Please ensure Javascript is enabled for purposes of website accessibility

Moog Inc. (MOG.A) (MOG.B) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribers - Feb 4, 2021 at 2:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

MOG.A, MOG.B earnings call for the period ending January 2, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Moog Inc. (MOG.A 3.12%) (MOG.B 0.00%)
Q1 2021 Earnings Call
Jan. 29, 2021, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day everyone and welcome to the Moog First Quarter Year 2021 Earnings Conference Call. Today's conference is being recorded.

And at this time, I would like to turn the call over to Ann Luhr, please.

Ann Marie Luhr -- Investor Relations

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 our actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of January 29, 2021, our most recent Form 8-K filed on January 29, 2021, and in certain of our other public filings with the SEC.

We 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 John?

John R. Scannell -- Chairman and Chief Executive Officer

Thanks, Ann. Good morning, thanks for joining us. We hope all our listeners continues to be safe and healthy. This morning we report on the first quarter of fiscal 21 and provide color on what we're thinking for the remainder of the year. Overall, given the ongoing challenging operating conditions, we're pleased with the results of this quarter.

Last quarter, we told the market that we were planning for COVID to be with us throughout our fiscal '21. Given this assumption, we projected that our business this year would be somewhat similar to the second half of fiscal '20. In my prepared remarks today, I'll provide my usual comparisons to the same quarter last year and also some reflections on the comparison of Q1 to the average of the previous two quarters.

There remains considerable uncertainty around the ongoing impact of COVID on our business. Therefore, similar to last quarter, we've elected not to provide specific guidance as we believe the range of possible outcomes is beyond our ability to accurately forecast. We will, however, update the markets on our assumptions for the business.

Similar to last quarter, I've arranged my headlines under the headings of macroeconomic, microeconomic and then Moog-specific items. First on the macro front, it's been a very eventful 90 days. In the U.S., we've seen a change in the administration with the Democrats taking control of both houses of Congress as well as the White House. At this early stage, it's hard to predict the impact of this political shift in our business, but it's probable that tax, trade and defense spending will all be on the agenda over the coming years. One thing that does seem clear is that interest rates will remain very low for several years to come.

This quarter, four years of Brexit discussions came to a close as the U.K. left the EU with a last minute deal. We don't anticipate any immediate impact on our business from this new trade arrangement between the U.K. and Europe. Finally, we all rejoiced in the announcements of approved vaccines against COVID, but at the same time, worried about the emergence of more infectious strains and the surge in cases in Europe and the U.S. As the calendar year closed out, only China reported GDP growth for 2020, while the rest of the world shrunk under the burden of the pandemic.

Second, on the microeconomic fronts, consolidation across our major markets continued with Lockheed agreeing to buy Aerojet, Teledyne combining with FLIR and MTS being carved up between Amphenol and ITW. Government spending in our Defense and Space markets remained strong and demand for medical products continued. It was great to see that the 737 MAX was certified to begin flying again and Boeing resumes deliveries to customers. Unfortunately, widebody demand continued to weaken and, excluding the impact of holidays, there was no appreciable recovery in air traffic.

Third, it was a solid quarter for our business under the circumstances. Relative to a year ago, sales and earnings were lower. However, on the positive side, comparing our performance with the second half of fiscal '20, first quarter sales held steady, and earnings per share were up sharply on an improved mix in Aircrafts. We also generated very strong cash flow in our first quarter. COVID continued to impact performance, and with the surge in cases in the Western Hemisphere, we saw an increased impact on our operational efficiencies across our footprint. We bought back 150,000 shares this quarter and completed the first significant acquisition in our Aircraft business in over a decade.

At the end of December, we paid $78 million to acquire Genesys, a company which provides a range of flight instruments, displays and autopilot systems for military and commercial programs. Genesys will add about $40 million to sales in fiscal '21 and will be neutral to earnings as a result of first year accounting impacts. We also booked our first significant production order for our RIwP turret system with the launch of the SHORAD contract.

Now let me move to the details, starting with the first quarter results. I'd remind our listeners that we provided a three-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.

Starting with the first quarter, sales in the quarter, of $684 million were 9% lower than last year. Sales were up in our defense, space and medical markets. Sales were lower across our industrial portfolio, and down over 50% in our commercial aircraft business. Taking a look at the P&L, our gross margin was down slightly under lower sales. R&D and SG&A spend was similar to last year, while interest expense was down on lower rates. Last year, we incurred a $4 million charge associated with calling our high-yield bonds which showed up in Other Income. Excluding this unusual item, the Other Income line is flat with last year. The effective tax rate this quarter was 24.9%, resulting in net income of $38 million, which is down 24% from last year, and earnings per share of $1.17, down 19% on a lower share count.

Fiscal '21 outlook. 90 days ago, we started the year with what we believed was a conservative set of assumptions. We believed COVID would be with us throughout our fiscal year. We assumed our defense, space and medical markets would remain strong. We predicted no recovery in our industrial markets. And finally, we were optimistic that our commercial OEM business would stabilize and we might see a slight recovery in the aftermarkets toward the end of the year. With one quarter under our belts, we think our assumptions still largely hold true. On the COVID front, the good news of a vaccine has been tempered by the surge in cases in Europe and the U.S. and the slow pace of vaccine delivery. Taken together, we believe we'll continue to have to deal with the effects of COVID throughout our fiscal year.

Relative to the second half of fiscal '20, our defense, space and medical markets are holding up as we expected. Our industrial markets have actually weakened in the first quarter, but we think we may have hit the bottom in Q1 and could see a slow improvement through the rest of the year. Finally, our commercial OEM customers continued to reduce their production forecast, although we believe they are now settling down and the commercial aftermarkets actually strengthened in the first quarter. Given the quarterly variation we see in the commercial aftermarkets, it's too soon yet to determine if this is a trend. All in all, we think the year will continue to unfold much as we thought 90 days ago.

Now to the segments, starting with Aircraft. Sales in the first quarter, of $287 million were 16% lower than last year. It's the same story as the last few quarters with strength on the military side and weakness on the commercial side. Military OEM sales were very strong this quarter on higher F-35 activity, robust foreign military sales and strength in our funded development programs. Military aftermarket was more or less in line with last year. On the commercial side, OEM sales were down almost 60% from a year ago. Sales to both Boeing and Airbus were down on every platform, ranging from 40% lower on the A320 to over 90% lower on the 737. Sales in our two flagship programs, the 787 and the A350 were down between 50% and 60%. Business jet sales were down almost 70%. The commercial aftermarket was down a third with weakness across the complete portfolio.

Comparing Q1 to the run rate of the second half of fiscal '20, we saw strong growth in our military OEM platforms, driven by the same three items mentioned above, F-35, foreign military sales and funded developments. The military aftermarket was lower after a very strong finish to fiscal '20. On the commercial side, the commercial OEM business was steady, signaling a gradual stabilizing of demand, while the commercial aftermarket was up on higher 787 and A350 activity.

Aircraft margins. Margins in the quarter of 9.7% were lower than a year ago as a result of the lower commercial sales. The good news is that margins were up nicely from the adjusted margins of the previous two quarters as a result of an unusually positive mix. This mix was a result of particularly strong foreign programs in Q1. We don't anticipate our mix would be quite so favorable as we move through the next few quarters.

Aircraft fiscal '21. Coming into the year, we described our outlook for aircraft as follows. We were assuming continued strong demand from our military customers, stabilization of our commercial OEM demand, and a modest pickup in the commercial aftermarkets toward the back half of the year. As of today, those assumptions are unchanged. From an external perspective, we're seeing continued strength on the military side and long-term commercial OEM demand is still moving downwards, but seems to be gradually settling. While the commercial aftermarket was strong in Q1, sales were within the normal quarterly volatility we see in this end market. Internally, we're managing through increased pressure on our operations capacity as a result of higher COVID cases.

Finally, the completion of the Genesys acquisition will add about $40 million to the Aircraft segment sales this year, split 50-50 between military and commercial. As I said before, given the impact of first year accounting, the acquisition will have a negative -- a negligible impact on operating profit.

Turning now to Space and Defense. Sales in the first quarter of $188 million were in line with the first quarter of last year. Sales in the Space applications continued very strong, up over 20% from a year ago. We had growth in our NASA work across our hypersonic programs and in integrated space vehicles. Defense sales were 11% lower than last year. We served four submarkets within our Defense sector, with two up this quarter and two down. Sales on military vehicles and into Naval applications were up in the quarter, while sales of missile steering systems, as well as into security applications were down. Our security business has been particularly hard hit by the pandemic as much of that business requires on-site installation work and this has slowed to a standstill over the last nine months.

Comparing this quarter with a run rate of the second half of fiscal '20 shows that the Space business is right in line. While Defense is slightly lower, it's still within the normal quarterly variation we might expect. Margins based on Defense margins in the quarter of 12.2% continues to be healthy albeit down somewhat from the last few quarters. As in our other businesses, we're seeing some increased pressure on operational efficiency as a result of higher COVID cases across our facilities.

Space and Defense fiscal '21. Coming into the quarter, our assumption was that we'd see continued strength in both the Space and Defense markets as we move through fiscal '21. This held true for the first quarter and continues to be our operating assumption as we look out over the coming three quarters.

Turning now to Industrial Systems. Sales in the first quarter of $209 million were 9% lower than last year. We experienced sales declines in three of our four major markets, with medical providing the only growth, up 3% from the year ago on higher pump sales. Sales into energy markets were marginally lower driven by lower sales of components into exploration applications. Sales into industrial automation were down over 10% with weakness across the entire portfolio of products. This is our biggest submarket and continues to be pressured from the combined effects of the industrial slowdown in Europe and the U.S., compounded by the impact of COVID. Finally, sales into simulation and test markets were down almost a third, with flight simulation particularly hard hit as a result of the drop in airline activity.

Compared to the run rate of the second half of last fiscal year, Industrial Systems were down a further 7% with weakness in each of our submarkets. Simulation test was hardest hit as sales to our flight simulation customers continued their quarterly sequential decline since Q2 last year. Sales into medical applications were also lower as surged demand for COVID-related components waned.

Industrial Systems margins. Margins in the quarter of 9.5% were lower than last year on the lower sales and the impact of COVID. Margins were in line with the average adjusted margins of the previous two quarters.

Industrial Systems fiscal '21. Our sales assumption coming into the year was flat sales in our energy, industrial automation, and simulation and test markets. We also predicted that our medical market would remain strong, albeit down somewhat from the highs we saw in the recent quarters as demand for COVID-related equipment slowed. After one quarter, medical sales were in line with our thinking, up from a year ago, and down from the second half. Although sales into our other three submarkets continued to weaken in the first quarter, we were encouraged by an improving book-to-bill ratio. Therefore, for the full year, our sales assumptions remain unchanged.

Summary guidance. It's been a good start to the year. We have adapted our business practices to live with COVID and our customers, our suppliers and our internal operations continue to function. We managed our way through some efficiency impacts in the first quarter as a result of increased infections across our footprint. The good news is that vaccines are under way. The less good news is that the pace of distribution is slower than we might have hoped. Therefore, we continue to plan for COVID restrictions across our business for the remainder of the fiscal year.

Looking at our five major markets. Defense, space and medical remains strong, industrial continued to soften in the first quarter and our commercial business stabilized relative to the previous six months. This quarter, we allocated our capital to growth, with the acquisition of Genesys in our Aircraft segment. Our overall approach to capital allocation remains unchanged. Our priorities are organic investments, acquisitive growth and return to shareholders with all decisions based on long-term value creation.

As we emerge from COVID over the coming year, we're optimistic that we'll see more acquisition opportunities than in the recent past. The present financial markets are providing easy access to almost free capital, which seems to be driving acquisition prices into the stratosphere. From our perspective, plentiful free money does not change the underlying economics and risks inherent in any acquisition and we intend to remain disciplined in our approach to valuations. Therefore, we remain cautious not to overpay.

As we look to the coming three quarters, we'll continue our hybrid working practices with most of our staff working remotely. Over the last nine months, we've learned how to live with COVID and have reconfigured our business to ensure the company remains strong and that we're in a position to invest in growth.

Looking to the future, we continue to pursue our long-term strategy of technology focus, diverse end markets, strong balance sheet, internal investments and complementary acquisitions.

Now, let me pass it to Jennifer who will provide more color on our cash flow and balance sheet.

Jennifer Walter -- Vice President and Chief Financial Officer

Thank you, John. Good morning, everyone. We had another very strong cash flow quarter. Free cash flow in the first quarter was $74 million, a conversion of almost 200%. That compares to $50 million of free cash flow in the same period a year ago. Strong collections on receivables, slower growth in inventories, lower compensation payments and reduced capital expenditures drove the increase in free cash flow. The $74 million of free cash flow in Q1, compared with an increase in our net debt of $24 million.

During the first quarter, we completed the Genesys acquisition in our Aircraft business, which increased our net debt by $78 million. We also repurchased just over 150,000 shares of our stock for $10 million and paid our quarterly dividends. Net working capital, excluding cash and debt as a percentage of sales at the end of Q1, was 29.2% compared to 28.4% a quarter ago. The increase is being driven by the addition of net working capital from the Genesys acquisition, with little being added in the way of sales due to the timing of the acquisition. Without the acquisition, net working capital as a percentage of sales would have been 28.6%, up only slightly from a quarter ago.

Capital expenditures in the first quarter were $20 million, up from $18 million in the fourth quarter and down from $27 million in the same quarter a year ago. This quarter, we began to invest after limiting our capital spend to compliance and business-critical projects in the early stages of the pandemic. Our strong financial position today affords us the opportunity to catch up on capital investments that we had delayed and invest in efforts to increase productivity and gain efficiencies.

Depreciation and amortization totaled $21 million continuing at the fairly constant levels that we experienced last year. Our leverage continues to be in our target zone. We have had very strong free cash flow generation during the past year, which fully offset the decline in our trailing 12-month EBITDA that resulted from the pandemic. After the first quarter acquisition, our leverage ratio would have been 2.4 times, the same as a quarter ago. The impact from the acquisition caused our leverage ratio to increase to 2.6 times as of the end of our first quarter.

At quarter end, our net debt was $869 million, including $98 million of cash. The major components of our debt were $500 million of senior notes, $400 million of borrowing on our U.S. revolving credit facility, $67 million outstanding on our securitization facility. We have $660 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0 times on a net debt basis. Based on our leverage, we could have incurred an additional $474 million of net debt as of the end of our first quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future.

Cash contributions to our global retirement plan totaled $13 million in the quarter compared to $10 million in the first quarter of 2020. Total retirement plan expense in the first quarter was $18 million, the same as in the first quarter of 2020. Our effective tax rate was 24.9% in the first quarter, down just slightly from 25.2% in the same period a year ago. We do not have any significant special items in either of these periods.

At the end of our first quarter, 12 month backlog was $1.9 billion, up 14% from $1.7 billion a quarter ago with increases in each of our segments. The increase in our total backlog during the quarter was much more dramatic. Total backlog at the end of Q1 was $4.7 billion compared to $2.6 billion a quarter ago. During the quarter, we renewed several long-term arrangements with customers in our Aerospace & Defense business. These supply arrangements cover periods up to 10 plus years. Under expanded reporting in ASC 606, we capture the full value of these arrangements in our total backlog.

We expect free cash flow generation in 2021 to be in line with our long-term target of 100% conversion. We continue to see shorter term pressures on inventories as our customers continue to change their demand and we work to slow our incoming receipts of inventory. However, the benefits associated with our efforts to create operational efficiencies in our business will outweigh these pressures later in 2021. We are beginning to ramp up our investments in capital expenditures from the constrained levels of the last few quarters. We are well positioned to invest in our business, and we've returned to a balanced capital deployment strategy. We will invest in our operations and explore opportunities to make strategic acquisitions and return capital to shareholders.

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

John R. Scannell -- Chairman and Chief Executive Officer

Thanks, Jennifer. Lisa, we're available to answer questions now if there are questions in the queue, please.

Questions and Answers:


Thank you. [Operator Instructions] We'll take our first question from Cai von Rumohr with Cowen. Please go ahead. Yes, thank you. Great quarter. So Jennifer, your conversion was 195% in the first quarter. Why only 100% for the year?

Jennifer Walter -- Vice President and Chief Financial Officer

So as we look out to the rest of the year, we've had very strong cash flow in the first quarter and a lot of that has been driven by our contract advances. So those were providing cash of almost $30 million in the first quarter. As we look toward the rest of the year, we'll be working some of that down, so that's going to be creating some pressure. There's also some pressure in some other areas. For instance, in receivables, we did get a onetime benefit last year. So there's potential for some of that to reverse as perhaps funding levels for DoD contracts changes. And the constrained levels of capital expenditures is another area that we would expect to be increasing our capital expenditures based on our strong financial position that we've got.

So there's some pressures as we look forward as we look to spend in the capital expenditure area as well. But there's some opportunities that will offset that. So with receivables, potential pressure, there would be some benefit relief on the payable side for the same reasons. And then slowing the incoming receipts on inventories that should provide us some benefit compared to where we are in the first quarter. So it's really a combination of all of those things.


Terrific. Good answer. So John, your aircraft sales, your military aircraft sales looked huge, the OE. Could you give us a little more color in terms of what drove that?

John R. Scannell -- Chairman and Chief Executive Officer

Well, it was three things, Cai, that really are driving the increase. It's the F-35. A little bit of that is timing related. As we've talked about in the past, it depends on when you've got contracts materials usage because, of course, a lot of it is long term contracts. So F-35 was very strong in the quarter. We had strong foreign military sales. This is a seasonal thing that we see each year. In the first couple of quarters, we tend to have some foreign military programs that are stronger. So that was stronger in the first quarter relative to the second half. And then funded development continues very strong, Cai. And so those were the three items that were really driving the sales increase on the military side, on the OEM military side.


And therefore we should look for strong gains for the year in military aircraft?

John R. Scannell -- Chairman and Chief Executive Officer

I think we'll continue to see a strong year, but I don't think -- for the full year, it's probably going to be a bit up from last year. That's what we said all along, we think military -- the whole defense business will remain strong for the year. I don't think we'll continue at the pace of the first quarter, but it will be a good year. The first quarter was particularly strong. I'm not sure that we'll continue at that pace. If you annualize that, I think that's probably a little bit too far.


Got it. So last question, you had that huge increase in backlog. Maybe give us some more color on that and particularly the aircraft programs where you signed up for 10 years and whether you feel the contract terms are a little better than they've been in the past?

Jennifer Walter -- Vice President and Chief Financial Officer

So these are, as I mentioned, they're in our A&D business. We did find some multiple supply agreements for long term periods. We aren't going to comment on the specific terms or customers that we've had. We do believe that the terms are mutually beneficial, both for our customers and then for us.


Okay. Super. Thank you.

John R. Scannell -- Chairman and Chief Executive Officer

Thanks, Cai.


We'll take our next question from Ken Herbert with Canaccord Genuity.

John R. Scannell -- Chairman and Chief Executive Officer

Good morning, Ken.


Hi, good morning, John and Jennifer. I wanted to first ask on the aircraft controls, really nice sequential improvement in the margins in that business, John. I know you called out mix as a benefit. But can you provide any more detail on your expectations for margins in that business? It sounds like maybe they stepped down a little sequentially into the second quarter, but can you help frame that up for us?

John R. Scannell -- Chairman and Chief Executive Officer

Yeah. You're right, Ken. So we did see a nice -- very nice sequential improvement. If you adjust the margins in the second half, there was some unusuals in the fourth quarter, but the margins are running 4% to 5% in the second half, and they popped up over 9% in the first quarter. But as I said, we have a seasonality in some of our businesses that, in the first quarter or two, we tend to have more foreign military sales and some programs and that does impact the mix.

And so very positive start to the year, but we do not anticipate those 9.5% margins to go throughout the year, just given the loss of business that we've seen on the commercial side. So we'll see them probably tick down as we go through the year, but it is better than the second half of last year. I think we'd end up the year better than the second half average, but we're not going to see that same performance as we go through the full year, we don't think.


Okay. That's helpful. And there's been some initial commentary from the Biden administration about pausing some international sales. Considering sort of the margin benefit there, do you see any risk to any of your, I guess, in '21, longer term perhaps, who knows? But is there any risk in '21, specifically, you see around F-35 or other programs that we should think about?

John R. Scannell -- Chairman and Chief Executive Officer

I -- so we don't know all of the details of what that might mean at this stage, Ken. We're not anticipating any significant risk as we look out over the balance of '21. As you say beyond that, things would change. But given the lead times on most of the types of things that we do, typically, the next 6, 9, 12 months are oftentimes already pretty much baked in. So there could always be a change, but we are not anticipating any significant impact from changes there over the rest of this fiscal year.


Okay. And then just finally, in your space business, really nice growth against, obviously, very difficult comps. The rest of '20, you put up 30% to 40% growth in the space business. Do we see a step down sequentially in growth in the space business, or are you able to maintain the growth against, obviously, the really strong growth in '20?

John R. Scannell -- Chairman and Chief Executive Officer

So we went from fiscal '19, we did about $220 million in our space business. Fiscal '20, we did almost $300 million. We're anticipating that we'll see some additional growth this year but not that type of growth percentage. I mean that was an enormous growth. That was a 30% to 40% growth. So we anticipate that we might see high single digits maybe growth this year in the space business, if it continues to play out the way it is, but not that same level of growth. But it's still growth up a very strong '20, and so I consider that a real positive. So our space business is becoming a bigger part of the portfolio.


It's very impressive. Were you surprised by the first quarter growth in space, because it seemed to be a bit ahead of expectations?

John R. Scannell -- Chairman and Chief Executive Officer

No. I mean, because the backlog, the contracts in these businesses tend to go out quarters or sometimes even years, Ken. So it's relatively -- it's not too difficult to look at the contracts that you have in backlog and what you think is coming in to predict the sales over the next couple of quarters. So to say that the first quarter was a significant surprise would not be true on the sales side. I'd say the growth in the space business over the last three, four, five years has been a real surprise. If we were sitting here together three or four years ago, I could not have anticipated, we would not have anticipated, I don't think the market did, the type of strength we're seeing in space. And of course, what's happened is we want to get back to the moon by 2024. Will that change now? Perhaps. But NASA started spending a ton of money. You've seen the emergence of the space force and the space layer and all of these applications where space is viewed as the next frontier in terms of the battle ground.

And so all of that is driving it. Then you got the hypersonics, huge push on hypersonics over the last few years. A good portion of that is in the space side of our business. So there's a whole series of what I'd call macroeconomic effects coming out of the government that's really driving that. It's not the commercial side of it. That may pick up again over the coming years, but that's actually been in the doldrums for quite a few years. So that's not where it's at. It's really on the defense side that we're seeing it. So it's hypersonics. It's a lot of additional satellites for space, defending space, and then it's the pickup in NASA spending on the SLS.


John, thanks so much for all the color. Nice quarter.

John R. Scannell -- Chairman and Chief Executive Officer

Thanks, Ken.


[Operator Instructions] We have a question from Michael Ciarmoli with Truist Securities. Hey, good morning, guys.

John R. Scannell -- Chairman and Chief Executive Officer

Good morning, Michael.


Good morning. Thanks for taking the question. Nice results. Maybe just to kind of go back to Ken's kind of original question on the margins. Can you maybe just -- obviously, the second half was pretty depressed. You got this mix up this quarter. But as I think about aircraft, maybe going back, I guess it was mid-'19, you had the operational challenges that you disclosed. It seems like that was going to be a multi-year effort to make improvements there around quality, on time, scrap. Can you just give us a general update around kind of what's been happening in the aircraft control segment on those operational improvement initiatives?

And I would think, obviously, volumes fall off a cliff in aerospace. But amid lower volumes, it might actually have been a little bit easier to implement some of these changes. And I guess what I'm getting at is when do we really start to see some of those benefits. Should we think about that exiting this fiscal '21, or just any color there on what's been happening on the operational side.

John R. Scannell -- Chairman and Chief Executive Officer

Sure. Yeah. So a couple of years ago, Michael, as you described it, we kind of hit a real challenge in the aircraft business. And we kind of took a step back and said, look, we built a business that was designed around a component supplier and we've now become a system supplier, and we've discovered that our operational capabilities are good enough for your components guy, and they're not good enough at the level that we're now playing in, and we really need to kind of retool around that. And you may remember at the time, we said we need to bring in additional talent into that area in order to do that. And we did two things. We've moved quite a lot of internal talent, some of our best management folks into the operations on the aircraft side. They're now well engaged and doing a lot of really good stuff. We changed out of -- I think we got six major production facilities. I think five of the six have a different manager running them now, different guy running it at the most senior level. So, we really injected a lot of talent down through the supply chain, etc., internally.

We then also engage with outside consultants. We spent a year with them working through primarily the supply chain side of it because that was the biggest challenge area for us. Learned a ton from that, have been working really hard over the last couple of years to implement those. Our engagement with the consultants has kind of wound down mostly because we got to the point where we've established the processes. Now it's a matter of embedding them and working them. What's happened, of course, is nine months ago COVID hit us. And so our plan is to continue making the types of improvements that we were going to do really got derailed because of COVID.

And there's been a dramatic shift in terms that I described in my remarks, just our available capacity. We've had situations where we're running three shifts. But on a second or third shift, we may have a relatively small skeleton crew in a particular area. Let's pick an area like grinding. We've got three or four people. While if one of them contracts COVID, we send them all the folks around them home for two weeks. And so we're down for two weeks in that particular area, which of course, is a step in the process of getting products out.

And so we've seen -- those have been the challenges we've been working with and have really absorbed time and efforts. We also, in the past, we would have the changeover shift. The next guy would come in before the last person left. Now we have a gap. We've got cleaning procedures. When people come, they also have their own cleaning procedure. So we've seen an impact on efficiency associated with that. And a lot of the great ideas we had about improving the processes and relaying out the value streams and all that, that has really taken a backseat partially also because we send a lot of people home. We want minimum people in the factory. So I would say that our operational improvement program, we continued to move along, but it has dramatically slowed over the last nine months from what we would have hoped and anticipated.

Having said that, now that we've got COVID, at least we know how to deal with this, we are continuing to work those issues. And I would anticipate that over the next nine months, I think by the back end of this year, we should start to see that impact. If you remember, when it came up, I said what we probably see is we'd start to see it in inventory first. Well, first of all, we see it in the customers' better delivery on time, or making sure our customers are more satisfied. Second, we see it in inventory that should start to come down. And then finally, we'd start to see it in the margins. Definitely, on the customer front, we've already seen that. We've seen that over the last year and we've maintained that through the COVID situation. Of course, with quantities dropping off significantly in the commercial side, it was relatively easy to do that. But we had already seen that before that happened.

The inventory piece we've not seen and that's because our commercial business has just fallen up so quickly that our ability to slow our incoming receipts has -- we've been chasing down this curve for the last nine months. And as Jennifer said, even this quarter, we saw the long term production rates that the OEMs are advertising continue to come down. So we continue to go back to our supply chain and say you got to send me less and less. But they're smaller players and we don't want to just shut them off.

So our inventory, our ability to slow it has come down. And so we're not seeing the inventory impact of the operational improvement, because it's being masked by the impact of COVID and the drop in the commercial. And then, of course, as I said, the margin piece we'd see later. We anticipate that as we get through this year, we should start to see both the inventory piece and into next year, that margin improvement piece.


Got it. That's helpful. So I mean, as we look at margins emerging from this downturn, obviously, the margins were challenged into the upturn, barely scratching that kind of 10% level. Do you envision structurally higher margins even if maybe the 787, A350 kind of hold these rates, if we don't get back to the narrowbody volumes? Do you think you can do structurally higher margins than say what you were doing in kind of the fiscal '18, fiscal '19 time frame?

John R. Scannell -- Chairman and Chief Executive Officer

I think if we can stabilize the demand, of course, we've got factories that are sized for 10 or 12 A350s and 787s a month that's physically that size. So you end up, no matter how you do it, you end up having underutilization in some of those factories. But we've resized the staff, although, we continue to look at that, because the quantities continue to come down. But we think we've resized and we will stabilize. And then we'll start to see the operations improvement come in.

So yeah, even at the lower quantities, assuming it can stabilize and we start to get some rhythm there, we believe that as we look out over the next couple of years, we can get the margins back up to what they were a couple of years ago. And from there, we can continue to see improvements, particularly if we started to see the volume on the commercial side tick up a bit.


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

John R. Scannell -- Chairman and Chief Executive Officer

Thanks, Michael.


All right. [Operator Instructions] All right. And there are no further questions at this time. I'd like to turn the call back over to John Scannell for any additional or closing remarks.

John R. Scannell -- Chairman and Chief Executive Officer

Thank you, Lisa. Thank you very much to everybody for listening in. As we said, we feel like we're off to a good start in fiscal '21, but it will inevitably remain a challenging year, I think, for all of us as we struggle our way through COVID. And hopefully, we'll continue to see improvements over the coming quarters. Thank you for your time. We look forward to coming back to you in 90 days. Thank you, Lisa.


[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Ann Marie Luhr -- Investor Relations

John R. Scannell -- Chairman and Chief Executive Officer

Jennifer Walter -- Vice President and Chief Financial Officer

More MOG.A analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Moog Inc. Stock Quote
Moog Inc.
$78.73 (3.12%) $2.38
Moog Inc. Stock Quote
Moog Inc.
$80.00 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.