Moog Inc.

and welcome to the MoG first quarter fiscal year 2020 earnings conference call. Today's conference is being recorded. At this time, I would now like to turn today's conference over to Ms. Ann Luhr. Please go ahead, ma'am.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to the risks, uncertainties and other factors It 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 January 24, 2020, our most recent Form 8-K filed on January 24, 2020, and 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 Industrial Relations homepage and webcast page at www.move.com.

John? Thanks, Anne. Good morning. Thanks for joining us. This morning, we'll report on the first quarter of Fiscal 20 and fine-tune our guidance for the full year. Overall, it was a strong start to our new fiscal year in terms of both sales and operating performance. This quarter, I'm adopting a new approach to the headlines, first offering some macroeconomic comments, followed by some microeconomic thoughts, and then focusing on what's going on inside our company. First, from a macroeconomic perspective, there's more clarity around both Brexit and the U.S. trade dispute with China than there was a quarter ago. While neither situation has significant direct impact on our business, the additional clarity should help stabilize the global economy and be positive for both our industrials and commercial aircraft businesses longer term. On the defense side, the continued unrest in the Middle East suggests a reduction in overseas, US overseas activities is not imminent, which supports our thesis for continued strong defense spending. Second, within our industry sectors, there have been developments in both our commercial aircraft and industrial markets. The uncertainty around the Boeing 737 MAX return to service has increased while the potential addition of simulator training requirements for MAX pilots has also emerged. On the industrial side, the economic climate in Europe has continued to weaken, particularly in Germany, and our team there believes we've not yet seen the bottom. In the defense market, excluding developments in the Middle East, the underlying narrative concerning near peer rivals in China and Russia has not changed, and spending priorities remain stable. Third, it was a good quarter for our business. Sales were up 11%, operating profit was up 14%, and earnings per share were up 18%. During the quarter, we witnessed the first flight of the Embraer E2-175 using all-mode flight controls, and our medical manufacturing facility in Costa Rica received a prestigious national award for operational excellence. We completed the acquisition of an industrial manufacturing company in Germany, which further strengthens our market leadership position in rotating devices. We refinanced our debt structure, reducing our interest rates and providing additional capital deployment flexibility. Our balance sheet is now nicely set up for the next several years and provides us with tremendous flexibility in how we allocate capital to create value for our shareholders. Finally, in the quarter, we repurchased 670,000 shares under our outstanding authorization. And then lastly, our colleague and friend, Don Fishback, decided to retire at the end of our first quarter. Don spent 38 years with our company in various finance functions, spending the last nine years of his career as CFO. He was a wonderful CFO, great business advisor, and personal friend. I will miss him, as will many of our listeners who have known Don. He'll continue as the director of Moog. Our new CFO is Jennifer Walter, who's been with Moog almost 20 years as controller, and more recently as vice president of finance. She'll do an excellent job taking over from Don. Now let me move to the details, starting with the first quarter results. Sales in the quarter of $755 million were 11% higher than last year, driven by strong organic growth, particularly in our A&D portfolio. Sales were up at each of our operating groups, with space and defense up 19%, aircraft up 12%, and industrial up 4% over last year. Taking a look at the P&L, our gross margin was down from last year on a less favorable mix, R&D was down on lower aircraft spend, while SG&A was lower as a percentage of sales. Interest expenses up slightly on higher debt levels. In other income, we had a benefit of about $2 million last year as a result of the sale of a small product line. Excluding this unusual item, the other income line is flat with last year. The expected tax rate this quarter was 25.2%, resulting in net income of $50 million, up 17% from last year, and earnings per share of $1.44, up 18% on a slightly lower share count. Cisco 20 Outlook. Our forecast for operating performance is unchanged from 90 days ago. However, we're making two minor adjustments to our full year outlook to reflect events in the first quarter which we had not forecasted. First, we're increasing our sales forecast by $35 million to account for the sales of the GAT acquisition in our industrial group. Given first-year acquisition accounting impacts, we're modeling this business to be break-even in fiscal 20. Second, we're adjusting our EPS forecast to include the combined impact of calling our high-yield bonds and the first-quarter share buyback activity. The net impact is a $0.05 reduction in our EPS forecast. The overall result is full-year sales of $3.05 billion and earnings per share of $5.50 plus or minus 20 cents. Now to the segments. I'd remind our listeners that we've provided a two-page supplemental data package posted on our webcast site which provides all of the detailed numbers for your models. We suggest you follow this in parallel with the text. Beginning with aircraft, Q1. Sales in the quarter of $340 million were 12% higher than last year. On the military side, we enjoyed good growth in both the OEM and aftermarket portfolios. OEM sales on foreign platforms were up nicely in the quarter, while F-35 sales to Lockheed were down slightly after a very strong first quarter last year. For the full year, we anticipate OEM sales on the F-35 will be up 17% over last year. In the military aftermarket, sales in the quarter were up across much of the portfolio, led by strong F-35 growth. As the fleet of F-35 airplanes in service continues to grow, our aftermarket activity will grow accordingly. In fiscal 20, we're forecasting the F-35 aftermarket to be more than twice the level it was just two years ago. On the commercial side, sales were up nicely from last year, albeit less than on the military side. OEM sales to both Boeing and Airbus were up double digits. Our Boeing book of business was up on higher 787 sales, the result of timing of orders. Sales on the 737 platform were down marginally from last year. Sales to Airbus were up on the A350 program, with the remainder of the Airbus programs down slightly. Sales into the commercial aftermarket were more or less in line with last year, with slightly higher 787 activity compensating for slightly lower A350 sales. Aircraft fiscal 20. We're keeping our full year sales forecast unchanged from 90 days ago at $1.33 billion, up 2% from fiscal 19. We're planning for 7% growth in the military portfolio, led by strong F-35 activity, but slightly lower commercial activity on reduced 787 and A350 OEM sales. Given the present uncertainty around the 737 MAX production rates, we're not adjusting our sales forecast for that program as yet until we know more. Aircraft margins. Margins in the quarter of 11.4% were a good start to the year. This quarter, we benefited from the unusually high level of sales on foreign programs as well as relatively low expenses. These effects will normalize as we move through subsequent quarters, so we're maintaining our full year margin forecast at 10.5%. Our operations 2.0 initiative continues to make steady progress, and as we said in the past, we should start to see the impact on both cash flow and margins towards the back half of fiscal 20. Turning now to space and defense, sales in the first quarter of $186 million were 19% higher than last year. and many others. In the defense market sales continued to be strong across most of the portfolio. Mid-size sales were up on continued high levels of production on our legacy platforms and increased development work on hypersonics. Vehicle sales were up on stronger domestic and European activity, while sales of our general components into a wide variety of end applications were up over 20%. Base defense fiscal 20. We're leaving our forecast for the year unchanged from 90 days ago. Full year sales of $770 million will be up 13% from last year, a combination of 16% growth in space and 11% growth in defense sales, all organic. Margins. Space and defense margins in the quarter of 13.6% were strong and a good start to the year. Compared to last year, higher sales, a slightly improved gross margin, and some favorable timing on certain expense lines resulted in almost 200 basis points of margin expansions. Over the next three quarters, spending on R&D and selling will gradually increase. So for the full year, we're keeping our margin forecasts unchanged at 13%. Now to industrial systems. Sales in the first quarter of 229 million were up 4% from last year. We had strong sales growth into medical applications and higher enteral pump and set activity. Sales into our other three markets of energy, industrial automation, and simulation and test were more or less in line with last year. Energy sales were marginally up on offshore oil production activity, while sales into industrial automation applications were slightly lower. As anticipated, we're seeing weakness in this business in Central Europe as the German economy continues to struggle. Finally, sales into flight simulation applications were up, but sales into the test market were down in both auto and aero applications. At the end of November, we completed the acquisition of GAT, a privately-owned German company which specializes in fluid rotary units, or FUs. These are devices which are used to carry fluids across rotating interfaces and are used in a wide range of industrial applications from machine tools to offshore oil exploration. We're already the world's leader in slip ring technology, which are devices used to carry electrical power and signals across rotating interfaces. Slip rings and Fluid Road Reunions are complementary technologies and are often used in the same applications. The acquisition of GAT opens new markets to Moog and enhances our competitive position at some of our existing slip ring customers. GAT sales for fiscal 20 should be $35 million. Industrial systems fiscal 20. We're adjusting our full year sales forecast to account for the acquired sales of GAT. These additional sales are within the industrial automation market. We're also refining our outlook for both simulation and test and medical. Given the slowing global economy, we believe our test sales will be $10 million lower, while the strength in our medical end market, particularly for our enteral products, will deliver $10 million of additional sales. The net result is full-year sales of $950 million. Industrial margins in the quarter of 11.7% were down from last year, but in line with our plans for the full year. In the first quarter of fiscal 19, we completed the sale of a small product line, which contributed just over 100 basis points of operating margin. The acquisition of GAT will contribute $35 million of additional sales, but given the impact of first-year accounting adjustments, we're modeling no additional operating profit. Therefore, for the full year, we're keeping our forecast for operating profit unchanged, at $106 million, but moderating the margin forecast slightly for the higher sales to 11.1%. Summary guidance. Q1 was a strong start to fiscal 20. Sales were up 11% against a planned 5% growth for the full year. Operating margin is ahead of our full year forecast, and earnings per share were above the high end of our guidance. Our defense business continues to show real strength across the complete portfolio, and our space business is back to strong growth after a flat year in 2019. Space is benefiting from the additional U.S. defense spending as well as the ramp up of activities at NASA to get back to the moon in the next four years. Commercial aircraft had nice growth in the quarter at our major OEM customers, although the aftermarket was up slightly from last year. Uncertainty around the max return to service increased during the quarter, but it's too early for us to model the impact yet on our full year results. Overall, commercial is on track for a year in which we're modeling a slight decrease in total sales from fiscal 19 due to the slowdown in some of our legacy programs. Finally, industrial sales in the quarter of almost 230 million are in line with the run rate for the year, excluding the impact of the acquired sales from GHE. We've been modeling a flat year for industrial compared to fiscal 19, but should now see about 3% growth from the acquisition. We believe the pattern of the first quarter will repeat over the coming quarters with strong medical sales compensating for continuing softness in our industrial automation business. Taken all together, we're pleased with our first quarter start to the year. We're keeping our outlook for the full year unchanged with minor adjustments for the acquired sales of GAT and the impact of our financing activities. Our first quarter benefited from some positive timing on various defense contracts as well as a slower ramp up of expense spending than we had anticipated. As our hiring catches up with our growth plans, expenses should come back into line with our forecast. And in addition, the favorable timing of orders and shipments we enjoyed in the first quarter will unwind somewhat over the balance of the year. Opportunities to do better include further growth in our defense business, although the availability of talent to meet the needs remains a constraint. In addition, our operational initiatives in aircraft could show positive results ahead of plan. Risks include the uncertainty around the max return to service, as well as a further deterioration in the industrial climate. As always, we try to provide a balanced view which weighs both the upside opportunities and the downside risks. For the second quarter, we expect earnings per share of $1.30 plus or minus 10 cents. Now let me pass you to Jennifer who will provide more color on our cash flow and balance sheet.