Ducommun Inc (DCO) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ducommun's Fourth Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, February 23, 2022. I would now like to turn the conference over to Ducommun's Vice President, Chief Financial Officer and Controller and Treasurer, Chris Wampler. Please begin.

Thank you, Norma, and welcome to Ducommun's 2021 fourth quarter conference call. With me today is Steve Oswald, Chairman, President and CEO. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections or performance that we may make during prepared remarks or the question-and-answer session that follows.

Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations and financial projections are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are therefore prospective. These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct.

In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing Ducommun include amongst others. The cyclicality of our end-use markets, the impact of COVID-19 on our operations or customers, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, competition and disasters, natural or otherwise.

These risks and others are described in our annual report on Form 10-K filed with the SEC, and our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2021 annual report on Form 10-K with the SEC today.

I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

Okay. Thank you, Chris, and thanks, everyone, for joining us today for our fourth quarter conference call. Today, as usual, I will give an update of the current situation at the company, after which Chris will review our financials in detail. The company remains focused first and foremost on the health and safety of our employees. The team has done an excellent job with safety protocols put in place since March 2020, and we continue to follow our best practices, aligning with health authorities throughout our many operations. The total number of cases is roughly 360 since the beginning of the pandemic. And within the company, we had 80 cases in Q4 of 2021 with the new variant.

Before going over the fourth quarter results, I want to highlight 2 transactions that were completed during the quarter and previously announced that I'm very proud of. First, we completed the sale-leaseback transaction of our Gardena performance center located in Carson, California, which was the first in the long history of the company. The building and land was sold for approximately $143 million, generating more than $110 million in after-tax proceeds. This was an extraordinary price based on the very high demand for commercial real estate in Southern California in Q4 and we took full advantage of it.

To put it in perspective, in 2015, we had the property appraised for a financial project, and it was $38 million. This transaction was a major event for our company's shareholders and allowed us to monetize a portion of our legacy California-owned real estate portfolio. Second, we completed the acquisition of MagSeal as well in Q4, a leading provider of high-impact military-proven magnetic seals for critical systems in aerospace and defense applications for $69.5 million net of cash acquired.

MagSeal was a critical purchase coming at the end of the second year of COVID and continue to advance our strategy to diversify and offer more customized, value-driven engineering products with aftermarket revenue. A portion of the proceeds from the sale-leaseback transaction for the Gardena performance center was deployed to pay for this acquisition. We are thrilled with both transactions.

Turning to the Q4 financial results. Ducommun's fourth quarter results were solid with company delivering year-over-year revenue growth of 4%, all organic. Company's defense business, although slightly down, still delivered a solid performance, and the commercial business showed modest year-over-year revenue growth for the second consecutive quarter. The commercial aerospace markets are recovering and we are seeing some bright spots.

For example, Spirit Aerosystems was our fourth largest customer for the second consecutive quarter in Q4 with over 5% of revenue, a significant difference from 2020. In addition to revenue growth, we posted margin expansion for gross profit at 22.6%, along with adjusted EBITDA of 14.8%. The team also posted adjusted operating income margins of 8%, which is excellent progress as we continue to build our track record of delivering through operational leadership and cost management in any environment.

The quality of earnings was solid as well with the company reaching GAAP diluted EPS of $9.05 a share versus $0.80 a share for Q4 2020 and adjusted diluted EPS of $0.79 a share versus $0.89 a share in 2020. Fourth quarter revenue was higher with Ducommun's commercial business showing year-over-year growth for the second consecutive quarter, up 12% and continued solid defense business versus prior year with offloading programs from primes, becoming more and more of a theme for our business.

The programs that had growth in Q4 included the F-18, F-15, F-16, UAVs, the General Atomics, Raytheon TOW program and other missile programs. Our approach to the market continues to be innovative products and processes that provide significant value to the defense customer, along with striving for a consistent high level of service. Raytheon missile and defense activity is also moving to a higher level since signing the strategic supply agreement with them over 2 years ago.

We've been hard at work in many areas, current and new programs, offloading and share shift. I'm happy to report that 2021 was a record year for that division and Raytheon Technologies overall. Raytheon Technologies is our largest customer and revenues increased more than 20% to $158 million in 2021 and Q4 alone was over $45 million, which is showing very good momentum entering 2022.

I mentioned earlier about the offloading from defense primes and the future benefits for the company. We've been hard at work with Raytheon, GA, Northrop Grumman and others and will be over $45 million in 2022 for strictly offloading, up from roughly $31 million in 2021. We then expect $90 million plus in 2023 and the long-term revenue run rate of programs already commercialized or in development will be over $125 million by 2025. These programs include Raytheon SPY-6, products for GA, tow harnesses and circuit cards and the next generation jammer.

In regard to the defense backlog, it also remained strong and ending Q4 with a backlog of $520 million. The commercial aerospace backlog also shows strong signs of recovery, increasing sequentially for the third consecutive quarter from $276 million at the end of Q2 2021 to $333 million at the end of Q4 2021, a very good sign. The total backlog of $905 million for the company is approaching pre-pandemic territory.

The company's cost factors are also continuing to pay dividends. You can certainly see, even before the pandemic, the company was working on initiatives to offset the 737 MAX beginning in Q4 2019. The effectiveness of our operational leadership and action since then and through 2 years of COVID shows in all our margins, GP, OI, EBITDA along with diluted EPS. In addition, Ducommun's overall low SG&A costs, including at our corporate level, is among the industry leaders.

For the full year 2021, revenue was $645 million versus $629 million in 2020. Operating income was $49 million versus $46 million in 2020, and backlog was $905 million versus $808 million in 2020. These notes reflect the return to growth commitment for 2021 that I made during the August 12, 2020, Q2 investor call. I am proud of the team for this achievement, as once again, this common team meets its commitments.

In regards to the outlook, our significant backlog in defense and continued momentum in commercial aerospace will result in high single-digit revenue growth for 2022. We estimate that revenue remain good in defense, but over the quarters ahead, we will see more and more commercial aerospace volume returned to Ducommun. Our high narrow-body to wide-body ratio for our business will help us as well, and we have the capacity, supply chain and strong operating team ready to deliver the forecasted rate increases ahead.

We're also working with OEM and Tier 1 companies to drive a higher percentage of share on key platforms and remain confident that this will occur in 2022. Another critical area is M&A. We're always actively looking for companies that fit our model and believe this will only be an accelerator to higher results. This has been demonstrated in the past. We expect to see this thing continue for the company and its shareholders.

Now, let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we posted fourth quarter revenue of $113.1 million, a slight decrease versus 2020. Solid showing was from revenue on some key defense platforms. As earlier mentioned, we saw increases in demand for our F-18, F-15, F-16, UAVs, TOW and other missile programs. Fourth quarter's military and space revenue represented nearly 70% of Ducommun's revenue in the period.

We also continue to be very well positioned for growth across our defense platforms over the next several quarters in all sectors, especially at Raytheon, and again, ended the fourth quarter with a strong backlog of $520 million, which represents 57% of Ducommun's total backlog. Within our commercial aerospace operations, fourth quarter revenue increased year-over-year to $41.6 million, driven mainly by build rate increases on other commercial aerospace platforms and business aircraft platforms.

Ducommun expects a meaningful improvement in the commercial aerospace market overall in 2022 and 2023, and the future is bright. The backlog within our commercial aerospace sector stands at roughly $333 million at the end of Q4, a significant increase sequentially compared to Q3 2021 and the third consecutive quarter of growth.

With that, I'll have Chris review our financial results in detail. Chris?

Thank you, Steve. As a reminder, please see the company's 10-K and Q4 earnings release for a further description of information mentioned on today's call. As Steve discussed, our fourth quarter results reflected another period of solid performance and completed our full year 2021 commitment of return to growth. The fourth quarter results were clearly bolstered by the significant impact of our sale-leaseback of our Gardena facility. We are pleased to see continued strong aerospace travel demand, which should translate in higher shipments going forward. We are looking forward to building on the 2021 results and are positioned to do so.

Now turning to our fourth quarter results. Let me review some of the highlights. Revenue for the fourth quarter of 2021 was $164.8 million versus $157.8 million for the fourth quarter of 2020. The year-over-year increase reflects $4.4 million of growth across our commercial aerospace platforms and $4.9 million of higher sales to industrial customers, slightly offset by $2.3 million of lower revenue within the military and space sector. Ducommun's overall backlog at the end of the fourth quarter was approximately $905 million, reflecting recent growth across our commercial aerospace platforms, setting up the company for strong top line performance in 2022.

This includes our backlog -- this includes the backlog of our MagSeal acquisition. Our defense backlog of $520 million, which is higher both sequentially and versus prior year, has us positioned for another strong year of defense. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with firm fixed prices and expected delivery dates of 24 months or less.

We posted total gross profit of $37.3 million for the quarter versus $34.8 million in the prior year period, while gross margins were 22.6% and 22.1% in 2021 and 2020 respectively. The slight increase in margin year-over-year reflects favorable product mix. While we are not immune to supply chain issues, we were able to manage through Q4 without significant supply chain impacts due to our performance center flexibility, utilizing strategic buys and inventory that we had invested in and a very good portion on the types of inventories that were in short supply.

SG&A was $25.4 million in the fourth quarter versus $22.6 million last year, largely reflecting higher professional services fees, a main driver of which was the Magnetic Seal acquisition, along with other onetime nonrecurring costs. Ducommun's reported operating income for the fourth quarter of $11.8 million or 7.2% of revenue compared to $11.6 million or 7.3% of revenue in the prior year period. Adjusted operating income was $14 million or 8.5% of revenue this quarter compared to $12.9 million or 8.2% of revenue in the comparable period last year.

Interest expense was $2.8 million in the fourth quarter of 2021 versus $2.6 million in the prior year period. The company reported net income for the fourth quarter of $110.8 million or $9.05 per diluted share compared to net income of $9.7 million or $0.80 per diluted share for the fourth quarter of 2020. As Steve discussed, the large increase year-over-year was primarily due to the gain recorded from our sale-leaseback transaction, which equated to $132.5 million pretax. This, along with a $2.5 million increase in gross profit was partially offset by higher income tax expense of $31.4 million and increased SG&A expense of $2.9 million.

Adjusted for the sale-leaseback gain and certain onetime expenses, adjusted net income was $9.7 million or $0.79 per diluted share in the fourth quarter of 2021 versus $10.8 million or $0.89 per diluted share in 2020. The fourth quarter 2020 EPS had a comparative tax benefit of more than $1.5 million related to incremental FIN 48 reversals compared to the fourth quarter of 2021. Adjusted EBITDA for the fourth quarter was $24.4 million or 14.8% of revenue compared to $22.8 million or 14.4% of revenue for the comparable period in 2020, reflecting the items I just discussed.

Now let me turn to our segment results. Our Electronic Systems segment posted revenue of $106 million in the fourth quarter of 2021 versus $99.1 million in the prior year period. These results reflect $2.9 million of higher commercial aerospace revenue and $4.9 million greater sales within our industrial end markets, partially offset by $0.9 million of lower revenue across the company's military and space customers. Electronic Systems operating income for the fourth quarter was $15.4 million or 14.6% of revenue versus $11.5 million or 11.6% of revenue in the prior year period, primarily reflecting improved product mix.

Excluding restructuring charges and other onetime items in both years, the margin was 15.5% in 2021 and 11.8% in 2020. This quarter demonstrates the type of performance our electronic business is capable of when the combination of strong revenue and favorable mix occur with SG&A cost control at our focus factors.

Our Structural Systems segment posted revenue of $58.8 million in the fourth quarter of 2021 versus $58.7 million last year. The year-over-year increase reflects $1.5 million of higher sales across our commercial aerospace applications, partially offset by $1.4 million of lower revenue within the company's military and space markets.

Structural Systems operating income for the quarter was $5.1 million or 8.6% of revenue compared to $6.2 million or 10% -- 10.6% of revenue last year. The year-over-year operating margin decrease was primarily due to unfavorable product mix. Excluding restructuring expenses and other onetime items in both years, the segment operating margin was 10.6% in 2021 versus 12.4% in 2020.

The MagSeal business results are part of the structures business. Corporate, general and administrative expense. CG&A expense for the fourth quarter of 2021 was $8.7 million or 5.3% of revenue versus $6.1 million or 3.9% of revenue in 2020. The year-over-year increase was primarily due to higher professional service fees of $1.8 million, a portion related to the Magnetic Seal acquisition.

Turning to liquidity and capital resources. We have available liquidity of $176 million and generated $11.7 million of cash from operations this quarter compared with $11.1 million in the prior year period. The current cash flow, quarter cash flow included $29 million tax payment related to our gain on our sale leaseback. Our trailing debt-to-EBITDA -- trailing debt to adjusted EBITDA ratio was approximately 2.3 at the end of the year. The calculation nets cash against debt and 2.3 million is the lowest in the last several years.

Subsequent to year-end, we paid down an additional $30 million on our term loans. In terms of capital expenditures, we spent $6.1 million during the quarter and $16.9 million for the year in total. Going forward, we anticipate spending between $16 million to $18 million in 2022 for sustaining capital and ongoing product development.

In conclusion, the fourth quarter from an operational standpoint played out largely like the third quarter. We posted solid results while growing our commercial aerospace backlog, setting us up for continued strong performance in 2022. We expect to see our top line and bottom line pick up momentum from Q1 as we move through the year.

We significantly improved the balance sheet through our sale-leaseback transaction, which provided over $110 million of after-tax proceeds for the company, while completing another bolt-on acquisition that expanded our portfolio of proprietary technology and opened up new aftermarket opportunities. We continue to look at innovative transactions such as these to accelerate our ability to deliver Ducommun's operating results and returns for our investors going forward.

I'll now turn it back over to Steve for his closing remarks. Steve?

Okay, Chris, thanks. Let me just cover a few other things before going to questions, I also want to mention that Ducommun was named to Newsweek's Magazine's inaugural list of the top 100 most loved workplaces for 2021. ranking #66 among the top 100 companies recognized nationwide for employee happiness and satisfaction. This list included other companies such as Dell, IBM and FedEx, and we are proud of our efforts to ensure Ducommun has a people-first culture.

In addition, in December, in partnership with the Los Angeles Chargers in the National Football League and the University of California, Irvine, Ducommun held its fourth annual stem on the sidelines competition, a regional competition promoting STEM education in the Los Angeles and Orange County, California high schools. More than 150 students from 17 different high schools participated in the 2021 contest at SoFi Stadium. And the winning teams were honored before the Los Angeles Chargers game on December 16, 2021. This is part of our company's commitment to serving our local community and promoting technical skills among high school students.

Ducommun also welcomed new Board member in December, Samara Strycker, Senior Vice President, Controller and Treasurer at Navistar International Corporation. Samara will be working on the Audit Committee as well, and she is a great addition to our team. In closing, I'd like to again take this time every quarter since really COVID began to tell to comment employees that I'm very proud of them and all their efforts dealing with the many challenges from the pandemic as well as the 737 MAX, all in 2020 and 2021. Our team members show up every day at our operations, although stressful, we get the job done for our customers, our nation and each other.

So with that, I'd like to open it up for questions, please.

(Operator Instructions) Our first question comes from Mike Crawford with B. Riley Securities.

First, you have another 1 or 2 facilities in California that you might be able to sell. Is that something you're going to explore this year?

Mike, this is Steve. Yes, and good to hear from you. Yes, we're going to explore it. Nothing concrete right now, but certainly, we've gone on this journey to look at these opportunities, especially now with where the markets are. We felt that the Gardena facility was right at the top, so we moved on that in Q4 and throughout the year, we'll be looking at possibly another opportunity and we'll keep you posted.

All right. Great. And then on these programs that are growing F-18, F-15, F-16, UAVs, TOW and other missile programs, like what specifically are the key structures and/or assemblies that you're providing for these programs that are helping to drive some of the growth?

Well, a lot of it is circuit cards. So a lot of it is circuit cards, a lot of it's cables. But like with the TOW missiles, it's a structural component of the missile. And as I mentioned, we also just picked up the card on that -- or the cards on that program as well as the harnesses. So it's a mix, but we certainly lean heavy into circuit cards. I mean, that's one of the things we're really seeing as well when I mentioned this offloading is that defense primes are looking at to comment and what we can provide for offloading opportunities to drive cost savings and we're working closely with many of them.

Excellent. And then should we expect rotary platforms that continue to decline?

This is -- it's -- I'd say it's PBD. I mean, certainly, FMS versus the last few years has not been our friend when it comes to rotary. We're going to see a little bit, as you know, a little bit more in commercial helicopters, I think, going forward, especially over the next year or 2. But I would say rotary looks to me sort of flat to down.

Our next question comes from Pete Osterland with Truist Securities.

I'm for Mike Ciarmoli this evening. Just first wanted to ask on the MagSeal acquisition. Could you provide any extra detail on what level of revenue or earnings contribution you're expecting in '22 as well as maybe the margin profile relative to the rest of the structures segment?

Yes. Pete, this is Chris. And on the acquisitions that we've had in the last 5 years, all of them have been of the size where there are not -- there's no requirement to disclose and we've had that stance of not disclosing beyond really the acquisition costs than what we're required to. So it's -- there's no additional detail to provide there, other than the reason we bought it, MagSeal, would certainly be excited about the product, the name and where -- what we can do with it.

Yes. And I think one other thing, I think you could certainly -- maybe we could get out a little bit to say that the margins are going to improve the structure situation. I think that the margins are going to be helpful.

Okay. Great. And then kind of following up on that line of questioning, just on margins within Structural Systems. Just given the plans for increased production rates on the MAX, how are you expecting margins to trend throughout the course of the year? Or should we be expecting that we'd see just sequential progression throughout the year beyond fourth quarter levels? Or are there some other puts and takes we should be thinking about?

Thanks, Pete. I mean the size of our 2 businesses electronics and structures, they're just such that they do bounce around a little bit. But having said that, through the pandemic, we saw structured margins sort of head to a single-digit level. We've gotten it back to double digits. Certainly, that's where we'd like to keep it.

I think if you look over the course of this year, absolutely, you're going to see it progress. These -- the rates are coming back as that takes hold, as that comes through with more volume to the facilities, that will be very helpful to us. So, I think the second half of the year, definitely, yes. And I think it just depends on sort of how much moves through here in these first couple of quarters.

Yes. Let me just add, obviously, one of our strategies is we're going for scale. And the way we have the business structure is that volume is certainly going to help us quite a bit, especially in the second half of the year and in 2023. So we're pretty excited about where this is going.

(Operator Instructions) Our next question comes from Ken Herbert with RBC Capital Markets.

Steve, was the uptick in the defense structures backlog in the quarter sequentially, was that all MagSeal that's sort of $20 million increase? Or was there something else driving that?

MagSeal was definitely a key piece of it, Ken. This is Chris. It was a key piece of it, but there were other puts and takes, but I think that's certainly the biggest piece of it.

Okay. And so if we look at obviously the total defense backlog, is there any way -- was it any way to maybe segment that out? Was it maybe flattish -- or I'm sorry, flattish sequentially, up some sequentially? I mean how do we think about the backlog in defense right now? And then, I guess, more importantly, either if you want to discuss this sort of with or without MagSeal, how do we think about growth specifically in defense and space in '22?

Yes. Ken, I think a couple of these first. That's why I brought up the offloading theme here that, look, there's movement among the different programs up and down, but we feel a couple of things first. We're certainly a supplier of choice on lots of things for either new or current programs. We have this offloading, 2022 is going to be very good. 2023 is going to be almost $100 million. So, that's really going to help us. And we're still doing the share shift. As I mentioned, Raytheon TOW missile case was a share shift from another supplier. So we think -- we feel good about defense. Going forward we have a very nice backlog. We feel good about decent growth in 2022.

Okay. That's great. And then can you just comment maybe in a little more granularity on your MAX ship set? Is that -- are you still essentially in line with Spirit? And I guess how much growth are you expecting from the MAX in particular in '22?

Yes. Ken, this is Chris. So, a couple of things. One, we certainly are expecting the pull-through to start happening a little more in line with the published rates that are out there. If you look at MAX right now, it's more at the 24% rate, it's going to work its way up into the low 30s. But we're still -- again, part by part, it's a little different story. So, there's no one answer there on the parts.

I will also want to circle back just on your question on the backlog on commercial. And I'm not sure I caught the question exactly right. But I mean, commercial structures backlog, I mean there was a nice uptick there from what we have going on with MAX as well as A320.

Yes, Ken, let me also just join here that, look, we feel really good about our position at Spirit. We think it's only going to get better. Obviously, we have our relationship directly with Boeing. And one of the real bright spots is after quite a long time, we're starting our spoiler line again for the 737 MAX in our Monrovia facility, which is a big revenue driver. So that's starting to get online and we're going to be back on that, which is -- it was down for at least roughly 18 months. So good things happening.

And if I could, just one final question. I know offloading has been a really nice sort of secular story on the defense side. I know you've taken some share on the commercial side. How do we think about -- or what's your view, Steve, on incremental share opportunities in the commercial market, in particular, as the supply chain seems to be pretty stressed as it looks to support both OEMs over the next one to 2 years and the rate increases?

Yes. Well, first, I mean, look, one of the real bright spots and I already mentioned, I think we're in really good shape with Boeing. And we tend to, especially on our titanium operations, which I talk about, we tend to really be the supplier of choice there for not only Boeing products, for the most part, but also at Airbus. Airbus has a captive titanium operation as well as some others, but we're sort of also a very high-level supplier for them.

And we believe that over the next year or 2, as you mentioned, with ramp-up and suppliers struggling with our, I think, really good track record. I think we've been, for the most part, 100% of time to Airbus for over 2 years now, even though the volumes are down a bit. We feel like that's -- some of that's going to come our way even from their internal operations. So, we think everything is heading in the right direction for both some share gain and obviously for the rates going up.

Our next question comes from [Brian Perry with Reece Street].

First, I wanted to offer my congratulations on being named to Newsweek's list of the top 100 most loved workplaces. It's really an incredible accomplishment. And the after-tax sale-leaseback proceeds came in $20 million plus above what you were guiding to last quarter, which I think was $90 million plus. Is that right?

Yes. And it was basically because we were in the middle of a great competitive bid process. And Steve sort of hit the highlight on the industrial market out here and how sort of red hot it is. So once that competitive process took hold, that is what took it beyond really the range that we thought for sure we'd get to.

That's terrific. In the earnings release, you call it industrial growth as being somewhat timing related. Is it -- could you flush that out a little bit?

Yes. I think a couple of things. One is the industrial backlog, as this was a starting point, definitely has some long lead time items to it, and we're seeing an increased uptick in demand there. And that certainly keeps us in a position to produce more product through there. I would say the industrial product, Brian, is if you watch our company, it's not one that we highlight as a high priority, it's one that we do in these facilities where it makes sense because we don't have a facility dedicated to industrial, so we can produce those products within another performance center. And so it's when the things work out right and when we can get to the right place with the customer, we'll take the work and we'll build it next as we get.

Yes, Brian, this is Steve. The industrial is really -- I think that is as planned and ahead a little bit with the orders. But in general, that's just really kind of opportunistic business that if we can do it and make good money, we'll do it.

Terrific. I guess last one from me. If I could circle back on the MagSeal one more time, I think on the Nobles acquisition you did at least give us an EBITDA multiple headline. Would it be possible to get some color just on the purchase price discipline on that one?

Well, I'll help you directionally, I guess, if you go back to those last several, we went and Steve talked specifically that we were really disciplined and kept it under 10x. I would say, through the pandemic and through all the different variables in the M&A market, particularly with attractive assets, the values just went higher. So, we were still in that -- giving recognition, the market got a little more frothy. We were still disciplined, but we will not say that it was below 10x.

I think that's right. I think, look, just for investors, and we try to be careful here overall. But I think you can count on us still having good discipline on MagSeal.

Well, congratulations again on the strong results and the really terrific sequential organic growth in the backlog. Love to see that.

Thanks, Brian. More to come.

I have a follow-up with Ken Herbert with RBC Capital Markets.

Chris, I wondered if you could just walk through a bit more of the detail on the cost structure associated as a result of the sale-leaseback transaction. How should we think about, for modeling purposes, the tax impact and maybe the -- obviously, the annual lease expense. And if I understand, well, obviously, this will flow through structures. But how should we think about the moving pieces of this year moving forward?

Ken. Yes. I mean you're right, it will go through structures. We've talked certainly a lot about the very good news on what this sale has done and the leaseback has done to -- the sale has done to our capital structure, capital resources and our headroom on being able to do things. The flip side of that is we've got the lease. And so with that, we've got roughly, I'll call it $4 million to $5 million when you count, so $4 million roughly for the lease and $1 million for incremental property taxes.

So you've got about a $5 million run rate coming at you annually that in this market, we're going to look to that facility to do everything they can to offset as much of that through just being running an aggressive business and pricing where it makes sense and everything else, so that we can help offset that along with obviously spending the money on MAX deal and other things to make it a big win.

Yes. Ken, let me just mention our Gardena facility makes some pretty unique things in the industry. So we feel we -- as we move forward over the next 12 to 18 months, we have fairly good pricing power and we're going to move on that too. So that's our plan. And at the end of the day, we still think despite some near-term headwind, we think the sale leaseback is the home run for us and for shareholders.

And if I could, Steve, just one final question. Now that you've done MagSeal, I know you've had a real focus on acquisitions and more IP within your portfolio and more aftermarket. Can you level set us here heading into '22 as to what percentage of the total business now represents aftermarket for both defense and commercial customers?

Ken, I think what I want to do is we're going to have some more communication throughout this year. I'd like to get back to you on that. As you know, I usually do. Okay. Yes, I would say that it's growing and we're happy with it. And it's a strategic priority, as I'm sure you know. So we'd come on it.

And at this time, there are no other callers in the queue. So I'll turn the call back over to Mr. Oswald for any closing remarks.

Thanks very much. Just want to thank -- first, thanks for all the questions and the dialogue. We appreciate it. Also, well, again, thank my team and thank as well our investors. We really appreciate all the support. It's been obviously a very challenging 2 years for everyone, world, our nation, companies, et cetera. We feel very good about where we're heading with the company. We hope you do as well. So have a nice evening. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.