Altra Industrial Motion - Q4 2021
February 16, 2022
Transcript
Operator (participant)
Good morning, and welcome to today's Altra Industrial Motion Fourth Quarter 2021 earnings conference call. My name is Candice, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for question and answer at the end. If you would like to ask a question, it is star followed by one on your telephone keypad. I would now like to pass the conference call over to our host, David Calusdian of Sharon Merrill.
David Calusdian (President)
Thank you. Good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they'll be referencing slides that are posted to the altramotion.com website under Events and Presentations in the Investor Relations section. Please turn to slide three. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors described in the company's quarterly reports on Form 10-Q, and annual report on Form 10-K, and in the company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp.
Does not intend to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP operating income margin, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt, non-GAAP free cash flow, and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading Discussion of Non-GAAP Financial Measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q4 2021 financial results press release on Altra's website. Please turn to slide four.
With me today, our Chief Executive Officer, Carl Christenson, and Chief Financial Officer, Todd Patriarca. I'll now turn the call over to Carl.
Carl Christenson (Chairman and CEO)
Thank you, David, and thank you for joining us today. I'd like to start this morning by recognizing the Altra team for an exceptional effort in 2021 in managing through the supply chain, inflation, and pandemic-related challenges and delivering strong financial results for the year, all while advancing our strategy to optimize Altra's position as a premier industrial company. Thanks to your contributions, we were able to continue collaborating with our customers, supporting one another, and executing strategically during this unprecedented time. I extend my sincere appreciation to all of you. Now please turn to slide five. As a result of the team's resilience, we were able to leverage positive broad-based demand trends in Altra's market position to deliver strong results in both the quarter and full year.
I will start with a few highlights from the year, and Todd will get into more detail on the quarter later in the call. Our 2021 results demonstrate the resilience of Altra's diverse portfolio of highly engineered products. On a full year basis, we grew sales by 10% to $1.9 billion, which was the high end of our guidance range. We ended the year with a very strong book-to-bill ratio of 1.11 and record level backlog of more than $800 million. This reflects both the strong underlying demand dynamics and Altra's strong market position. As a result, we're beginning 2022 with good top line visibility, affirming as in past quarters, that the underlying fundamentals of Altra's business remain intact with strong long-term growth prospects. Top line performance may be constrained by supply chain, logistics, and labor challenges.
We've remained diligent in managing the factors within our control to mitigate external risks such as availability of materials, logistics challenges, and inflation to deliver a solid year on the bottom line. Throughout 2021, we continued to deploy Altra's world-class business system to drive improvements in many aspects of our business, including productivity, supply chain and logistics, product innovation, and organic growth. Inflation was greater than we had anticipated through the year, resulting in a cost price lag. Inflation for certain integrated circuits was particularly impactful. We implemented price increases throughout the year and will continue to implement price increases in Q1 and Q2 of 2022. We expect that the pricing actions we have taken and have announced will get us back towards our typical historical margins in Q2, provided we don't see significant additional inflation.
Full year net income was $27.7 million or $0.42 per diluted share, compared with a loss of $25.5 million or $0.39 per share in 2020. Non-GAAP diluted EPS for 2021 increased from $2.88 last year to a new company record of $3.22. We continued to demonstrate the strength of Altra's cash generative business model, generating $176 million in non-GAAP free cash flow in 2021. This cash generation allowed us to make continued progress deleveraging our balance sheet by paying down a total of $155 million of debt in 2021. We exited the year with net debt to non-GAAP adjusted EBITDA leverage ratio under 3.0x.
Now that we have reached our target leverage range, we are putting more emphasis on actively managing the portfolio to accelerate top line growth and deliver margin expansion while maintaining a strong and flexible balance sheet. On that note, please turn to slide 6. I would like to highlight two recent announcements that demonstrate our progress executing on our strategy to position Altra as a premier industrial company with a focus on highly engineered products in the motion control and power transmission markets. The first is the acquisition of Nook Industries, which we closed on December 31st. With Nook, Altra is positioned to benefit from cross-selling opportunities that leverage our expanded and complementary linear motion control product offerings, while also gaining strong customer relationships in strategic end markets such as medical, factory automation, and defense.
We also have the opportunity to utilize Altra's scale to leverage fixed costs while capitalizing on Nook's production capacity to better satisfy increasing customer demand. We estimate Nook generated approximately $42 million in revenue in 2021, and the transaction is anticipated to be cash accretive to Altra's earnings in 2022, excluding any one-time or acquisition-related costs. Nook is a great fit with Altra, one that brings us not only significant potential for cost and sales synergies, but an outstanding portfolio and great group of employees. We're pleased to welcome the Nook associates to the Altra team. As we announced last week, we've entered into an agreement to sell our Jacobs Vehicle Systems business to Cummins Inc. for $325 million.
Selling JVS aligns with our strategy to focus Altra's portfolio on highly engineered products in the motion control and power transmission markets. Upon closing, the transaction will substantially reduce our net debt. I'd like to take this opportunity to express my appreciation to the JVS team for their dedication and support. We believe that operating as part of Cummins will give them an opportunity to thrive with more strategically aligned ownership, and I wish them all the best. Now turning to slide seven in a review of the markets in more detail. Starting with transportation, which represented approximately 14% of our business in 2021, primarily related to JVS. Q4 sales were down double digits compared with Q4 last year, reflecting the ongoing slowdown in China for Class eight heavy-duty trucks, as well as the semiconductor chip shortage industry-wide.
Moving to factory automation and specialty machinery, which represents about 12% of our business, demand in robotics, electronic assembly equipment, specialty machinery, and general factory automation machinery remains strong. Q4 sales were up high double digits compared to the prior year and down low single digits sequentially, primarily due to the typical seasonality. 2022 is shaping up to be another strong year in this market, given the positive long-term macro trends driving growth. Turf and garden, ag, and construction, which combined represents approximately 10% of our business, continued to perform well in Q4, growing high double digits year-over-year, with all three segments up sequentially. The fundamental growth drivers in these markets appear to be strong as we begin fiscal 2022, and our outlook remains very positive.
Material handling, which represents about 8% of sales, was up double digits in Q4, driven by continuing strength across all key segments, including conveyors, forklifts, and vertical lifting systems. Long term, we remain positive about our growth prospects in material handling, driven by trends such as e-commerce, electrification, and warehousing efficiency improvements. Medical equipment, which is about 7% of our sales, was down double digits year over year. As we saw in Q3, this was in part due to difficult comp with the prior year quarter's exceptionally strong COVID-related respirator and ventilator sales. In addition, our Q4 results reflected slowdowns in discretionary spending and CapEx as Omicron began spreading across the country. We're positive about the outlook for 2022, given the anticipated easing of COVID restrictions and return to more normal levels of spending and investment, as well as favorable prior year comps.
Longer term, medical equipment remains an exciting growth market for us and is supported by several secular tailwinds. Moving into aerospace and defense, which combined is about 5% of sales. Commercial aerospace was down single digits from Q4 last year, but up slightly on a sequential basis. Reflecting ongoing project timing headwinds, the defense side of the business was down double digits year-over-year. Our aerospace and defense business remains an important bottom-line contributor with a very attractive margin profile, a strong competitive position, and high barriers to entry. A&D bookings in Q4 were strong, setting the stage for improved results in 2022. In addition, acquiring Nook Industries expands our motion control and power transmission capabilities in the A&D marketplace. Renewable energy, which represents about 4% of sales, was down double digits versus Q4 last year and sequentially.
Bookings were lower both year-over-year and sequentially, reflecting supply chain delays and COVID-related labor market disruptions. As we saw last quarter, many of our customers are facing logistics challenges as product is being held up at ports due to global shipping delays. Looking ahead, we're expecting these headwinds to continue affecting bookings into the first half of 2022, followed by a rebound as the year progresses. Longer term, given the growth in demand for zero carbon energy solutions, we continue to believe that renewables represents a very exciting growth play for Altra. Finally, distribution, which represents about 25% of sales, was up double digits from Q4 last year and up single digits sequentially. Our sales in the distribution market continue to track in line with the general industrial economy.
Our bookings and book-to-bill for the quarter were strong, and we're anticipating a solid performance in this part of our business in 2022. Looking forward, we expect underlying economic strength and growth to continue driving strong-based end market demand in 2022. Now please turn to slide 8. We begin 2022 not only extraordinarily proud of the entire Altra team, but increasingly confident that we can achieve our strategic ambition to position Altra as a premier industrial company with sustainable competitive advantages and long-term success. I'd like to conclude with a few key points. First, the resilience of Altra's diverse portfolio of highly engineered products continues to prove out, as evidenced by our 2021 results that were highlighted by a 10% top-line growth, strong order rates, and record year-ending backlog.
We have consistently and effectively managed the factors that we can control, like strategic pricing initiatives, supply chain management efforts, and cost controls to deliver strong operating performance in this uncertain environment. We expect to continue to benefit from these actions as we move through 2022. Now that we have reached our targeted leverage ratio, we are positioned with greater capital deployment optionality. We will continue to actively manage the portfolio to accelerate top-line growth and deliver margin expansion while maintaining a strong and flexible balance sheet. The Nook and JVS transactions provide us with great momentum as we start the year and transition Altra into the next phase of transformative growth. We're hosting an Investor Day on Tuesday, March 8, to share more on Altra's strategic roadmap. We hope that many of you can join us either virtually or in person in New York City.
With that, I'll now turn the call over to our longtime team member, recently named CFO, Todd Patriarca.
Todd Patriarca (CFO)
Thank you, Carl, and good morning, everyone. It's a pleasure to be here for the first time since transitioning into my new role as Altra's CFO. Please turn to slide 9. Sales for the fourth quarter were up 3.7% year-over-year to $470 million. Excluding foreign exchange, Q4 sales were up more than 4% year-over-year, reflecting continuing customer demand and a strong contribution from price, despite significant challenges with supply chains, including labor shortages, transportation issues, and material shortages. Gross margin of 33.6% was lower versus Q4 last year, primarily due to the expected slowdown in Class eight truck-related business in China and a difficult comparison with very strong prior year COVID-related medical equipment sales.
That said, we had a record year for revenues and non-GAAP earnings per share in 2021, and we're well positioned to continue executing on our strategy. We're entering 2022 with record backlog and solid underlying market demand despite the external challenges. We are continuing to make progress in deleveraging the balance sheet, and prior to the Nook acquisition, we reduced our debt by $155 million, exceeding our 2021 paydown targets. Taking a closer look at our top-line performance, price contributed 290 basis points for the quarter, and FX had a negative effect of 40 basis points. Net sales for the PTT segment, excluding FX, were up 13%. The year-over-year increase demonstrates the continued resilience of our balanced portfolio of opcos, as well as the success of our ongoing price cost efforts within the segment.
Net sales for the A&S segment, excluding FX, were down 3.6% from Q4 last year. The decline was driven by extended semiconductor lead times across many of our end markets, including automotive, as well as challenging comps for our heavy-duty truck market and medical business due to record sales into the ventilator market in the prior year. Excluding JVS, fourth quarter organic sales for the A&S segment increased 2.6% year-over-year. Taking a closer look at our organic sales performance by geography, organic sales were up 10.6% in Europe and 12.4% in North America, with strength across most end markets. Organic sales in Asia and the rest of the world were down 20.2% year-over-year, mainly due to the Class eight truck and wind energy markets in China, as Carl discussed.
Turning to look at our operating performance, non-GAAP income from operations decreased by $10 million from Q4 last year or 12.9%, primarily due to the expected return of costs related to the exceptional cost savings actions taken during 2020 and price cost challenges and higher operating expenses due to inflation. Price lagged cost by approximately 100 basis points in the quarter. Given the price increases we've implemented to date and future planned price increases, and assuming no additional inflation, we expect to be ahead of the price cost curve starting in the second half of the year. As a result of our combined cost, pricing, and supply chain actions, we anticipate operating margin improvement as the year progresses and year-over-year improvement.
Non-GAAP adjusted EBITDA was $87.2 million for the fourth quarter or 18.6% of net sales, down 260 basis points compared with Q4 last year. This was driven primarily by the lower gross margins as a result of the slowdown in truck market in China and wind and COVID-related medical sales, as well as the price cost dynamic and the expected higher SG&A expenses compared to a year ago. Interest expense for Q4 was up 151% year-over-year, driven by $32.1 million of incremental non-cash write-offs of deferred financing costs, debt discount, and the unrecognized amortization expenses associated with the interest rate swap settled, all related to the November refinancing. Please turn to slide 10 for a closer look at our balance sheet improvements, cash flow, and liquidity.
Free cash flow for the quarter was $31.9 million, compared with $91.3 million a year ago. We generated $176 million in free cash flow in 2021. Working capital was up $31.4 million or 10.9% from Q4 last year, primarily driven by an increase in inventory reflecting supply chain delays and inflationary pressures. Capital expenditures during the quarter totaled $15 million, up 60% from the prior year quarter as we continued to invest in growth opportunities. We ended the quarter with $246.1 million of cash. Since completing the A&S merger, we have paid down $465 million in term debt. In November, we completed a $1.4 billion refinancing of our Term Loan B and revolving credit facility.
In December, we borrowed $130 million under the new facility to finance our acquisition of Nook. With that, our net leverage remains just under 3x. Looking ahead, between our planned debt paydowns and the anticipated proceeds, assuming we close the sale of the JVS business, we expect to exit 2022 with leverage of approximately 2x on a net debt basis, well within our target range. As a result of our November 2021 refinancing, we've reduced our interest cost by 50 basis points, which saves approximately $4.5 million annually at current debt levels, while also providing us with the ability to further reduce interest costs as we continue to delever.
Upsizing to a $1 billion revolver, which incorporates acquisition holidays for leverage, provides us with greater flexibility to invest in organic growth and execute on our M&A strategy. Entering 2022, we will continue to manage our leverage, positioning us for future investments in growth, both organically and through M&A, and supporting our quarterly dividend. Please turn to slide 11 to review our full year 2022 financial guidance. As we begin 2022, we're confident about Altra's prospects for the year. Although risks related to COVID, the supply chain, labor markets, and inflation remain elevated, we expect continued strength across most of our markets in a healthy 2022 from a revenue perspective. We're encouraged that we've been able to leverage our strong customer relationships to pursue opportunities to gain share by outperforming our competitors and meeting our customers' needs.
Although the double-digit growth we saw in 2021 may not be sustainable, we're entering 2022 with more than $800 million in backlog and a book-to-bill ratio of 1.11. We're also encouraged by the performance of our business and our prospects for continued margin expansion. In addition to the record backlog, we're entering 2022 with pricing initiatives underway that we expect to flow through to the bottom line as the year unfolds. Although we expect to see continued challenges in the year ahead, especially during the first half of the year, from labor shortages, transportation issues, and material shortages, the team has proactively managed these challenges thus far, and we expect to continue doing so.
I would like to note that the 2022 guidance we're providing today includes the contributions of Nook Industries and JVS, which is currently treated as an asset held for sale. We intend to update our 2022 guidance upon closing of the JVS transaction, which we expect to complete in 2022. With that as background, our guidance for 2022 is as follows: annual sales in the range of $2.025 billion-$2.065 billion, GAAP diluted EPS in the range of $2.84-$2.92, and non-GAAP diluted EPS in the range of $3.55-$3.70. Non-GAAP adjusted EBITDA in the range of $410 million-$425 million.
Depreciation and amortization in the range of $100 million-$110 million, lower than prior years due to the asset held for sale accounting treatment. Capital expenditures expected in the range of $45 million-$50 million. A normalized tax rate for the full year to be in the range of 21%-23%. Adjusted non-GAAP free cash flow in the range of $200 million-$225 million. I would like to note that we have provided a pro forma historical view of Altra, excluding JVS, as an appendix to our presentation slides. For purposes of our 2022 guidance, we have assumed JVS's contribution to be similar to their 2021 results.
In summary, Altra delivered record revenues and earnings per share in 2021, and we believe we are well positioned to repeat that in 2022. Our team is working hard to mitigate higher costs through pricing and other tactics, and we continue to focus on our portfolio and driving profitable growth. I'll now turn the call over to Carl before we take your questions.
Carl Christenson (Chairman and CEO)
Thank you, Todd. We look forward to reporting our progress in 2022. Our incoming order rate remains very strong. We're working on initiatives to close the cost price gap. We continue to develop innovative solutions for our customers, driving organic growth. We're executing on a synergies plan for the Nook acquisition, and we're leveraging the Altra business system to drive improvements across the entire company. I'm also very excited about the actions we're taking to improve the balance sheet, which will enable us to advance our strategy to become an even higher value supplier to our customers and position Altra as a premier industrial company for the long term. With that, we'll now open up the call for questions. Candice?
Operator (participant)
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove your question, please press star followed by two. Again, to ask a question, it is star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Bryan Blair of Oppenheimer. Your line is now open. Please go ahead.
Bryan Blair (Managing Director)
Thank you. Good morning, guys.
Carl Christenson (Chairman and CEO)
Morning, Bryan.
Todd Patriarca (CFO)
Morning, Bryan.
Bryan Blair (Managing Director)
To dig in on your sales outlook a little bit, you know, how's your teams thinking about first versus second half, growth rates, given the influence of backlog position, the order momentum, early in the year and the timing of expected price realization? Then for the full year, what's contemplated for volume versus, price contribution in the 5%-7% organic outlook?
Carl Christenson (Chairman and CEO)
Yeah, Bryan, I might have told you this before in one of our other conversations, but this is the period I've never experienced in my career, where in other economic recoveries, we always felt like we had much more control over our own destiny. Right now, we're really throttled by the supply chain, logistics, labor shortages, and you know, we're working really hard to mitigate those and offset them, but that's really the throttle. I think you'll see Q1, where again, even you know, so far in the quarter, the bookings have been outstanding, but just getting the capacity ramped up to be able to get those bookings out the door is really challenging. I think that's the real throttle on the business.
Now with COVID, you know, starts to reduce, and you saw, at least yesterday, I saw that they're talking about increasing the number of international flights, which might free up logistics a little bit. If some of these challenges start to mitigate, we're starting to see a little bit better labor too. Some of these things start to mitigate. We think the back half of the year, we can start to work on that backlog.
Todd Patriarca (CFO)
Yeah. Regarding your question, Bryan, about sort of the cadence throughout the year. You know, the first half will be more challenging than the second half, and we expect Q1 to be, you know, similar to the Q4 run rates from a margin perspective. Q2 is where we'll start to see some of the pricing actions really starting to take hold, and we'll start transitioning into those more typical margin ranges. Accelerating more in the second half of the year as the price increases fully take effect, and we've worked through, you know, that $800 million backlog.
As it relates to, you know, volume versus price, you know, we've got baked into our guidance, you know, between 300 and 325 basis points for price. The remainder of that is the volume.
Bryan Blair (Managing Director)
Okay. That's very helpful. For Nook Industries, how should we think about growth rates for the foreseeable future? Where are run rate margins and what kind of margin have you factored into your deal model as synergies are realized? To, I guess, think about that progression, you know, where is gross margin right now relative to Altra? You know, the annualized synergies as they ramp, are they weighted to COGS or SG&A over the coming years?
Todd Patriarca (CFO)
Yeah. Related to Nook, it rolls up into our Thomson business. You know, it has very similar margin profiles as Thomson, so I'd call it sort of fleet average for A&S. You know, from a growth perspective, you know, they're in that 5%-7% range, like the rest of the business. The synergies, you know, I think we said in our release previously, you know, $6 million, so 15% of their top line in synergies. We expect to get, I think, about a third of those in year one. We expect those to start flowing through to the bottom line sometime before the end of the second quarter.
Bryan Blair (Managing Director)
Okay. Appreciate the detail. One more, if I may. I promise it's not a multi-parter. What are the expected net proceeds from the JVS sale? I'm just not sure what the tax basis is there.
Todd Patriarca (CFO)
Yeah. There's about $25 million worth of tax leakage on the JVS deal. We're estimating netting about $285 million after deal fees and taxes.
Bryan Blair (Managing Director)
Okay. Understood. Thanks again, guys.
Carl Christenson (Chairman and CEO)
Okay. Thanks, Bryan.
Operator (participant)
Thank you. Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is now open. Please go ahead.
Jeff Hammond (Managing Director)
Hey, good morning, guys.
Carl Christenson (Chairman and CEO)
Morning, Jeff.
Todd Patriarca (CFO)
Morning, Jeff.
Jeff Hammond (Managing Director)
Just really wanna dig in on the sequential margins. It looks like 3Q to 4Q revenues were kind of flat, and you had a pretty big dip. Just wondering, you know, how much is kinda mix versus, you know, price cost getting worse versus, you know, something else?
Todd Patriarca (CFO)
Yeah. From Q3 to Q4, it didn't necessarily get worse. It shifted a little bit from a price cost standpoint. You know, we went from whack-a-mole, which is continuing on, and then we started seeing more pressure on the electronic side of things in the fourth quarter. About half of the impact was from those electronics in the fourth quarter. You know, we continue to believe that that's gonna continue into the first quarter. You know, we made a number of price increases during the fourth quarter, but those won't, you know, start to really kick in as, you know, we're working through that backlog in the first quarter.
We expect somewhere around 75% of the backlog will have flushed through by the end of the second quarter, and that's why we're, you know, we believe that the second quarter is where we'll start seeing the margins expand as the pricing takes hold.
Jeff Hammond (Managing Director)
Okay. Price cost in Q1 versus that 100 basis point headwind.
Todd Patriarca (CFO)
I think it's gonna be similar to that. Yeah. I think it's gonna be comparable.
Jeff Hammond (Managing Director)
Okay. back on, like, seasonality, you know, I guess normally you have kind of a stronger first half versus second half on the top line. Is that any different this year just given, you know, given all the moving pieces with supply chain, et cetera?
Todd Patriarca (CFO)
Yeah, it is gonna be different this year. We expect it to, you know, continuing to ramp up through the third quarter, and then sort of level out going into the fourth quarter. You know, again, dealing with the supply chain and labor issues, we're a little bit throttled in the first part of the year.
Jeff Hammond (Managing Director)
Okay, great. Just last one on end markets, any kind of moving pieces and trends, you know, outside of what you saw in Q4? You know, any big laggards or leaders within the, you know, the growth outlook?
Carl Christenson (Chairman and CEO)
I think we're starting to see some projects get released in some of the later cycle markets, which is really encouraging. We saw some really good mining projects that we booked in Q4 and you know, we're bidding on some, you know, really nice projects now. I think the oil and gas, you know, which people held back on CapEx last year, whether that starts to free up a little bit is a question mark. With what's going on in that market, the price of oil and you know all the disruption that's out there, we think there's a good chance that some of that, they'll release some funding there.
Then the infrastructure bill, you know, on the construction side and aggregate and other pieces, you know, we're really encouraged that that's gonna have some real legs to it too and starting to see some free up. Markets like marine, which are typically late cycle, big, you know, expensive projects, that amped up probably in the back half of last year. There's some really encouraging signs, and the order book is just rock solid. It's really, really good.
Jeff Hammond (Managing Director)
Okay, great. Thanks, guys.
Todd Patriarca (CFO)
Yep. Thanks.
Carl Christenson (Chairman and CEO)
Thanks, Jeff.
Operator (participant)
Thank you. Our next question comes from Michael Halloran from Baird. Your line is now open. Please go ahead.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Hey. Good morning, gentlemen.
Carl Christenson (Chairman and CEO)
Morning, Michael.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Maybe we could just talk a little bit about inventory levels from two perspectives. One, how do you think channel inventory looks? Two, how are your inventory levels looking? Kind of how you're looking at expectations for both of those so that as you track through the year?
Todd Patriarca (CFO)
You want to take the distribution, and I'll take our inventory?
Carl Christenson (Chairman and CEO)
Yeah, I'll say in general, I'd say, inventory levels, if people could get more, they would take it. We're seeing, you know, most of it get sold through. I don't think that's just in the distribution channel. I think that's probably our OEM customers too. Hopefully, if things free up a little bit, we'll start to see a little bit of an inventory build and get some of that inventory put back in place.
Todd Patriarca (CFO)
From our own internal standpoint, you know, we've increased our inventory balances quite a bit during the year. I think as Carl mentioned, we'd like to continue probably building that a bit more if we could get some key pieces to that, 'cause it is having an impact on our ability to ship to customers. You know, I think the teams have done a really good job of managing it and you know, trying to get inventory in to help secure some of the pricing that they have in their backlog as well, which has also driven up our inventory balance. Overall, we're not very concerned about our working capital.
It's actually weathered quite well through the pandemic, especially on the AR and AP side, and the inventory will continue to support this, you know, really high demand levels that we're seeing.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Thanks for that. Excluding the JVS business in China, maybe some thoughts on just the trend lines there. Obviously, a really tough comp on the JVS side and the China business. How do the rest of it look?
Todd Patriarca (CFO)
Yeah. The other item was that Portescap, the medical business, just outsized performance in the back half of 2022 or of 2020. That had an impact. You know, wind was also tough for us this year, especially in China. You know, we saw you know, modest growth across the rest of the markets. When you look at the segments, you know, PTT grew faster. I think that partially is due to starting to see some activity in these later cycle markets. You know, the A&S side grew more modestly when you exclude JVS, which had a big negative impact on it, you know, grew in the 3% range.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Thanks for that. One last one here.
Todd Patriarca (CFO)
If we could get more out-
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Yeah.
Todd Patriarca (CFO)
Yeah. I was gonna say.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Go ahead.
Todd Patriarca (CFO)
If we could get more out, we could, you know, if we didn't have these constraints, you know, the revenue on the A&S side would have been significantly higher.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Well, makes sense. Last one here, just on the M&A side. Obviously you got some moving pieces in the short term here. What's the pipeline look like, but what's the willingness to go after the pipeline ahead of the JVS close?
Carl Christenson (Chairman and CEO)
I think we're gonna continue to build the pipeline and pay down debt through this year. You know, once we close the JVS transaction and, you know, really improve the balance sheet, that's when we're probably more likely to pull the trigger on something. We're at the, you know, right around three now, and I think we've stated our goal is to be between two and three, so I'd prefer to get it down closer to two and work on the pipeline as we go through this. That work is going really well. I think that's you know, if you look at the Nook acquisition we did, the Thomson business was really involved in diligence and coming up with the integration plan and the strategy plan. Historically, that would've been done by corporate.
We're trying to get the businesses more involved in developing the pipeline and then, working on the deal once we get it going. That's going really well. That's a nice, really nice change for us.
Michael Halloran (Senior Research Analyst of Flow & Motion Solutions)
Thanks, Carl. Thanks, Ted.
Todd Patriarca (CFO)
Thanks, Mike.
Carl Christenson (Chairman and CEO)
Mike.
Operator (participant)
Thank you. As a reminder, if you would like to register a question, please press star followed by one on your telephone keypad. If you'd like to remove your question for any reason, please press star followed by two. Our next question comes from Joel Tiss of BMO Capital Markets. Your line is now open. Please go ahead.
Joel Tiss (Managing Director)
Hey. Guys, how's it going?
Carl Christenson (Chairman and CEO)
Good, Joel. How are you?
Todd Patriarca (CFO)
Hey, Joel. How are you?
Carl Christenson (Chairman and CEO)
Congratulations, Joel.
Joel Tiss (Managing Director)
Oh, yeah.
Todd Patriarca (CFO)
How much time do I have?
Joel Tiss (Managing Director)
Yeah. Well, now we won't have to be as confused with Christenson and Christensen and all that kind of stuff, so you made it a little easier for us.
Todd Patriarca (CFO)
Good.
Joel Tiss (Managing Director)
Can you talk a little bit about the pricing in the backlog? Given how tight the markets are, you know, is the pricing a little bit dilutive that's in the backlog? Given the tightness in the markets, is there an ability to adjust that? Or you just wanna be true to your customers and just push it through and worry about tomorrow?
Todd Patriarca (CFO)
Some of our backlog is gonna be dilutive, which is why, you know, we believe Q1 is gonna see similar margin levels as Q4 as we work through that. You know, we are going after anywhere we can, you know, put in surcharges to at least cover the costs. We are pushing that. You know, there is probably about half of it that is price exposed.
Joel Tiss (Managing Director)
Okay. Then maybe this is an unfair question, but I wanna ask it anyway. In any businesses or product lines that you guys are noticing that are maybe a little more commoditized and, you know, I mean, you probably have a good insight where they're pricing through. Maybe instead of calling out the businesses, maybe can you give us a sense, would it be, you know, 10% of sales or 5%, or you think that you've cleaned most of that out over the years?
Carl Christenson (Chairman and CEO)
You broke up for part of the question where you said they're commoditized and trying to push price to a. I didn't. I think I missed the key part of the question. Just broke up.
Joel Tiss (Managing Director)
Yeah, just trying to figure out, like, maybe what percent of revenues that you guys have noticed has been a little more difficult to get pricing through, you know, implying that the businesses have become commoditized.
Carl Christenson (Chairman and CEO)
Yeah, it's interesting, Joel. Even the components that I would say are more commodity-like in nature and where it's more price and availability, we're able to get price on those. Where we can't get price is where we have long-term contracts with customers and the big OEMs, you're kinda locked in with a multi-year contract. We're pushing through surcharges and you know, and going to the mat trying to get price. That's probably where it's more of a challenge. Some of the commodity products we're actually doing quite well on pricing. Some of the things that are more commodity-like.
Joel Tiss (Managing Director)
Okay.
Carl Christenson (Chairman and CEO)
Yeah.
Joel Tiss (Managing Director)
That kind of leads into my last question. Can you talk a little bit about your focus on acquisitions? You know, where are there kind of more reasonably priced areas or, you know, that's less of a concern, you're more focused on trying to kinda enhance your competitiveness and find synergies and, you know, related product lines. Thank you.
Carl Christenson (Chairman and CEO)
Yeah. Thanks, Joel. Where we're focused on looking is in those end markets that we think are gonna have better secular growth trends. Automation, medical, aerospace and defense, robotics.
Todd Patriarca (CFO)
Robotics.
Carl Christenson (Chairman and CEO)
Yeah, automation. We haven't seen anything that looks like it has a reasonable, at least in my history. The multiples now are just kinda stratospheric. It's just shocking what some of the businesses are going for. We do have a really good plan. Again, I'm gonna put a pitch in for our Investor Day 'cause I think we're gonna go through, you know, a lot of what the long-term strategy for the business is and those places where we wanna grow and how we're growing, both organically and in our portfolio management, where we wanna build out through acquisition. I think it'll be much clearer, and we'll have more time to spend on it on the Investor Day. Hopefully you can make it to the Investor Day.
Joel Tiss (Managing Director)
All right. Well, thank you so much.
Todd Patriarca (CFO)
Thanks, Joel.
Carl Christenson (Chairman and CEO)
Thanks, Joel.
Operator (participant)
Thank you. There are no additional questions waiting at this time, so I'll pass the conference over to our management team for closing remarks.
David Calusdian (President)
Okay, thank you. Thank you again for joining us today. As a reminder, as I just put a plug in, our Investor Day, we'll be hosting that on March eighth in New York City, and we really hope you can join us. That concludes today's call. Thank you.
Todd Patriarca (CFO)
Thank you.
Operator (participant)
That concludes today's conference call. Thank you for your participation. You may now disconnect your line.