were disappointing. Our Space and defense sector has had a tough second half of this fiscal year after several years of strong margin performance. Similar to the third quarter, we saw some cash growth in several of our fixed-price development contracts across both end markets.

In addition, we incurred $2.5 million of impairment charges as we exited certain product and contract arrangements. Taking together, these pressures depressed margins by 300 basis points in the quarter. As is all of the case, we believe we've captured the impact of all future cost increases within the quarter. Full year fiscal '21 margins of 11.1% were lower than prior years as a result of the second half impact described above.

Space and defense fiscal '22. Our forecast for fiscal '22 projects another year of double-digit sales growth. Defense will lead the way with sales up 14% from fiscal '21. The growth is primarily in our vehicles product line across both U.S. and foreign programs. We also anticipate stronger component sales for our slip rings. Space sales will be up 5% as a result of the continued growth in our integrated space vehicles product line.

We're projecting operating margins of 11.5% in fiscal '22. This is up from fiscal '21, but not back to the level we enjoyed a few years ago. There are 2 reasons for this. First, we're cautious after the experience of the last 6 months; second, we're seeing a mix shift in the business to newer, more integrated product offerings. On the defense side, it's our turret business and on the space side, it's our satellite vessle box offerings. Combined, these new product lines are delivering most of the sales growth in fiscal '22, [but] as with many new business endeavors, they are at slightly lower margins than our legacy business.

Turning now to Industrial Systems. Sales in the fourth quarter of $226 million were more or less in line with last year after adjusting for foreign exchange movements. Sales were up in industrial automation, energy and simulation test were sharply lower in medical. Industrial automation sales were up 11% on strength across the portfolio. We see the nice rebound in this business over the last 6 months as the global economies have started to recover from COVID.

Energy sales were up on increased offshore production activity. Simulation and test sales were up slightly on some project work in the materials test area. Core flight simulation sales were down slightly from a year ago. Our medical pump business was marginally lower as the after effects of the COVID surge slowly work their way out of the supply chain. In addition, sales of components into sleep therapy and medical imaging were lower.

Industrial Systems fiscal '21. Full year sales of $892 million were 2% lower than last year. Adjusting for the impact of foreign currency gains, underlying sales were down almost 5% on the year. 3 of our 4 major markets were weaker, with industrial automation being the exception with modest growth.

Industrial automation makes up half our segment sales. Sales into this industrial automation market dropped significantly with the onset of COVID in our third quarter last year. They remain depressed for about 9 months. And since the second quarter of this year, we've seen a recovery as investment in capital goods has ramped up to meet surging demand.

This quarter, our core hydraulics and electric components business was up across most of the portfolio of end markets. Energy sales for the year were down as oil prices remained subdued. Simulation and test sales were depressed, all attributable to flight simulation, where our annual sales for full-flight simulators were down almost 30% from the prior year.

Finally, medical sales were lower as anticipated as the COVID surge we enjoyed in fiscal '20 waned. On a more positive note, fiscal '21 sales into medical applications were 12% higher than our pre-COVID fiscal '19 sales.

Industrial margins. Margins in the quarter of 8.5% included almost 200 basis points of restructuring and impairment charges. In the quarter, we continued our portfolio refinement selling a small product line and closing a site in Asia. Full year margins of 9.6% were down from fiscal '20 on the lower sales volume and inefficiencies associated with 12 months managing through COVID.

Industrial Systems fiscal '22. Our first look at fiscal '22 suggests modest sales growth over last year. We anticipate that our industrial automation and energy markets will be flat with this year, while both simulation and test and medical should be higher. Industrial automation sales will remain flat as modest underlying growth is negated by the portfolio refinements we're going through.

Our growth in this market is primarily limited by our ability to ramp production rather than a shortfall in demand. Both supply chain and labor constraints are impacting our ability to grow sales. Our energy market has been pretty stable over the last few years as the price of oil has remained muted. The recent surge in oil prices may have a longer-term impact on our business if prices remain elevated. However, given the long cycle in this industry, we're not anticipating any material impact in our fiscal '22. Simulation and test sales will be higher on additional auto test work and a modest recovery in flight simulator volumes. We continue to anticipate a very slow recovery in the flight simulator market over several years.

Finally, sales into medical applications will be higher on additional component sales with the biggest increase in motors for sleep therapy products. We're forecasting full year margins next year of 9.5%, in line with fiscal '21. Investments in new electric vehicle applications and our continued journey to refine our portfolio are suppressing margin expansion this coming year. These activities should start to pay dividends as we get into fiscal '23 and beyond.

Summary guidance. In fiscal '21, we learned to live with the pandemic through a full 12 months and delivered much better results than we had imagined going into the year. Looking forward to fiscal '22, we're optimistic that the pandemic will continue to recede. However, we anticipate we will be living with the effects of the pandemic on both the supply chain and labor market for all of these coming 12 months. Based on what we know today, we're optimistic about our business and are forecasting both top and bottom line growth.

Looking at our 5 major markets in fiscal '22, we believe defense and space will remain strong. Industrial markets will continue to improve, commercial aircraft will show nice recovery and medical will return to modest growth. In normal circumstances, we believe our projections for the coming year accurately balances the risks and opportunities we're seeing. However, we're living through extraordinary circumstances, and it is very difficult to quantify the potential impact of supply chain disruptions and labor challenges. Our forecast assumes some level of continued disruption in line with the trends we've seen in the last 2 quarters.

Additional risks include rising inflation and the impact of the vaccine mandate on our ability to deliver products to our customers. On the positive side, should COVID continue to recede and the supply chain constraints start to unwind, we could see upside in our Industrial and commercial aircraft businesses. After 18 months of the pandemic, our strategy remains unchanged from pre-pandemic times.

We're a technology company focused on solving our customers' most difficult technical challenges. Customer intimacy is at the core of our strategy, and we believe long-term relationships with our customers drive long-term value. We focus on our core technologies of motion and fluid control while serving a wide range of end markets, which benefit from our expertise. Capital allocation is focused first and foremost on growth, both organic and via acquisitions.

We believe this is the best way to generate long-term shareholder value. We will also return capital to shareholders through our dividend policy and use our share buyback program opportunistically. Finally, our culture of trust and collaboration has stood the test of time and carried us through the extraordinary challenges in the last 18 months. We're optimistic about our future while remaining realistic about the challenges.

In fiscal '22, we anticipate sales of just over $3 billion and earnings per share of $5.50 in plus or minus $0.20. These results represent an increase of 6% on the top line and 13% on the bottom line. We believe the year will start slowly and accelerate sequentially.

For Q1, we anticipate earnings per share of $1.10, plus or minus $0.15. Now let me pass it to Jennifer to provide more color on our cash flow and balance sheet.

[Jennifer Walter, VP & CFO]

Thank you, John. Good morning, everyone. Free cash flow in the quarter was $22 million or 65% conversion. We had another strong year for free cash flow coming in at $164 million and topping 100% conversion.

That compares to free cash flow of $73 million in the same quarter a year ago and $191 million for all of last year. Free cash flow has been especially strong since the start of the pandemic 6 quarters ago. In the first few quarters of the pandemic, we are focused on preserving cash to ensure we had sufficient liquidity to manage through the uncertain times ahead. We've since begun to increasingly invest in our business as the markets we serve have stabilized.

Over this 18-month period, we generated $328 million of free cash flow, which is just over 150% conversion on an adjusted basis. The $22 million of free cash flow in Q4 compares with a decrease in our net debt of $23 million. During the fourth quarter, we paid our quarterly dividend and repurchased some shares. These outflows were partially offset by proceeds from the divestiture of a small product line in our Industrial Motors business. For the year, $164 million of free cash flow compares with a decrease in our net debt of $42 million.

During the year, we acquired Genesys for $78 million, paid dividend of $32 million and repurchased 400,000 shares for $30 million. These outflows were partially offset by divestitures.

Net working capital, excluding cash and debt, as a percentage of sales at the end of Q4 was 29.1%, about the same as a quarter ago. We've continued our trend in reducing inventories. We also benefited from the timing of payments. Growth in receivables offset these benefits. Receivables increased due to billings late in the quarter, certain customers not taking deliveries and supply chain issues that delayed shipments.

Capital expenditures in the fourth quarter were $40 million. We increased our investments in capital expenditures beginning in the second quarter this year, once the level of uncertainties from the pandemic subsided. We continue to catch up on capital investments that we had previously delayed. In addition, we are consolidating some of our operations into new facilities to reduce our footprint over time and recapitalizing for next-generation manufacturing capabilities to increase production efficiencies through automation.

At quarter end, our net debt was $803 million, including $101 million of cash. The major components of our debt were $500 million of senior notes, $322 million of borrowings on our U.S. revolving credit facilities and $80 million outstanding on our securitization facility.

We have $746 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0x on a net debt basis. Based on our leverage, we could have incurred an additional $609 million of net debt as of the end of our fourth quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future.

Our leverage ratio was 2.3x on a net debt basis as of the end of our fourth quarter comparing to 2.4x a year ago. Strong cash generation was offset by the pressures on EBITDA from the impact of the pandemic as well as capital allocated towards acquisitions and share repurchases. Our leverage ratio continues to be within our target zone of 2.25x to 2.75x.

Cash contributions to our global retirement plans totaled $16 million in the quarter compared to $12 million in the fourth quarter of 2020. Contributions have increased for our defined contribution plans. In the U.S., participation has increased in our defined contribution plan, as our defined benefit plan remains closed to new participants.

Global retirement plan expense in the fourth quarter was $20 million, down from $21 million in the fourth quarter of 2020, excluding the settlement loss from last year. For the year, expense was $71 million, down from $79 million without the settlement loss in 2020. Defined benefit plan expense is down due to the settlement of about half of the liability of our largest plan with defined contribution expense up related to increased planned participation.

Our effective tax rate was 19.0% in the fourth quarter compared to 28.3%, excluding charges associated with the pandemic in the same period a year ago. Lower tax rate this quarter is attributable to the release of valuation reserves. For the full year, our effective tax rate was 22.8% compared to 20.9% adjusted rate in 2020. This year's rate includes charges associated with the revaluation of deferred tax liabilities in the U.K., mostly offset by adjustments to last year's provision in the U.S.

We amended our securitization facility yesterday. Under the facility, a receivables financing subsidiary may sell receivables to a financial institution in an amount up to $100 million. These transfers are treated as sales and accordingly, the receivables are derecognized from our balance sheet.

The new structure reduces our working capital levels. We expect free cash flow generation in 2022, including the benefit of $100 million from the securitization facility to be in line with our long-term target of a 100% conversion. Receivables will be the greatest source of cash due to the securitization facility. We also expect inventories to continue to be a source of cash while customer advances get worked down.

We expect capital expenditures in 2022 to increase to $160 million as we invest in facilities and infrastructure to support future growth and operational improvements in business. Depreciation and amortization are expected to be $96 million. Our financial situation is strong. We are well positioned to invest and deploy our capital. Our priority at this point is to invest in our business and fund organic growth. We continue to explore M&A opportunities, though pricing remains high on that front. We may also complement our growth strategy with returning capital to shareholders. With that, we'll turn it back to John for any questions you may have. John?

[John Scannell, Chairman & CEO]

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

[Operator]

[Operator Instructions] Our first question comes from Ron Epstein with Bank of America.

[Unidentified Analyst]

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

[John Scannell, Chairman & CEO]

I'll just see if I can understand your question. Is that right?

[Unidentified Analyst]

Yes. Just -- so just how much -- what kind of a difference you're seeing in lead times today versus where they were, call it, 6 months ago?

[John Scannell, Chairman & CEO]

Yes. So that's -- it's anecdotal is the best you can do with that Elizabeth because we buy thousands and thousands of different parts. But I think we're seeing lead times doubling and trebling. It's dramatic changes when you go to reorder something. And the challenge can be that in this system, in your ERP system, you have a reorder lead time of a time, 12 weeks or something, and you're running with that.

And then when you go to reorder the supplier tells you, oh, it's not 12 weeks. It's actually 30 weeks now. And so you have this shock and then, of course, the response to that. Hopefully, inventory, which used to be a very bad thing now is a really good thing. And so if you've got sufficient inventory to cover you through some of those long lead times that helps. So far, we have seen challenges, which have prevented us shipping some amount of product to our customers, but not to point yet where it's completely held us up not like the auto companies.

But it's got more difficult, I would say, over the last quarter, there's a lot more effort from our supply chain organizations in chasing parts working with our suppliers, trying to make sure we can keep the production going. So it's significant changes, and it's in everything. It's not -- it used to be electronic components and processors. It's everything from plastic parts to all kinds of metal parts. It's across the board. And on the flip side, I would say one of the things I mentioned in my text, is on the industrial automation side of our Industrial Systems business.

Our challenge there is more based on our ability to supply rather than a demand issue. And we've seen our own lead times for products and the type of products we make, go out from 4, 6 weeks to 12, 14, 16 weeks, so more than a doubling of our own lead times to our customers. So we're kind of seeing it on both sides.

[Unidentified Analyst]

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

[John Scannell, Chairman & CEO]

Well, I don't know about long-term growth rates, but I'll offer you this perspective. Half of our business, if you take the Defense and Space and the vast majority of our Space business is government-funded business, that's over half of our business. And as I said on the call, it would seem that despite the fact that we've moved from a Republican to a Democratic administration, there seems to be across-the-aisle support for the idea that we're back into a near peer kind of major power-type rivalry, particularly with China and the recent Chinese demonstration of hypersonic weapon, I think, has only accelerated that thinking.

And so we're optimistic that defense and space will remain strong for the coming years. I'm not sure how long that is, but that there will be growth opportunities. F-35 is being toned down, of course. We have a broad portfolio of offerings there that we're feeling very comfortable about. And as I mentioned on the call, some of the growth -- one of the growth actually we're seeing in our Space and Defense business next year is really around new product areas, integrated turrets, the business that we weren't in 3 or 4 years ago and integrated space [Indiscernible] and also a business that you go back 3 or 4 years we weren't in.

So new products, new technologies, I think, and the underlying budget level should stay strong. I have to be -- we all have to be optimistic about the commercial recovery, both on the OE side. I mean, Boeing 787 and the 350 are the 2 big programs for us. And as you know, Boeing is now talking about 2 a month and that's down from 14 a month, 2 years ago. A350 is maybe at 4 or 5 a month. So hopefully, you get out a few years, that would come back strong and with it, the aftermarket will come with us.

And then Industrial, right now, we're seeing a surge in demand. We're constrained in terms of our growth by our ability to get products to our customers. Hard to know if that's underlying demand or if it's a little bit of a reaction to supply chain and lead times going out. The Industrial business tends to move up and down over a multiyear cycle. So hopefully that cycle, I would imagine it will at least continue in terms of the upside for the next 2 or 3 years. Beyond that, I think it will be a cyclical business. And our efforts there are to focus on new growth vectors like in the electric vehicle and the green initiatives that we think there might be opportunities in the future.

And then medical, I'd see that growing with the underlying medical business, which seems to have nice single-digit -- high single-digit growth opportunities, just given demographics and health care costs. So I'm optimistic, definitely optimistic about the long term. The portfolio is diversified across end markets, which also really helps. But right now, the signs, I think, are positive for the longer-term growth beyond '22.

[Operator]

Our next question comes from Cai von Rumohr with Cowen.

[Cai von Rumohr, Cowen]

So it looks like the charges, the $0.18 works out to around $7 million, $8 million. Can you give us some color where they are by each of the 3 groups. And then I think you mentioned more product rationalization this year approximately what are you talking about? Where is it? And sort of maybe from 20,000 feet, the whole idea here is this that some products have become less profitable or it's a new strategic initiative to kind of call the less profitable?

[John Scannell, Chairman & CEO]

Yes. So let me see if I can answer the question. So in the quarter, Cai, you're right, $0.18, you can call it $8 million-ish. About half of it was probably in the Space and Defense side, the other half of what was in Industrial, give or take. And it was exiting from a variety of small businesses, impairment charges associated with getting out of a product line with exiting some customer relationships. So it was that type of thing. And they were all a cut of $0.03, $0.04 here, $0.03, $0.04 there.

So while, it all added up to $0.18, but it wasn't a big enough issue to call out on the front of the financial statements. So that was what happened. As I say, across Space and Defense and our Industrial business is really where we saw that impact in the quarter.

In terms of what the scope of it was this year, and we mentioned that it will be more next year, we think. This year, it's probably about 1% of sales that we ended up kind of finding our way out of -- Next year, it'll probably be closer to 2% of sales we're thinking. It doesn't sound like a big number on the total sales, but it's continued to accelerate.

And you may remember that we did announce that we had an agreement, although it's not closed for the sale of our navigation aids business about a quarter ago. That's not closed. Once it closes, perhaps this quarter, we'll obviously -- we'll report on that then. But that's just an example of it. And if I look at what we think will happen next year, I think that will probably be -- it will be split pretty much across the 3 groups.

In each of the groups, there are product lines that we are not -- we don't see a long-term future in. And to your question, so why are you doing this? It really is about focusing the business on those product lines where we believe there is -- either we have the best -- they're the most profitable product lines. And if we have something that's underperforming, if we have a clear strategy that says it's got a lot of future growth potential and will become a great business, we, of course, will stick with it and take the time.

On the other hand, after a while if we find we're in the business where it's not performing particularly well, and we don't see that it has any real future potential. We usually determine that it's probably best in the hands of somebody else. So it's really around refining the product line to drive long-term margin improvement.

[Cai von Rumohr, Cowen]

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

[John Scannell, Chairman & CEO]

You mean in the coming year?

[Cai von Rumohr, Cowen]

Yes, in '22, yes.

[John Scannell, Chairman & CEO]

Yes. So in our forecast for next year, Cai, we have not baked that in, plus or minus. And so because some of them -- you never know when it's going to happen, and you never know at what price you particularly if you're selling a business. Some of them will be closed down where we could make an estimate of the costs.

Some of them now are sales. And so much of that depends on the price that you get and the carrying cost of it on the books. And so the sales of businesses, they could have a material swing, but most of the time, it will be a cash positive or neutral. But there may be -- if we're writing off goodwill or asset impairments, then we could see some bigger numbers. But all of it, I would say, is onetime, and I would factor it out of the underlying operating performance of the business.

But at this stage, I can't or I won't give you an estimate of it because I'm not sure exactly what will happen and when. And then also not -- we're not sure exactly what type of price we might realize for some of the businesses. Sometimes, oftentimes, if you're faced with exiting, particularly a smaller product line, we do the analysis between can we sell us? Do we want to wind it down? Do we want to exit it? Is it a multiyear, find your way out of this. And those conversations are ongoing. It's never quite clear until you get to that point as to what you'll actually do. So for that reason, we're cautious about putting a number on it.

[Cai von Rumohr, Cowen]

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

[John Scannell, Chairman & CEO]

So yes, that is still the target, Cai, a lot of it, it will happen in '22, but some of this stuff takes actually longer than we might imagine. And so we'll probably continue into '23. And of course, on an ongoing basis, when you've got lots of different product lines, it's a constant thing. But most of the adjustments, I'd say, have been '21, '22 and '23 Part of what we're also doing, Cai, I called it out in the text is we are -- we exited 5 small sites. And so we're consolidating sites. And typically, what goes with that is there's additional -- as we consolidate into our larger sites and get out of some of the smaller sites. And typically, a product move like that is a 12-month process by the time you organize it, make sure it's moved up and going in the next location.

So that will also continue into '22 and to some extent, also into '23. And in terms of building the base for margin expansion, that's exactly what this is doing. It's making sure that we're in the products that we need to be in to get our margins into the teams over the next few years. And I won't provide you with a definite time line because I've done that in the past, and then I've beaten my words.

But I can tell you that there is a continued focus on that. And the whole portfolio refinement is about making sure we find ourselves in the businesses that we can be most successful in as measured by our ability to generate strong returns.

[Operator]

[Operator Instructions] Our next question comes from Mike Ciarmoli with Truist.

[Mike Ciarmoli, Truist]

Maybe just to stay on where Cai was there. Just so we're clear, Industrial, you've got some sales. I think you said it might be a 2% headwind to sales next year. So as we look at the Industrial segment guide for next year, should we assume that there's about a 2% divestiture headwind in there? Or how should we be thinking about kind of the -- I guess, all the segments? Should we be thinking about a 2% headwind across all the segments? It sounded like there are going to be some puts and takes, just to try and get an apples-to-apples of where the underlying organic growth is going to be next year?

[John Scannell, Chairman & CEO]

So the total growth, the top line growth, Mike, that we're talking about for next year is about 6%. And what we said is that we may be looking at a portfolio acquirement that might be at 2%. So you have to take that off because as I said, our forecast is not baking in the impact of the portfolio refinement in what we're doing. So 6% organic, but perhaps if we manage to get through the refinement that we're talking about and maybe sell off some businesses, maybe have a 2% headwinds moving in the other direction. And as I also said, that 2% is kind of spread across the 3 businesses. So if I take Industrial, right now, we're forecasting a 2% growth.

And if you said, well, if you did the portfolio refinement, that might be a 2% headwind to get a little bit of that. What is happening, though, is over the last year and into next year as well is we have been transferring sales between our Industrial business and our Space and Defense business. It's a small number, 1%, 2% of sales. But what has happened is that we've had over the years, mixed facilities.

If you remember back a few years ago, we had our Components group and the Components group serves both Industrial and aerospace and defense markets. It was a product business, slip rings and motors. It was the business that we bought from Litton Poly-Scientific way back in the early 2000. When we took the Components business and the gentleman running is retired, we decided we would split it into the A&D side and the Industrial side, and we align those with our other 2 businesses.

But what came with that, of course, is that they had mixed facilities. They have facilities that did both military work and industrial work. And over the last few years, we have been systematically focusing on we have either -- all our facilities are either all industrial are all aerospace and defense because we believe that that's a much cleaner way of running the business. And so we have been moving product around it.

And part of that is that came up to the industrial side as we've been moving some of the sales that were in our Industrial business that are A&D-related, moving those product lines and in some cases, closing a facility or 2 into the Space and Defense group. So there's a little bit of growth in the Space and Defense group, a couple of percent that's actually a transfer from our Industrial Business.

And so there's a little bit of that going on as well, Michael, in the background. But overall, for next year, industrial, we're not seeing any growth in the energy business. That's kind of been flat for the last few years, recent spike in oil. I don't think that plays through. Industrial automation, as I mentioned, some of that is -- it's not growing, but that's mostly the product transfer out into Space and Defense. And it's the underlying our ability to just get more product out, we're supply constrained rather than demand constrained. And then we're seeing a little bit of an uptick in both simulation and medical.

[Mike Ciarmoli, Truist]

Got it. And then just sticking on kind of the restructuring theme, I guess, where are we with -- I guess you were calling it at the time in aircraft Operations 2.0, I mean, then I think it's a 2-year mark, maybe in July, I would have thought -- I mean, you're guiding for some margin expansion. I would have thought we would have started to see a bit more of an impact there. And then can you maybe just say what the R&D spend is going to be and if that's a headwind year-over-year in aircraft?

[John Scannell, Chairman & CEO]

So Mike, under normal circumstances, I would agree completely with it. But as I mentioned, in fiscal '21, our commercial aircraft business is 50% down on the '19 levels when we started this program. and our commercial aftermarket is 25% down. And our facilities around the commercial are commercial dedicated, most -- a lot of our commercial OE production is in the Philippines. And so next year, we're showing margins. We're talking about margins of over 10% in our aircraft business at a time when the commercial business is still highly depressed. And so I think if we could factor that out and go back to the same level of utilization and efficiencies that we had in '19 on the same production levels, I think we would be seeing a significant improvement in our -- I know we would be seeing a significant improvement in our operational underlying business in 2022 versus what we saw in '19.

But there's -- as I say, there's labor-vaccine mandates, supply chain constraints, all of these that are swapping the impact of our internal efficiency activities. So we've continued down that path. We continue to invest. We continue to do better, but there are just macro forces that have dramatic. We're like a sales vote and we've managed to trend the sales, but we've after moving into a huge storm at the same time. So I think that's what swamping, Mike.

[Mike Ciarmoli, Truist]

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

[John Scannell, Chairman & CEO]

Yes. So there's clearly the F-35 top line is down about 10% next year in our forecast from what we saw this year, perpetually back to what we saw the level of kind of 2020. And so that plays through in that. But we are seeing a nice pickup on the helicopter side. And particularly on the FLRAA and that's just based on development market, not based on Textron or Bell winning. If they do, that would be wonderful, but that will probably be a -- in FY '23 impact, not in FY '22.

So yes, F-35 down. What increased helicopter activity, increased some increased development work. All of that means that if we look at the OEM side, we're up just a tiny a little bit, but -- and we got some additional Genesys sales. So you could call the OE side flat, F-35 down compensated by helicopters. And we're seeing on the military aftermarket up a little bit significantly down from '20, but hopefully, the run rate that we saw in the fourth quarter, we had a kind of a very soft Q2 and Q3.

So not much on the aircraft side, actually, sales pretty much in line with what we saw in fiscal '21. But then on the Space and Defense side, it's on the defense side Mike, it's the turret business. I mean we won't assure program, and that will just be a much bigger program next year.

And then all of those things kind of puts and takes here and there. A little bit more hypersonic work, maybe a little bit tactical missile work, a little bit more navy, a little bit less of security. But overall, that all kind of balances out and we see the growth in the integrated the turret business that we have. And it's the same on the space side. The growth is on satellite vessel. And so what this is, is it showing the investments that we've made over the last 6 to 8 years, getting into more integrated products, it's showing that starting to flow through on the sales line.

So it's a product-related and an innovation-related growth rather than an underlying market growth. We are also seeing strong sales though, an uptick on the slip ring side of our business on the component side. So that could too. So I agree, I think the primes are seeing more pressure, but we have specific product lines or areas that we anticipate growth coming into next year.

[Operator]

[Operator Instructions]

[John Scannell, Chairman & CEO]

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

[Operator]

There are no additional questions at this time.

[John Scannell, Chairman & CEO]

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

[Operator]

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