Moog Q2 2023 Earnings Call Transcript

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Provided by Quartr
April 28, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Moog Second Quarter Fiscal Year 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Aaron Asteycan. Please go ahead, sir.

Speaker 1

Good morning, and thank you for joining Moog's 2nd quarter 2023 earnings release conference call. I'm Aaron Estrachan, Director of Investor Relations. With me today is Pat Roche, Our Chief Executive Officer and Jennifer Walter, our Chief Financial Officer. Earlier this morning, we released our results and our supplemental Financial schedules, both of which are available on our website. Our earnings press release, our supplemental financial schedules and remarks made during our call today and adjusted non GAAP results.

Speaker 1

Reconciliations for these adjusted results to GAAP results are contained within the provided materials. Lastly, our comments today may include statements related to expected future results and other forward looking statements. These are not guarantees as our actual results may differ materially from those described in our forward looking statements and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings. Now I'm pleased to turn the call over to Pat.

Speaker 2

Good morning and welcome to the call. Today, we will share our update on a quarter marked by record sales, solid earnings and the cash commitment to support the growth. We reiterate our full year guidance for margin and reflect a heavier demand on cash. Before getting to the details, I'd like to briefly remind you of several broad themes that I shared during my first earnings call and highlight how these are driving change in the organization. Every day, our motivated employees are driven to improve the lives of millions across the globe through the application of our deep technical capabilities in solving our customers' most difficult motion control challenges in applications when performance really matters.

Speaker 2

I described the 3 areas in which we are focusing our attention to improve the business, Namely customer focus, people, community and planet and financial strength. And I highlighted Simplification as key to enhancing the performance of our company. To advance this agenda, our Board of Directors, After the Q1 earnings call, appointed several new officers to the leadership of our company. These appointments are the result of a clear focus on talent development over the last decade. These leaders Bring the necessary experience and skill to deliver on the ambitious plans we have to grow our company, to achieve great results in each of the areas of focus and to take us to the next level of performance.

Speaker 2

With these appointments, we have started to transform our organization and the way in which we work. Over the next few months, we will separate the commercial and military business within our current aircraft segment. Fundamentally, the business models for commercial and military aircraft are completely different. I want these businesses to have the flexibility to more effectively respond to the needs of these 2 distinct end markets. When the separation is complete, each business leader will have direct responsibility for the focused factories, The dedicated engineering and manufacturing staff and the production resources for their respective business, They will be fully accountable for the operational and financial performance of the business.

Speaker 2

We've taken a big step forward in our simplification journey by moving away from a matrix structure in aircraft controls towards 2 separate businesses. This change will drive greater clarity and performance. There should be no doubt that we are following a clear philosophy to align our organization around the end markets we serve and the specific business model we need to succeed and to give our leaders the dedicated resources they need and the accountability to deliver so that they can make the best decisions to run each business. We will apply this philosophy throughout the organization. I am confident that this approach will enhance customer focus through improved operational performance And drive improved financial results as we concentrate on value creation in each segment of the business.

Speaker 2

The separation process will be completed by the start of fiscal 2024. Now there is a lot more that I would like to share and I'm thrilled to let you know that we will host at Investor Day in New York City on June 6, 2023. I want to use that opportunity to provide more detail on the And many other initiatives that we are driving to grow our company and deliver stronger margin performance. Jennifer Walter, Mark Trabert, our Chief Operating Officer and I will explain our exciting plans for the business over the next few years. And we will also be joined by other members of the executive team.

Speaker 2

Now let me turn to the macro economy. Not much has changed in the last 90 days. Overall, the context continues to support the growth of the company in each of our end markets. Unfortunately and tragically, the war in Ukraine continues as a war of attrition. Anticipation of a spring offensive is driving intense efforts to resupply the Ukrainian military with increased commitments from the U.

Speaker 2

S, NATO allies and European countries. In addition, each of these countries are intent on rebuilding their own depleted inventories. This will drive defense spending for the next decade. Travel continues rapidly. Each of you who has traveled over the last month or so has experienced the busy terminal buildings, Full flights and travel delays.

Speaker 2

The commercial in service fleet has almost recovered to the 2019 levels. This strength is predominantly in narrow body aircraft on domestic routes. Long haul travel, Especially to Asia still lags, but the opening up of China and increased travel through the Middle East are boosting wide body utilization. Finally, Business Jet flight hours are already above 2019 levels. We are already seeing the benefits These factors in our commercial business.

Speaker 2

Industrial markets continue to be more resilient than we anticipated. Bookings are solid with a strong backlog covering our fiscal year. Sentiment remains mixed with the March purchaser managers index Indicating contraction in our major markets, yet German industrial production is up sequentially. Now let me turn the focus to our company operations. We continue to invest in the growth of the business.

Speaker 2

We have building upgrades and expansion plans at several sites globally. Most notably, within this quarter, We acquired a 200,000 square foot building adjacent to our headquarters site in East Aurora to address immediate space needs. And we also started site clearance for the construction of 150,000 square foot advanced integrated manufacturing facility on our main campus. Within the next month, we will officially open a new purpose built 200,000 square foot manufacturing facility in Tewkesbury, England that consolidates 3 existing buildings at that location. In all cases, our manufacturing teams Re architecting machine layout, material flow and automation for improved production efficiency.

Speaker 2

We continue to drive operational improvement across all segments with a clear goal to simplify our business and eliminate waste. This drives operational performance to the benefit of our customers and drives financial performance to strengthen our company. It takes time and consistent management focus to build this continuous improvement muscle. Our Costa Rica facility Has been at the forefront of these efforts. I'm proud to share that the Shengo Institute has recognized our journey with an award for our Costa Rica facility.

Speaker 2

This is a credit to the more than 600 employees that built this world class facility from Greenfield site over 15 years ago. Costa Rica is our reference site that helps show us the way as we continue to build continuous improvement capability across the company. Finally, we continue to deal with supply chain challenges throughout this quarter. We expect that these pressures will continue for longer than we had previously assumed. Now notable within the quarter, We're delighted that the government's Office of Accountability confirmed the award of the Future Long Range Assault Aircraft, or FLARA, to the Bell Textron team.

Speaker 2

This clears the way to progress the development of the V-two eighty replacement for the Black Hawk helicopter. This will be a substantial program for MOG for years to come. On the commercial side, both Airbus and Boeing confirmed plans to increase production rates on narrow body and wide body aircraft over the next Airbus announced their intent to increase A350 production to 9 a month by the end of 2025, And Boeing confirmed their intent to ramp the 787 to 5 per month in late 20 22 3 and to 10 a month in the 2025, 2026 time line. We continue to accelerate electrification and autonomy in construction equipment. At ConExpo 2023, The largest North American trade show, Moog Construction launched Terra Tech, which is our electrification solution for compact construction equipment And also hosted a live demonstration of our autonomy software and hardware fitted to a Bobcat skid steer.

Speaker 2

There was strong interest in our offering. Now turning attention to our financial performance. Our sales were remarkable in the quarter, a proud record for our company. Adjusted operating margin performance through the first half of the year was better than the prior year and will be yet stronger in the second half of FY twenty twenty three. We delivered sales of $837,000,000 up 9% on prior year, reflecting strength in each segment.

Speaker 2

These sales were particularly strong in several areas, in commercial OEM and aftermarket Due to the aviation recovery in defense, due to the ramp to full rate production of our reconfigurable integrated weapons platform at And in space, due to our differentiated electronics and satellite components offering. And Finally, in Industrial due to capital investment in automation applications. Our 12 month backlog now stands at $2,300,000,000 Up 1% year over year and our bookings remain strong. Our adjusted operating margin was down 20 basis Strong operational performance was masked by charges on developmental programs and an unfavorable mix. At the bottom line, we delivered adjusted earnings per share of $1.42 exceeding the midpoint of our forecast.

Speaker 2

Our cash flow was clearly pressured in this quarter due to some atypical outflows and increased working capital requirements required to support the growth in our business. Now I'll hand over to Jennifer to review our financials in more detail.

Speaker 3

Thanks, Pat. I'll begin with a review of our Q2 financial performance. I'll then provide an update of our guidance for all of FY 'twenty three. It was an exceptional quarter from a sales perspective. We hit a record level of sales for the company and for each of our segments.

Speaker 3

We achieved $1.42 of adjusted earnings per share, just over the midpoint of our guidance. Sales in the 2nd quarter were $837,000,000 Total company sales increased 9% over the same quarter a year ago. Excluding the impact of divestitures and foreign currency movements, sales were up 11%. The largest increase in segment sales was in Aircraft Control. Sales of $347,000,000 increased 11% over the same quarter a year ago.

Speaker 3

Commercial OE sales in the quarter were especially strong, driven by market recovery in wide body platforms as well as growth in business, Jeff. Commercial aftermarket sales were also very strong, particularly on the A350 program, with this program steadily ramping over the past 4 quarters. Military aircraft sales declined in the Q2 compared to the same quarter a year ago. The military sales decrease reflects lower funded development activity, including the delayed start on the FLORA program. In addition, military aftermarket sales were down from a particularly strong quarter a year ago.

Speaker 3

Sales in Space and Defense Controls of $246,000,000 increased 10% over the Q2 last year. Adjusting for the divestiture of a security business last year, sales increased 12%. The sales growth was driven by Accelerated activity on avionics and components for satellites the ramp up in production on the reconfigurable Turret program, which hit full rate production levels in the Q1 this year, also drove sales this quarter. Industrial Systems sales increased 3 percent to $244,000,000 Excluding foreign Currency movements and the divestiture of our sonar business last year, sales were up 8%. The sales increase was driven by elevated investment in capital Sales in Energy, adjusting for the divestiture last year, were relatively flat compared to a year ago, as was Medical, while Simulation and Test was down slightly on timing of orders.

Speaker 3

We'll now shift to operating margins. Adjusted operating margin of 10.4% in the 2nd quarter decreased 20 basis from the Q2 last year. Our margin was pressured this quarter by charges on development programs and an unfavorable mix. On the positive side, these pressures were mostly offset by strong operational performance on our underlying business, marginal return on the sales increase and lower research and development expenses. Adjustment to operating profit this quarter were $3,000,000 reflecting covering the commercial aircraft business, our response to the Russian invasion of Ukraine and refinements in our portfolio.

Speaker 3

I'll now describe the key drivers of our adjusted operating margins for each of our segments. Operating margin in Aircraft Controls Decreased to 9.5% in the 2nd quarter from 10.0% in the same quarter a year ago. The 50 basis point decrease resulted from an unfavorable sales mix driven by strong commercial OE sales. Operating margin in Space and Defense Control was 11.7%, up slightly from 11.6% a year ago. We incurred significant charges on space vehicle programs again this quarter, 270 basis points worth, masking the benefit associated with higher sales and improvements in the core business.

Speaker 3

Operating margin in Industrial Systems was 10 point 4%, down slightly from 10.5% a year ago. We incurred a few operational charge This quarter, which were offset by incremental margin from strong sales. Interest expense is another area that's impacting our financial results. In the Q2, interest expense was $15,000,000 up $7,000,000 over the Q2 of last year. The increase in interest expense relates to higher interest rates and, to a lesser extent, higher levels of debt.

Speaker 3

Putting it all together, adjusted earnings per share came in at $1.42 just over the midpoint of our guidance from a quarter ago. The $1.42 adjusted earnings per share this quarter is down 5% from the same quarter a year ago due to higher interest expense, partially offset by increased operating profit. Let's shift over to cash flow. For the quarter, we had a use of free Cash flow of $101,000,000 We had nearly $60,000,000 of atypical outflows this quarter, dollars 28,000,000 to purchase a building, $15,000,000 of cash taxes for the R and D expense amortization law that was not repealed and $14,000,000 for timing of compensation payments. Beyond these, the negative free cash flow this quarter was driven by working capital growth.

Speaker 3

Working capital grew significantly this quarter. Sales, particularly late in the quarter. Inventories also increased related to supply chain pressures. We continue to strategically purchase certain components in the sense of the disruption to reduce the risk of shipment delays. Despite that, we've experienced situations in which we can't ship products if the necessary component isn't available.

Speaker 3

Capital expenditures came in high at $60,000,000 as we purchased a building for $28,000,000 just off campus from our headquarters in East Aurora, New York. We're expanding our Space and Defense operations in Western New York to support our growth and are glad to have acquired this building so close to our other facilities. We continue to invest in our facilities to accommodate our growth, Focus our factories and enhance our capabilities through automation. Excluding this building purchase, capital expenditures were $32,000,000 up slightly from our Q1, but down from the same period a year ago. Our leverage ratio calculated on a net debt basis was 2.5 times as of the end of our second quarter.

Speaker 3

Our leverage ratio is in the middle of our target range of 2.25 times to 2.75 times. Our capital deployment priorities, both long term and near term, are unchanged. Over time, we look to have a balanced approach to capital deployment, Growing our business both organically and through acquisitions, while also returning capital to shareholders in the form of dividends as well as share repurchases. Our current priority and where we see the greatest potential return continues to be for investing for organic growth. We're building up new businesses that we believe have huge potential like the electrification of construction equipment.

Speaker 3

We're also investing in our core businesses And capital expenditures are a part of these investments. In addition to investing for organic growth, we'll continue to look for strategic acquisitions to complement our portfolio. We also remain committed to our dividend policy.

Speaker 1

I will

Speaker 3

now turn it over to guidance for the full year. We are reiterating our fiscal year 2023 guidance for the company's adjusted operating margin and adjusted earnings per share on slightly higher sales. Our backlog remains solid and our performance is on track to achieve these results. Based on second quarter pressures on cash, We are decreasing our free cash flow guidance for the year. Let's take a more detailed look.

Speaker 3

We're projecting sales of $3,200,000,000 in FY 'twenty three, which is up $15,000,000 over our previous guidance. That's a 5% sales increase compared to FY 'twenty two and 7% when we adjust for divestitures over the past year and the impact of foreign currency movements. We expect sales growth in each of our segments with the biggest driver being Commercial Aircraft. Aircraft Control sales are projected to increase 6% to $1,300,000,000 The increase is on the commercial side of the business. Commercial OE will be up across the board with growth on Airbus and Boeing Platforms, Business JEVs and the Genesis business we acquired a couple of years ago.

Speaker 3

We'll also see growth in an already strong commercial aftermarket business. To account for strong sales this quarter, we're increasing our commercial OE forecast by $5,000,000 and our aftermarket sales forecast by $15,000,000 We expect an offsetting decline in military aircraft sales driven by lower aftermarket sales. We're decreasing our military aftermarket sales guidance $20,000,000 to reflect the relatively slow start to the year. Basin Defense Control sales are projected to increase 5 to $920,000,000 Adjusting for the divestiture of a security business late last fiscal year, sales will be up 8%. When looking at our numbers in the segment, it's helpful to remember that we shifted the product line from defense into space at the beginning of our Q1.

Speaker 3

Adjusting for that shift, we're expecting nice increases in both base and defense. The increase in defense sales reflects the production ramp for the reconfigurable turret. Our sales forecast is unchanged from our previous forecast. Industrial Systems sales are projected to increase 4% to $940,000,000 Adjusting for the sales of Sonar Business and foreign currency movements, the increase is 7%. Growth will come from each of our submarkets, reflecting our solid backlog.

Speaker 3

Our sales forecast is up $15,000,000 from our previous forecast on our strong sales this quarter. Turning over to operating margins. We're holding our forecast for adjusted operating margin at 11.0 In FY 'twenty three, which is up from 10.2% in FY 'twenty two. We're expecting stronger performance in each of our segments. Industrial Systems will increase 170 basis points to 11.2%, largely associated with capturing efficiencies on the higher level of sales and realizing benefits associated with our portfolio shaping and pricing activities.

Speaker 3

Space and Defense Controls will increase 70 basis points to 11.6% on higher sales. Aircraft controls will increase 20 basis points to 10.3 percent. We'll benefit from factory utilization as sales in the commercial OE business increase. However, this benefit will largely be offset by an unfavorable mix with a relative increase in commercial OE. Higher interest expense and a higher tax rate will depress earnings per share by $0.68 relative to FY 'twenty two.

Speaker 3

For FY 'twenty three, we're continuing to project adjusted earnings per share of $5.70 plus or minus $0.20 which is up 3% over FY 2022. Adjusting for interest and taxes, EPS would be $6.38 an increase of 15%, reflecting strong operational performance. Next quarter, we're forecasting earnings per share to be $1.45 plus or minus $0.15 Finally, turning to cash. We're projecting free cash flow for FY 'twenty three to be 0, down from the $100,000,000 we were projecting to generate 90 days ago. The change largely reflects our receivables to level off with strong collections on our balances, offset by normal growth in the business.

Speaker 3

We expect that the use of cash for inventories moderates in the remainder of the year due to consumption of program specific inventory. Customer advances will be a source of cash later this year with advances coming in aircraft controls and space and defense controls. We are managing capital expenditures for the year to be approximately $165,000,000 We're reprioritizing As always, our aim is to share a forecast that represents a balanced outlook Overall, we had a good first half to the year, and our outlook for the rest The year looks strong. We're positioned nicely from a liquidity and leverage standpoint, enabling us to invest for future growth of our business. With that, I'll turn it over to Pat.

Speaker 2

Thank you, Jennifer. As you've heard, we closed out a remarkable quarter, delivering record sales and we're on a path to deliver a fiscal year with 7% organic growth and 80 basis points margin improvement. We are now happy to turn over to you and take questions.

Operator

And our first question It's going to come from Christine Leung from Morgan Stanley. Please go ahead.

Speaker 4

Hey, good morning, Pat and Jennifer.

Speaker 2

Good morning. Good morning. Good morning. How are you, Christine?

Speaker 4

Great, great. So in your prepared remarks, Pat, you kind of talked about portfolio shaping. I guess, if you look at the company over the past 10 years, revenue on a CAGR basis is Up just low single digit. Margins are up maybe about 200 basis points. If you think about the actions that you want to take To shape the portfolio now and then you've got the aerospace and defense upcycle coming.

Speaker 4

Where does the company like What does the company look like 5 years from now? Do you see this as a higher growth or a higher margin company? Like which direction Are these actions that you're taking, where do you want to go?

Speaker 2

So if I try to The question which we will do in more detail at the Investor Day in June, but the first response to your question is I think we've demonstrated as a company an ability to innovate and grow organically, and we've had strong underlying organic growth. That's continuing. And we have, as you said, we have some tailwinds coming from the markets that were in. Defense is really significantly growing, so is space. So they're helping us.

Speaker 2

They're assisting in the innovation that we've done in growing those underlying core businesses. I I think we also have the opportunities arising from the new areas that we've endeavored to develop, space vehicles where we're building full satellites, construction equipment And Agile Prime, which gives upside potential, I believe, on top of an already strong core growth. So that's the growth side of the business. I think for us, the focus shifting to margin enhancement is a significant change in Our direction as a leadership team. And over the next number of years, you will see stronger margin growth than we've had in the past.

Speaker 2

And that's what we'd like to describe in more detail in June.

Speaker 4

Great. Looking forward to that. And maybe a follow-up question on the free cash flow outlook. Can you talk about what why in this Quarter, there was a big change in expectation for free cash flow. Did a particular event happen or what made you more conservative?

Speaker 4

What did you see where you're expecting

Speaker 3

It happened in the quarter. And as I mentioned, the building that we acquired for $28,000,000 was part of that change in the forecast. We are going to change some of the prioritization of activities that we're doing in other capital expenditures such that we're not increasing By that full $28,000,000 in our capital expenditures. So that was part of it. There were some other types of things.

Speaker 3

So for instance, we had the R and D amortization. So that hit us for First time, that's $15,000,000 Our pressure in each of the next two quarters are going to be about $8,000,000 So it's about $30,000,000 for the year. That's not necessarily a change in the forecast, but that is something that contributed to the Q2 low level of cash or the use of cash rather. As I look at the rest of Q2, there's a number of things that happened. And I would say supply chain is definitely A big factor in there.

Speaker 3

There's a number of things that happened that affected both our receivables. For instance, on the receivables, the supply chain constraints Commercial aircraft business that was significant growth that also gets caught up in receivables. And we had timing of Sales late in the quarter, particularly in our industrial business, that was high. Supply chain continues to impact Things in our inventory as well. The other thing that we had is a timing thing.

Speaker 3

It's really in the customer advances where we worked down significant levels of, dispense Program advances in there. But as we're going through the rest of the year, we've got confidence that we can not Have this same level of use of cash continue. We are looking for, in receivables, stronger growth. I mentioned the timing of Receivable generation associated with the late sales in industrials, so that will come back to us. And we also had some programs, for instance, where we're It'll get fulfilled in the second half of the year, so we won't use cash to the same level that we did in the first half.

Speaker 3

And we've got some nice customer advances that are coming in within our aircraft and our Space and Defense business. So I would say overall, we're being pressured by Supply chain and it takes a while for this to actually manifest. Some of the decisions that we are making as far as which components to By long lead and buying quantities so that we have them, it takes Several quarters for those decisions to actually manifest themselves into our numbers and actually inflate them from a balance sheet perspective, but we believe that we're balancing that appropriately. One thing that we Are doing 2 right now is we're starting to look at some components that are not as, I would say, risky We are worrisome. I would say electronics and space and electronics and other parts of our business continue to be something we want to focus on and make sure that we've got on hand because of the difficulties associated with that part of the supply chain.

Speaker 3

But there's other components throughout the business that are kind of softening from a risk And we're starting to take action to strategically look at those specific components and parts of And start to work those down without replenishing them. And so that will be some benefit as we look Forward, but it takes a while to work those down so that and obviously a delay in when we'd be able to see those come down.

Speaker 4

Thank you, Jennifer. And if I could add a third follow-up. When do you anticipate working capital headwinds to start reversing? And could we see at some point working capital becomes a tailwind? And if it's going to be at the end of this year?

Speaker 4

Or is this more fiscal year next year?

Speaker 3

It's not going to be in this year. I think as we look to the back half of the year, the back half of the year is going to look better than the experience that we had this quarter. But before it becomes a real tailwind, we'll be outside of this year.

Speaker 4

Great. Thank you very much.

Operator

And our next question will go to Michael Ciarmoli. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for taking the questions. Maybe just to stay on that last topic that Christine and Jennifer, you were talking about supply chain. I mean, are you guys a little late to the game here? It seems like Building buffer stock, looking at component sourcing, build versus buy.

Speaker 5

I'm just trying to understand what Maybe just more of the dynamic around there. I mean, it seems like we've heard a number of other entities putting these actions into place several quarters ago.

Speaker 3

I would say that we have been doing these for quite some time, for a good solid year or so. In certain Maybe a year or so, it was a number of different components. And I would say in the past quarter or 2, it's been more limited to the electronics. That's the area that's kind of sticking and not coming in and out. Earlier on, maybe a year or so ago, we had other components That were causing issues.

Speaker 3

We also had freight. We had epoxies. We had a bunch of these types of things. They were challenged for a quarter or so, and then they eased up and Some came back or different ones replaced them. So I would say that, I don't feel like we're late to the party we We have been doing this.

Speaker 3

We have been doing these electronics for a while. Some of the electronics that we have are 18 to 24 months lead times. So they're long in duration for us to react to.

Speaker 2

Michael, I think the dynamics change, and so we're continuing to I would have said if you were back in quarter 4, quarter 1, we had significant challenges getting Space rated componentry. That was our big challenge then. Electronics has been a continual challenge And through the last year or so and continues to be other issues around forgings eased up at certain points last And on the business and end market we're trying to address, and we're responding to those changes. I think the change that In outgoing assumptions that we had were that toward the mid year, the supply chain challenges will begin to ease up. And I think our perspective at the moment is it's not going to come back soon.

Speaker 2

It's going to go out through the end of the calendar year at least. So that's a change in assumptions. And therefore, we are holding on to more inventory than we had originally intended. We may have intended to start Turning the oil tanker around and starting to try and reduce down inventories, but that's not possible at the moment given the situation on supply.

Speaker 5

Got it. Okay, that's helpful. And then just, I think in the prepared remarks you called out FLARA. What sort of R and D effort It's going to come along with FLAR. I mean, I know we've seen kind of the R and D weigh on aircraft in the past.

Speaker 5

Is this something that would be similar in nature? Certainly, it's going to be a bigger program, but how are

Speaker 1

you guys thinking about some of the

Speaker 5

R and D investment for that program?

Speaker 2

So we're moving into what we call the engineering and manufacturing development phase of the program. We're in discussions with At the moment, I was finalizing contracts on that so that we can get started. The work will begin to ramp up towards the midway into, let's say, Q3 and into Q4 and then continue on for the next 3 to 4 years. Do you want to comment on the level?

Speaker 3

Yes. This contract, just so you know, it doesn't flow through R and D. It actually flows through sales for us. So this year, we are projecting $10,000,000 in sales. We Previously projected $25,000,000 in sales, but due to the timing of the award, we're now expecting to be Get an award around the June timeframe.

Speaker 3

We should have $10,000,000 of sales this year. It doesn't go through R and D.

Speaker 5

But presumably, is it low margin customer funded revenues? So would it be a drag on margins?

Speaker 3

It's a drag on margins.

Speaker 1

Okay.

Speaker 5

And then last one, Pat. I mean, I just I know you guys have the upcoming Investor Day. I mean, you've got AC revenues at a record level, margins are down. They've kind of been range bound here. I mean, you mentioned this matrix structure in aircraft controls.

Speaker 5

I mean, there was a period of time where you guys did mid Margins, is that something that kind of this moving away from the old structure to the separate business? Is the path or the goal to get back to mid teens where some of your peers with proprietary sole source components products, They're generating these types of margins. Is that sort of what we should be conceptually thinking about here?

Speaker 2

Well, I prefer to share the goal when we get to the Investor Day, Michael, but we're definitely driving margin enhancement within the Commercial Business and the Military Business. So you will see that when we lay it out in June. We have Specific plans in place that are helping us to achieve that. We've been working very hard over the last year on trying to improve the gap between cost and Bryce, there's been a lot of change in the supply chain side. We've been working through those issues With our suppliers, but also working with the OEMs to see how we address that challenge.

Speaker 2

And I think towards the tail end of this year, you'll begin to see that improvement flowing through on our commercial business.

Speaker 5

Got it.

Speaker 1

Okay, perfect. I'll jump back in the queue guys. Thank you.

Operator

And I'll turn the call back over to Pat for closing comments or additional remarks.

Speaker 2

All right. Thank you very much. I'd like to thank you for joining the call and for all of the questions.

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