Moog Inc.

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 April 24, 2020, our most recent form, 8K, filed on April 24, 2020, and in certain of our other public filings with the FCC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, A copy of today's financial presentation is available on our investor relations webcast page at www.moog.com. Thank you. John?

Thanks, Anne. Good morning. Thanks for joining us. This morning we'll report on the second quarter of fiscal 20 and discuss the future outlook for the company in light of the COVID-19 crisis. Given the uncertainty in global markets, we're suspending our normal practice of providing detailed guidance for the remainder of the fiscal year. In reviewing my comments from 90 days ago, COVID-19 was not a topic on our agenda. Indeed, it wasn't even a word in our vocabulary. In late January, we talked about Brexit, the US trade dispute with China, and unrest in the Middle East. Some eight weeks later, all our attention shifted to responding to the rapidly changing situation as a result of the spread of the virus. I hope our comments today will leave our investors with two clear messages about our business. Short-term strength from our diversity. And second, long-term value from our fundamentals. As usual, I'll start with the headlines. First, the second quarter was strong. The pandemic only started to affect our operations late in the quarter and had relatively little impact on our results. Sales in the quarter were up 6%, net earnings were up 21%, and earnings per share were up 26% from a year ago. Free cash flow was $12 million. and during the quarter we purchased 1.6 million shares under our share buyback program. The first half of fiscal 20 is a record for the company in terms of sales, net earnings and earnings per share and provides a solid foundation as we enter this crisis. Second, early in March we started to understand the scope of the emerging pandemic. We set two clear priorities. First and foremost was the health and safety of our employees and their families. and second, to continue to meet the needs of our customers and thereby secure the financial well-being of the company. Third, we took action. We transitioned to working from home wherever possible and implemented changes in our work practices for production employees who continued to come into the plants. We focused our financial attention on modeling liquidity and leverage. We implemented expense and cash conservation actions, including hiring and salary freezes Elimination of consulting and other discretionary expenses and focused on minimizing capital expenditures. We paused our share repurchase program and also decided to temporarily suspend our quarterly dividend payment. Fourth, we assessed our markets and developed future business scenarios. We believe we are relatively well positioned to weather this storm. Our diversity across markets is our strength. Our defense and space businesses combined make up almost half of our sales and are mostly US government funded. Both businesses are strong and should continue to be well supported. Our medical business is close to 10% of our sales and we're seeing increasing demand for our pumps. Our industrial business is just over a fifth of our sales. We anticipate we'll see a drop off in demand in these markets as the crisis unfolds. And finally, our commercial aircraft business is likely to be the hardest hit. However, to put this into context, Commercial OEM customers represented 17% of our total sales in the first half of fiscal 20 and sales into the commercial aftermarket were about 5% of our business in the same period. Fifth, our financial position is healthy and our relationships with our bank group strong. We refinanced our entire balance sheet over the last six months and we are conservatively leveraged. And finally, we're investing where we can to support the fight against the virus. We're adding staff in our medical facilities as demand for pumps surges. In addition, our industrial group supplies small motors that are used in ventilators. The demand for these motors has increased from 800 units per month to 30,000 units per month. Our staff is working tirelessly to increase our capacity and expand the supply chain to meet this need. In summary, I would describe our situation today as stable. The vast majority of our staff around the world are working productively. Most of our facilities continue to produce products and both our supply chain and our customers continue to operate. Under the new practice of social distancing, we estimate we are operating at perhaps 80 to 90% of our normal capacity. It may be early days yet in the crisis, but so far we're meeting our two primary objectives of keeping our employees safe and maintaining the financial health of our company. This is a testimony to the commitment of our employees around the globe, and I'd like to thank each of them for their dedication. Now let me return to my normal reporting format. I'll describe the results of the second quarter in a little more detail, and then walk through each of the operating groups. The fiscal 20 second quarter. Sales in the quarter of $765 million were 6% higher than last year, driven by organic growth across our AMD portfolio. Those were up 17% in our space and defense group, up 6% in our aircraft group, and down just 1% in our industrial group. Taking a look at the P&L, our gross margin was more or less in line with last year. R&D spending was down on lower aircraft activity, but spending on selling and admin was up on the higher sales. Interest expense was marginally higher than last year on higher debt levels. The effective tax rate this quarter was low at 19.2%, as a result of some special items. The overall result was net income of $50 million, up 21% from last year, and as I mentioned, earnings per share of $1.48, up 26% from last year. Fiscal 20 outlook. Given the uncertainty of the present economic situation, we're not providing specific guidance for the second half of our fiscal year. However, I will offer some qualitative comments about each of our markets. I would stress that the situation in each of our markets is very fluid and there are many unknowns, so our commentary today could change materially in the future. Now to the segments. I'd remind our listeners that we've provided a two-page supplemental data package posted on our website. We suggest you follow this in parallel with the text. Starting with aircraft, Q2. Sales in the quarter of 341 million were 6% higher than last year. with all of the growth coming on the military side of the house. Sales were up over 20% on the F-35. The sales were also higher on the Black Hawk helicopter and on the KC-46 tanker. In the military aftermarket, it was a similar story with higher F-35 and Black Hawk activity. We also enjoyed higher F-15 aftermarket sales. This quarter, the Army downselected to two competitors for the next phase of both the FLARA and FARA Future Vertical Lift programs. were well positioned on the Textron V280 for the Flara contest and are happy to report that we are on both the Bell Textron and Sikorsky teams for the Flara competition. On the commercial side, total sales were flat, with higher aftermarket sales compensating for slightly lower sales to our OEM customers. OEM sales to Boeing were in line with last year. We saw a nice growth on the 787 program, which compensated for 737 sales down 50% from a year ago and 777 sales down 20%. Airbus sales were up over 10% from last year driven by lower A350 activity and A380 sales essentially going to zero. Commercial aftermarket was up mostly on 787 activity as the size of the fleet out of warranty continues to grow. Aircraft margins. Margins in the quarter of 10.2% were up from 8.5% a year ago. In the second quarter last year, we booked a $10 million charge associated with a quality issue on a vendor-supplied part. The hiring margins this year are a combination of the higher sales and a better mix, as well as the absence of last year's charge. However, the margin performance in the quarter was tempered by about 100 basis points as a result of a charge on a development program. Our operations 2.0 improvement activities continued through the first two months of the quarter, but have since slowed as we focused on restructuring our work environment. Progress will continue over the coming quarters, but not at the pace we were planning. Aircraft fiscal 20. In offering some thoughts on the coming six months, I'll try to address both supply side and demand side issues. Let me start with the military half of the business. On the supply side, our facilities are located in the US and the UK, have been deemed essential by the authorities, and continue to operate. To date, our supply base has continued to function well, although we have a couple of suppliers who shut their facilities for multiple weeks. We're optimistic that they will return to work before our inventory of parts is depleted, but the supply chain will remain our biggest unknown in meeting our customer needs. On the demand side, the vast majority of our business is funded by the US DoD, and we're confident that this market will remain strong. In summary, we're optimistic that the military side of the aircraft business will remain solid for the coming quarters, with the risks skewed to the supply side of the equation. Turning now to our commercial business, our major factories are in the Philippines, the UK, and the US. All facilities continue to operate. Similar to defense, we have risks in the supply chain, but for the moment, we're well positioned to meet the needs of our customers. On the demand side, it is a much more concerning picture. Our airline customers are dramatically reducing flights and we believe that our OEM customers will cut production rates significantly. We're working with all of our customers to get a clearer picture of their demand over the coming quarters but the situation continues to evolve daily. In summary, we believe the commercial side of our business will be significantly lower over the coming quarters with the risk skewed to the demand side of the equation. Turning now to space and defense, sales in the second quarter of 193 million, or 17% higher than last year. This quarter, it's the space market that is providing the majority of the growth, with sales up 38% over a year ago. We had significant growth in hypersonic launch vehicle activity and NASA development programs, as well as strength in our satellite engine and avionics product line. Note that we record our hypersonic development activity partially under our space market and partially under our defense market. Launch vehicles used to raise hypersonic weapons into space are included under space, while pin steering controls on hypersonic vehicles used during descent are included under defense. Defense sales were up 7% from last year, with strength across most of the product lines, including missiles, vehicles, and naval systems. Our security business was down, as planned shipments to customers moved out to future quarters. Space and defense margins. Margins in the quarter of 12.8% were up from last year. We're pleased with this margin performance given the high level of funded development within the group. This funded development is very positive for the long term as it sets the foundation for future production programs, but tends to dilute margins somewhat in the short term. Space and defense fiscal 20. In space and defense, it's a similar story to our military aircraft business. On the supply side, most of our facilities are in the US with a couple of operations in Europe. All sites are operational and our risks are mostly in the supply chain. On the demand side, most of our business is supported by US government funding. We believe that funding should continue more or less as planned for the remainder of our fiscal year. Staffing challenges and production inefficiencies as a result of social distancing measures will result in lower productivity and lower output than normal, but overall, the business should weather the next couple of quarters reasonably well. Turning now to industrial systems. Sales in the second quarter of 231 million were down marginally from last year. The stability on the top line belies the sales shifts in our major markets. Sales into energy applications were 23% higher due to the fact that half of the acquired sales from our recent GAT acquisition in Germany are coded to this market. GAT specializes in fluid rotary unions which complement our slip ring technologies. Sales were also up double digits in our medical applications as demand for our infusion pumps continues strong. We've been gaining share in this market over several quarters as a major competitor has struggled with production challenges. As we look to the future, we anticipate continued strength in this market to support the COVID-19 crisis. Sales into industrial automation were down almost 10%. There were two factors at play. First, the continued slowdown of global capital spending, independent of the pandemic. And second, a loss of sales in the quarter, particularly in China, due to the virus. Finally, sales into our simulation and test market were also lower as demand for both auto and aero test systems particularly in China slowed. Industrial margins. Margins in the quarter were 10.7%. These margins are down from a year ago and a less favorable mix. Our traditional hydraulics products sold into industrial automation applications are off significantly from a year ago. And in addition, the sales from our GAT acquisition are at relatively low margin due to first year acquisition accounting effects. Industrial systems fiscal 20. The outlook for our industrial business over the next couple of quarters is perhaps the most difficult to project. Here we have a combination of both supply and demand uncertainties. On the supply side, some of our facilities produce products essential in the fight against the virus, such as medical pumps and certain small motors used in ventilators. These facilities will continue to produce as fast as possible. However, most of our industrial plants and their supporting supply chains are spread across the globe. Each location is at a different phase in their fight to contain the virus, and each plant is subject to local government regulations and work practices. The good news is that so far, almost all of our facilities continue to operate and our supply chain is working. On the demand side, our book-to-bill remain just above one in the second quarter, but bookings may slow as we move through the rest of the year and our customers adjust their orders in line with the end market demand. What that demand will look like is difficult to determine. Let me provide some summary comments before handing you over to Jennifer. We all find ourselves in unprecedented times. Today, as we face the immediate COVID-19 lockdown and the ensuing economic fallout, we believe we are relatively well positioned. Our diversity across markets and our strong balance sheet are key to navigating the short-term challenges, while the strength of our franchise and our fundamental approach to business are the basis for our continued long-term success. Over the years, we've described the fundamentals of our business as follows. One, we solve our customers' most difficult technical challenges. Two, we develop a leading position in niche technologies across a diverse range of markets. Three, we develop unique IT, both in product design and manufacturing. And four, we believe in a conservative financial approach to business. Our highly technical products specifically designed to meet our customers' applications make it very difficult to be replaced by alternative sources and supply. Therefore, our fortunes will rise again as our customers recover. Our investment in R&D and our staff of highly skilled engineering talent will continue to create new opportunities to provide value to our customers. And our prudent approach to capital allocation and focusing on maintaining a strong balance sheet will allow us to rebuild for the longer term. Finally, we believe our employees are our most important asset. Our culture of trust, integrity, and cooperation means that our leadership and staff around the world are committed to the long-term success of the company. As we look out over the coming six months, we believe our defense, space, and medical businesses will remain strong, our industrial business is likely to face some challenges, and our commercial aircraft business will be hardest hit. As the picture becomes clearer, we will take all necessary steps to restructure our business to this new reality. Beyond that horizon, it is difficult to say, but our diversity across end markets should serve us well as some markets recover ahead of us. Throughout this time, we will continue to invest in R&D, process improvements, and long-term initiatives that will provide benefits for years to come. Let me finish with this thought. I believe in years to come, we will all tell future generations about the time the world stood still. and then one day it started turning again. Now let me pass it to Jennifer who provides some color on our cash flow, balance sheets and COVID-19 financial model.