Fourth Quarter Conference Call, Fiscal Year 2021
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 4, 2022, our most recent Form 8K filed on November 4, 2022, and in certain of our other public filings with the SEC.
We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our investor relations webcast page at www.moog.com.
Good morning. Thanks for joining us. This morning we’ll report on the fourth quarter of fiscal ’22 and reflect on our performance for the full year. We’ll also provide our initial guidance for fiscal ’23.
As usual, I’ll start with the financial highlights.
Our fourth quarter sales were in line with our forecast from 90 days ago. Adjusted earnings per share of $1.36 were up 8% from last year, but at the lower end of our forecast as a result of $0.10 of program charges in our Space business. Excluding these charges, our underlying operations were right on plan. Adjusted free cash flow of $19 million was positive, but weaker than we had anticipated as supply chain conditions continued to weigh on working capital.
Overall, fiscal ’22 was a strong year for the company, despite the challenges associated with COVID, supply chain, inflation and labor attrition. Adjusting for acquisitions, divestitures and foreign exchange movements, sales were up 9% from last year. Adjusted operating margins expanded 50 basis points and adjusted earnings per share were up 14%.
Looking back on the full year, the following headlines stand out.
1. First, it was a year in which the world order was redefined for generations to come. The Russian invasion of Ukraine in February changed the geo-political landscape in Europe for decades. In Asia, escalating tensions over Taiwan and the consolidation of power in China under Xi Jinping further eroded the relationship with the U.S. Combined, these events have redefined the global political landscape into an East-West divide – déjà vu for those of us over 40. From a Moog perspective, all activities with Russia have stopped and we’re taking a more cautious view of the future of business in China. While these global events are not positive for humanity, higher defense spending in the west represents a longer-term tailwind for our business.
2. Second, despite the geo-political uncertainty, it was a good year for the company overall. Our adjusted year-end results met the guidance we provided to the street 12 months ago in terms of sales, margins and EPS. Our performance to plan was all the more impressive given the continued COVID restrictions, particularly in China, the deterioration in supply chain performance across all our markets, and the emergence of inflation over the course of the year. Free cash flow was lower than plan, but this was a consequence of deliberate decisions to prioritize customer commitments over inventory optimization.
3. Third, organic growth led acquisitive growth as the engine for value creation. Our multi-year focus on innovation continued to bear real fruit in fiscal ’22. Over the last few years, we’ve repeatedly described our 3 new growth vectors – our RIwP turret, integrated space vehicles, and our construction initiative. In fiscal ’19, these 3 initiatives had total sales of less than $40 million. In fiscal ’22, sales were over to $160 million, a 4-fold increase in 3 years.
4. Fourth, our margin expansion journey continued in fiscal ’22. It was a busy year for resizing our businesses and shaping the portfolio. During the course of the year, we divested 3 businesses with annual sales of about $60 million, completed restructurings in each of our operating segments, exited our operations in Russia, and closed or sold several facilities. These actions generated $71 million in net cash proceeds.
5. Fifth, our prudent approach to capital allocation was unchanged from prior years. We spent $139 million on capital expenditures, $36 million on share repurchases, $33 million on dividends, and $15 million on 1 acquisition and several investments in technology start-ups. We continued to look aggressively for larger acquisition opportunities, but could not find assets which met both our strategic and financial filter requirements.
6. Finally, our strong results this year, in the face of significant challenges, are a great credit to the 13,000+ Moog employees around the world. I’d like to recognize their contribution and thank them for their continued dedication to serving our customers.
Now, let me provide some more details on the quarter and the year.
Q4 Fiscal ‘22
Sales in the quarter of $768 million were 6% higher than last year. Adjusting for foreign exchange movements, underlying sales were up 9%, on strong performance on the A&D side of the house. Taking a look at the P&L, our gross margin was down slightly on the charges in the Space business. R&D was lower as we shifted resources to funded development programs. SG&A was in line, while interest expense was up on higher rates. The effective tax rate in the quarter was high at 31.6%, as a result of non-deductible charges associated with divestitures. The result was net income of $29 million and EPS of $0.92. In the quarter our portfolio shaping actions resulted in charges of 44 cents. Excluding these charges, adjusted net income of $44 million and adjusted earnings per share of $1.36 were both up 8% from last year.
Fiscal ’22
Full year sales of $3 billion were up 6% from fiscal ’21. The main drivers of growth were the commercial aircraft business, both OEM and aftermarket, as well as increased sales in our RIwP program in Space & Defense. Gross margin was in line with the previous year while R&D was down, primarily in the Aircraft Segment. Over the last few years, we’ve continued to shift Aircraft R&D resources onto paid development programs. SG&A was up in 2022 as travel and marketing expenses grew from the pandemic lows. Interest expense was up marginally on higher rates later in the year. A slightly higher tax rate resulted in adjusted earnings per share of $5.56 in fiscal ’22, an increase of 14% from $4.88 in fiscal ’21. Our GAAP results for the year included $0.73 cents of charges associated with various impairment charges and our portfolio shaping activities.
Fiscal ’23 Outlook
The story for this coming year is sales growth, margin expansion, and improved free cash flow with items below the operating profit line weighing on our EPS growth. For fiscal ’23, we’re projecting sales of $3.2 billion, an increase of 5% over fiscal ’22. Adjusting for the stronger dollar and loss of sales from divestitures, underlying organic growth will be 7%. We anticipate growth in each of our operating segments, with the biggest gains in the Commercial Aircraft and Space markets. Full year margins of 11.0% will be up 80 basis points on stronger performance across all three operating segments. Significantly higher interest expense, a stronger dollar and a higher tax rate will depress earnings per share by 74 cents relative to fiscal ’22. For the full year ‘23, we’re projecting EPS of $5.70 plus or minus $0.20 cents, up 2%. Just for reference, if interest, taxes and exchanges rates in fiscal 23 were the same as fiscal 22, EPS would be $6.44 – an increase of 16%. Full year free cash flow will be $130 million, representing a conversion ratio of 70%.
Now to the segments. I’d remind our listeners that we’ve 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.
Aircraft
Headlines / Macro
It was a relatively quiet quarter in our Aircraft markets. There was good news on the commercial front as Boeing resumed shipments of the 787 and there were early signs that China might restart flights of the 737 MAX. The C919 also achieved Chinese certification. We have the high lift system on this Chinese airplane, but a slow production ramp means our sales in the coming year are not material. On a less positive note, there was more uncertainty around the certification of the MAX -7 and -10 at the end of the quarter than at the start. On the military side, we’ve not yet seen any direct impact from the conflict in Ukraine. In October, we were disappointed to learn that the decision on the FLRAA contest would be moved out to the end of the calendar year. As we’ve described in the past, we’re teamed with Bell on the V-280 and do not have a position on the Sikorsky vehicle. Finally, supply chain constraints continued to weigh on the business, limiting our top line growth and pressuring our cash flow.
Aircraft Q4
Sales in the quarter of $324 million were 9% higher than last year. All the growth came from our commercial business, up almost 40%, while defense sales were down 6% from the same quarter last year. We enjoyed strong growth in both the OEM and aftermarket segments of the commercial business. OEM sales to Boeing were up over 40% with strength across the complete book of business. Airbus sales were only up marginally from last year. Business jet sales almost doubled and higher sales from our Genesys acquisition completed the make-up of the growth. Commercial aftermarket sales were up almost 50% from last year. The growth was driven primarily by our widebody programs with strong performance on both the 787 and the A350. Even though international travel has been slow to recover, the utilization rates of the 787 and A350 fleets has increased much faster as airlines have brought their most efficient airplanes back into service first.
On the military side, both the OEM and aftermarket were 6% lower than last year. Lower sales on the F-35 and V-22, combined with the loss of sales from our Navaids divestiture, were the main drivers on the OEM side. In the aftermarket, many of our key programs were lower, including the F-15 and F-18. Despite the war in Ukraine, we’ve yet to see any material impact from higher defense spending filter through to our aircraft aftermarket.
Aircraft fiscal ‘22
Full year sales of $1.26 billion were 8% higher than last year. The story was similar to the fourth quarter with strong commercial performance compensating for a slightly weaker military performance. Commercial OEM sales were up on strong sales to both Boeing and Airbus, while sales into business jet applications doubled from fiscal ’21. The commercial aftermarket was particularly strong this year – well ahead of our expectations 12 months ago. The primary driver was the faster recovery in the fleet usage of the widebody platforms. In addition, we had several one-time items through the year which generated about $20 million of sales. These items will not repeat next year.
On the military side of the house, lower sales on the F-35 and on foreign fighter programs, combined with lost sales from our Navaids divestiture drove a 6% decline in the OEM top line. In the aftermarket, the good news is that our sales have stabilized after a big drop in fiscal ’21. This year, stronger V-22 sales mostly compensated for declines across much of the rest of the portfolio.
Aircraft Margins
Margins in the quarter were 10.7%, up almost 200 basis points from last year. The recovery in the commercial book, and, in particular the strength in the commercial aftermarket, drove the increase. Lower R&D expense also contributed to the improvement, as engineers transferred from internal developments to funded programs.
Full year adjusted margins of 10.1% were up 180 basis points from fiscal ’21 – driven by the same factors as the quarter.
Aircraft fiscal ‘23
We’re projecting fiscal ’23 sales of $1.33 billion, up 6% from fiscal ’22. The strength is all on the commercial OEM side of the house, with strong sales growth at Boeing, Airbus, Gulfstream and in our Genesys product lines. Commercial aftermarket sales will be down slightly from last year. However, excluding the $20m benefit from one-time items in fiscal ’22, the aftermarket is actually up 9% organically next year. Military OEM sales will be up slightly year over year. Higher F-35 and foreign military sales will compensate for lower V-22 sales. Our forecast includes about $40 million in sales for the FLRAA program. This assumes the V-280 is the platform of choice and that the decision is announced before the end of calendar 2022. The military aftermarket will be in line with fiscal ’22.
We’re forecasting FY23 margins of 10.3%, up slightly from fiscal ’22 adjusted margins. The higher sales are a tailwind as factory utilization improves. However, 2 headwinds dampen margin expansion for the coming year. First, higher commercial OEM sales tend to dilute overall margins, and second, the one-time items in the commercial aftermarket in fiscal ’22 drove an outsize margin performance. Relative to fiscal ’21, aircraft margins in fiscal ’23 will be up 200 basis points on the back of the commercial sales recovery. We anticipate continued margin expansion beyond FY23.
Space and Defense
Headlines / Macro
Our Space & Defense business continued its run of strong organic growth this quarter. The macro-economic indicators for both markets remain very strong. In early October, our teams attended the AUSA show in Washington. It was clear from our discussions with both customers and the Army, that air defense is becoming an ever more critical capability for ground forces and that this trend offers many future opportunities for our RIwP turret. Also, as part of our Agile Prime strategy, we exhibited a prototype hybrid electric UAV which can be used for various defense missions including cargo movement and weapons deployment.
In Space, our market position as a top tier supplier of mission critical components was again on display this quarter. On September 26th, NASA successfully intercepted Dimorphos, a small asteroid some 7 million miles from earth, with the DART spacecraft, or the Double Asteroid Redirection Test spacecraft. The mission objective was to test if NASA could change the flight trajectory of an asteroid that might be on a collision course with earth in the future. Moog provided various valves, actuators and electronic components on this vehicle – all of which worked perfectly. We’re looking forward to the upcoming first launch of the Artemis rocket in November. Moog provides the thrust vector control actuation on this next generation moon rocket, just like we provided the thrust vector control on Apollo 11 back in 1969. With the Space market booming, we believe that Moog’s heritage and demonstrated flight capability give us a distinct advantage over many of the new entrants. We’re confident our ability to deliver reliable solutions will continue to fuel our growth in this market for years to come.
In operational news, as part of our on-going portfolio shaping, we divested our security business this quarter. This business was based in Chicago with about $20 million in annual sales. We entered this market after the 9/11 attacks almost 20 years ago. We believed that the burgeoning homeland security budget would provide opportunities for growth. The Driver’s Vision Enhancer application was a real success during the Iraq conflict but over the last few years this business has struggled to meet our growth and margin expectations.
Space and Defense Q4
Sales in the quarter of $217 million were 9% higher than last year. This quarter, the growth was all on the defense side, with sales into Space applications down from last year. Defense sales were way up as the production of the RIwP turret for the M-SHORAD program continued to ramp. Beyond our RIwP business, higher sales into missile applications and in our components product line, compensated for lower sales across other vehicle and naval programs. On the Space side, we had lower sales into NASA applications, and on hypersonic development activities as various programs wound down in advance of future production awards.
Space and Defense fiscal ‘22
Full year sales of $872 million were 9% higher than last year. The growth was almost entirely in the defense market driven by the M-SHORAD program. On the Space side, growth in our Integrated Space Vehicles and Avionics product lines compensated for lower NASA work. It’s worthwhile noting that, over the last 6 years, our Space & Defense segment has grown at annual compound rate of 10%.
Space and Defense Margins
Adjusted margins in the quarter of 9.4% were below our run rate for the year. Two factors contributed in about equal amount to the disappointing margin performance. First, supply chain constraints for space-qualified components were particularly impactful this quarter. Second, our growing business in space vehicles experienced cost growth across several programs. Each of these factors individually, depressed margins by about 200 basis points.
Full year adjusted margins of 10.9% were down slightly from fiscal ’21, driven mostly by the additional costs associated with supply chain challenges and labor inefficiencies, as well as the program charges we took in Q4.
Space and Defense fiscal ‘23
Our forecast for fiscal ’23 projects another year of strong organic growth. Total sales will be up 7% to $930 million, a combination of $400 million in Space and $530 million in Defense. In contrast to fiscal ’22, where the growth was all on the defense side of the business, growth in fiscal ’23 is all on the Space side. Part of the story is an operational decision to realign the THAADS product line from the Defense sector over to the Space sector in fiscal ’23. This results in $25 million of sales moving from Defense to Space next year. In addition, in the fourth quarter, we divested our security product line. This results in the loss of $20 million in defense sales in fiscal ’23. Excluding these 2 effects, defense sales would actually be up organically 7% next year. The growth is across much of the product line including vehicles, naval and components. Similarly, excluding the product line transfer, underlying Space sales will be up 11% in fiscal ’23. The increase is in our launch vehicles and integrated space vehicles product lines.
We’re projecting operating margins of 12.4% in fiscal ’23. This is up 150 basis points from adjusted fiscal ’22 margins on the higher sales and the absence of material charges on development programs.
Industrial Systems
Headlines / Macro
The industrial markets remained strong this quarter with a book to bill of about 1. This is a slight slowdown in bookings from our most recent quarters. It’s a story of good news today and worries about tomorrow. As we enter fiscal ’23, we have a very healthy backlog relative to our forecasted sales. Last year at this time, we had 42% of our projected FY22 sales in backlog. Today, we have 57% of our projected 12 month sales in backlog. This gives us confidence in our forecast for the coming year. On the other hand, the backdrop of war in Ukraine, an energy shortage in Europe and higher interest rates globally will create headwinds longer term.
Our industrial product-line shaping continued this quarter as we divested an off-shore energy business based on Scotland. This business had annual sales of about $12 million.
Looking to the future, our move into the construction equipment market also got a boost at the recent Bauma tradeshow in Germany. This is the largest show in the world for construction equipment. At this show, we were the chosen partner to provide electric solutions to 3 of the worlds’ top construction equipment manufacturers: Bobcat, Case New Holland International and Komatsu.
Industrial Systems Q4
Sales in the quarter of $227 million were in line with last year. Adjusting for foreign exchange movements, underlying organic sales were up 6%. On an adjusted basis, real sales were up in 3 of our 4 markets, with simulation & test marginally lower than last year. Most of the growth was in the industrial automation market. The majority of this business is outside the U.S. with over half in Europe. In local currencies, industrial automation was up over 10% from last year. Sales into our other 3 major markets were more or less in line with last year. We’ve continued to see strong demand across our range of industrial products, while supply chain constraints have limited our sales growth.
Industrial Systems fiscal ‘22
Full year sales of $907 million were 2% higher than last year. Similar to the quarter, adjusting for foreign currency effects, underlying sales were up 5%. Increased demand for flight training simulators drove a double-digit increase in our simulation & test market. On the other hand, we saw some softening in the demand for our medical products as conditions normalized post COVID. Our energy and industrial automation markets were both up low to mid-single digits. In the energy market, higher oil prices and increasing energy usage drove increased demand for both our exploration and generation products. In the industrial automation sector, we saw increased investment in capital equipment to expand factory capacities and alleviate supply chain bottlenecks. For the full year, our book to bill remained above 1, with 12-month backlog up almost $140 million from the same time a year ago.
Industrial Systems Margins
Margins in the quarter of 6.6% include over 400 basis points of charges for portfolio shaping activities. In the quarter we disposed of a UK-based business, incurred modest restructuring and impairment charges and sold a building in the US as we consolidated operations into existing facilities. Non-cash losses of about $18 million were partially compensated by a $9 million gain on the real estate sale. On a cash basis, net proceeds from these actions was $26 million in the quarter.
Adjusted margins in the quarter of 10.8% resulted in full-year adjusted margins of 9.5%.
Industrial Systems fiscal ‘23
Our first look at fiscal ’23 suggests a very small increase in sales, with strength in flight simulation and medical pumps compensating for slightly lower sales in both energy and industrial automation. Our energy market is down on the lost sales from the divestiture in Q4 while our industrial automation sales are lower on the stronger dollar. We continue to worry about a potential global recession and an energy crisis this coming year so, despite our healthy backlog, we’re forecasting sales conservatively as we enter the fiscal year.
We’re forecasting full-year margins next year of 10.5%, a 100-basis point expansion on adjusted margins in fiscal ’22. Our portfolio shaping activities over the last couple of years are starting to have a positive impact on the bottom line.
Summary Guidance
This time last year, we planned for a fiscal ’22 with COVID receding and the world slowly returning to a pre-pandemic normal. We assumed commercial air travel would recover, defense spending in the US might be pressured, and the industrial world would be strong. Instead, a war in Europe, growing tensions in Asia, extreme supply chain disruptions and rising inflation made for a challenging environment. The performance of our commercial aircraft business exceeded our expectations with the aftermarket particularly strong. The invasion of Ukraine meant that Defense shifted from a potential headwind into a multi-year tailwind. The industrial markets remained strong, but our results were tempered by the availability of parts in the supply chain and by input cost pressures. Through the year, our teams worked hard to meet our customer commitments and reprice our products where possible to maintain margins.
Our initial look at fiscal ’23 suggests another strong year for the company with top line growth, margin expansion and healthy free cash flow. We’ll continue investing in organic growth opportunities and deploying our capital to build a platform for long-term success. Our forecast for next year assumes that supply chain disruptions will continue all year but moderate as we get into the second half. We’re also assuming no major impact from an energy disruption in Europe, nor a serious escalation of the war in Ukraine. We assume continued interest rate hikes and that we’ll be able to raise prices selectively to combat inflation. As always, our forecast is our best attempt to balance all these factors and provide the market with a realistic outlook. Risks to the downside are mostly associated with an escalation of hostilities in Europe, heightened tensions in Korea, or a further deterioration in relations with China. Opportunities to do better include an earlier easing of the supply chain, a mild winter in Europe and a potential end to the war in Ukraine.
Longer term, I’m more excited than ever about our business prospects. This optimism is based on both the external environment, as well as our internal initiatives. Externally, we’ll enjoy tailwinds from increasing Defense spending, the Commercial Aircraft recovery and continued investment in Space. In the industrial world, spending on automation to bring production back to the west, and technology shifts to tackle climate change will boost the need for our motion control products. Internally, our investments in new growth vectors will continue to pay off. The addressable market for our RIwP turret, space vehicles and construction solutions is measured in the billions. We believe our new agile prime initiative will create further large market opportunities. In parallel, our focus on providing world class components in our chosen markets will give us the base for enduring success. Finally, the fundamentals of our strategy will remain constant. We’ll continue to focus on solving our customer’s most difficult technical challenges, while building our IP and investing our capital prudently to create long-term value for our shareholders.
In closing, we’re very excited about the future. Our underlying businesses are performing well, our diversity across end markets provides resiliency in the face of economic uncertainty and our internal initiatives are showing enormous promise for outsized growth over the coming years. We recognize the challenges we’ll face in the coming year with on-going supply chain issues, higher interest rates and a potential recession in our industrial markets. Despite these challenges, we’re very optimistic about our business and see continued growth and margin expansion over the coming years. In fiscal ’23, we anticipate sales of $3.2 billion, operating margins of 11%, and earnings per share of $5.70, plus or minus 20c. Similar to fiscal ‘22, the year will start slowly and then accelerate sequentially. For Q1, we anticipate earnings per share of $1.25, plus or minus $0.15.
Now let me pass you to Jennifer who will provide more color on our cash flow and balance sheet.
Thank you, John. Good morning, everyone.
Today I’ll start with some headlines and a reminder on our securitization program, before shifting into Q4 and FY22 cash flow matters. I’ll then share a first look at cash flow in FY23.
Supply chain constraints continue to impact our free cash flow generation, and we’re projecting those pressures to remain as we head into the next year. We’re continuing to purchase certain components in advance of requirements as we’re concerned they might otherwise delay shipments. We’re prioritizing meeting customer commitments over managing cash in the current environment, while being mindful of an increasing interest rate environment.
We’re continuing to invest in our business, and we’ll see that come through in capital expenditures. We just amended and extended our U.S. revolving credit facility, and we’re in great shape to make these investments. We’ve made a couple of divestitures this year, which has generated cash that also helps to fund these activities.
As a reminder, we amended our securitization facility in the first quarter. Our balance under this facility was $100 million at year end. Due to the structure of this facility, the associated receivables are not recognized on our balance sheet, which reduces our working capital levels. To provide a comparable look at our cash generation and financial position, I’ll first share adjusted free cash flow and net working capital metrics without the effects of the securitization facility. I’ll also include the metrics as calculated from our financial statements near the end of my comments for your reference.
I’ll now shift over to results in the quarter and all of FY22. Adjusted free cash flow generated in the quarter was $19 million. For the year, we generated $7 million of adjusted free cash flow. Supply chain constraints impacted our cash flow this year. We also decided to maintain a steady level of production on the 787 program to ensure our supply chain remains healthy and to keep our facilities operating efficiently. This level of production exceeds the rate at which Boeing is taking deliveries, which puts pressure on our working capital.
The $19 million of adjusted free cash flow in Q4 compares with a $32 million decrease in our net debt, inclusive of the securitization facility. This past quarter, we received $36 million of cash related to the sales of two businesses and one building. On the cash outflow side, we paid $12 million for share repurchases and $8 million for the quarterly dividend payment.
For the year, we received $71 million of cash related to the sales of three businesses and one building. While these sources of cash are not included in our free cash flow numbers, we’re able to use them to fund our capital expenditures that are currently higher than historical levels. We repurchased 487,000 shares this year for a total cost of $36 million, and paid $33 million on dividends.
Adjusted net working capital (excluding cash and debt) as a percentage of trailing-twelve-month sales at the end of Q4 was 29.7%, down from 30.2% a quarter ago. About half of the decrease in the past quarter reflects the impact of divestitures. Inventories as a percentage of sales decreased for the seventh straight quarter and we had favorable timing on liabilities. These benefits were partially offset by growth in receivables.
Capital expenditures in the fourth quarter were $33 million, about the same as in the previous quarter. Our capital expenditures for the year were $139 million. Our focus continues to be on investment in facilities and infrastructure to support growth, and investment in next generation manufacturing capabilities to drive efficiencies.
At year end, our net debt was $719 million, including $119 million of cash. The major components of our debt were $500 million of senior notes and $341 million of borrowings on our U.S. revolving credit facilities. In addition, we had $100 million associated with the securitization facility that does not show up on our balance sheet.
At year end, we had $762 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 $664 million of net debt as of the end of the year. We are confident that our existing facilities provide us with the flexibility to invest in our future.
A week ago, we amended and restated our U.S. revolving credit facility. It remains a $1.1 billion facility, and matures in five years. Our team did an incredible job securing this deal in today’s environment in which banks are facing challenges in achieving appropriate returns for capital deployment. Our terms are largely the same, with our pricing grid being the same or better at various leverage levels. We’re glad to have completed this transaction with these terms given the current environment.
Our leverage ratio, calculated on a net debt basis, was 2.2x as of the end of 2022, down from 2.3x a year ago. Our leverage ratio continues to be around the low end of our target range of 2.25x to 2.75x.
Global retirement plan contributions and expense in the fourth quarter were relatively flat with the same quarter a year ago. Cash contributions to our global retirement plans totaled $16 million in the quarter, while expense was $21 million. For the year, contributions of $65 million and expenses of $83 million were up due to higher levels of participation on the U.S. defined contribution plan. Expenses were also higher as last year included a $6 million curtailment gain resulting from the termination of our defined benefit plan in the Netherlands.
Our effective tax rate was 31.6% in the fourth quarter, compared to 19.0% in the same period a year ago. The relatively high tax rate this quarter is a result of the loss on the sale of an offshore energy business based in Scotland. This loss includes a write-off of the cumulative foreign currency loss that has no associated tax benefit. Without this impact, our effective tax rate was 23.4%. Last year’s fourth quarter tax rate had a favorable tax impact associated with the pension curtailment gain. For FY22, our effective tax rate was 23.6%, up modestly from FY21’s 22.8% rate. Both years benefitted from provision to return adjustments. Next year, in FY23, we’re expecting an effective tax rate of 25.0%.
I’ll now turn to cash flow for next year. In FY23, we expect growth in sales of 5%, which at current working capital levels would drive $40 million of working capital growth. Our capital expenditures are projected to be $150 million while depreciation and amortization is just over $90 million, creating another $60 million of pressure on free cash flow. Those two factors – sales growth and capital expenditures in excess of depreciation and amortization – get us to a starting point of about $80 million for free cash flow generation, or 45% conversion. The good news is that we’re projecting free cash flow generation for FY23 to be much stronger at $130 million, or about 70% conversion. We’ll see nice improvement in working capital that will help us achieve the $130 million of free cash flow generation. We have assumed that the enacted tax law associated with R&D expense amortization will be repealed, given bipartisan support for innovation.
I’d also like to share some of the metrics and amounts you’ll be able to calculate from our financial statements. These reflect GAAP accounting for the securitization facility. Free cash flow in the quarter was $30 million, and free cash flow generation for the year was $107 million, which is about 60% conversion on adjusted net earnings. Net working capital was 26.4% of sales at the end of the year. Going forward, I’ll no longer report the impact of securitization on free cash flow generation unless there’s a material change in our securitization balance. Net working capital will continue to include a benefit of about 300 basis points.
Our financial position remains strong. We’re effectively managing through the current supply chain environment. We’re looking to invest to support further growth and capitalize on efficiencies, and we’ve got the liquidity to do so. We’re maintaining leverage where we’d like to see it, and our financial position is solid.
With that, we’ll turn it back to John for any questions you may have.
John……