Moog Inc.

Good day, everyone, and welcome to the Moog first quarter year 2021 earnings conference call. Today's conference is being recorded, and at this time, I'd like to turn the call over to Ann Lohr.

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 risks, uncertainties, and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of January 29, 2021, our most recent Form 8-K filed on January 29, 2021, 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 investor relations webcast page at www.move.com. John?

Thanks, Anne. Good morning. Thanks for joining us. We hope all our listeners continue to be safe and healthy. This morning we report on the first quarter of fiscal 21. and provide color on what we're thinking for the remainder of the year. Overall, given the ongoing challenging operating conditions, we're pleased with the results of this quarter. Last quarter, we told the market that we were planning for COVID to be with us throughout our fiscal 21. Given this assumption, we projected that our business this year would be somewhat similar to the second half of fiscal 20. In my prepared remarks today, I provide my usual comparisons to the same quarter last year and also some reflections on the comparison of Q1 to the average of the previous two quarters. There remains considerable uncertainty around the ongoing impact of COVID on our business. Therefore, similar to last quarter, we've elected not to provide specific guidance as we believe the range of possible outcomes is beyond our ability to accurately forecast. We will, however, update the market on our assumptions for the business. Similar to last quarter, I've arranged my headlines under the headings of macroeconomic, microeconomic, and then most specific items. First, on the macro front, it's been a very eventful 90 days. In the U.S., we've seen a change in the administration with the Democrats taking control of both houses of Congress as well as the White House. At this early stage, it's hard to predict the impact of this political shift in our business, but it's probable that tax, trade, and defense spending will all be on the agenda over the coming years. One thing that does seem clear is that interest rates will remain very low for several years to come. This quarter, four years of Brexit discussions came to a close as the UK left the EU with a last-minute deal. We don't anticipate any immediate impact on our business from this new trade arrangement between the UK and Europe. Finally, we all rejoiced in the announcement of approved vaccines against COVID and at the same time worried about the emergence of more infectious strains and the surge in cases in Europe and the US. As the calendar year closed out, only China reported GDP growth for 2020, while the rest of the world shrunk under the burden of the pandemic. Second, on the microeconomic front, consolidation across our major markets continued, with Lockheed agreeing to buy Aerojet, Taladine combining with FLIR, and MTS being carved up between Amphenol and ITW. Government spending in our defence and space markets remained strong, and demand for medical products continued. It was great to see that the 737 MAX was certified to begin flying again and Boeing resumed deliveries to customers. Unfortunately, wide-body demand continued to weaken and, excluding the impact of holidays, there was no appreciable recovery in air traffic. Third, it was a solid quarter for our business under the circumstances. Relative to a year ago, sales and earnings were lower. However, on the positive side, comparing our performance with the second half of fiscal 20, First quarter sales held steady and earnings per share were up sharply on an improved mix in aircraft. We also generated very strong cash flow in our first quarter. COVID continued to impact performance and with the surge in cases in the Western hemisphere, we saw an increased impact on our operational efficiencies across our footprint. We bought back 150,000 shares this quarter and completed the first significant acquisition in our aircraft business in over a decade. At the end of December, we paid $78 million to acquire Genesis, a company which provides a range of flight instruments, displays, and autopilot systems for military and commercial programs. Genesis will add about $40 million to the sales of fiscal 21 and will be neutral to earnings as a result of first-year accounting impacts. We also booked our first significant production order for our RIP turret system with the award of the Shorad contract. Now let me move to the details, starting with the first quarter results. I'd remind our listeners that we've provided a three-page supplemental data package posted on our webcast site which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Starting with the first quarter, sales in the quarter of $684 million were 9% lower than last year. Sales were up in our defense, space, and medical markets. Sales were lower across our industrial portfolio and down over 50% in our commercial aircraft business. Taking a look at the P&L, our gross margin was down slightly on the lower sales. R&D and SG&A spend was similar to last year, while interest expense was down on lower rates. Last year, we incurred a $4 million charge associated with calling our high yield bonds, which showed up in other income. Excluding this unusual item, the other income line is flat with last year. The effective tax rate this quarter was 24.9%. Resulting in net income of $38 million, which is down 24% from last year, and earnings per share of $1.17, down 19% on a lower share count. fiscal 21 outlook 90 days ago, we started the year with what we believed was a conservative set of assumptions. We believed COVID would be with us throughout our fiscal year. We assumed our defense, space, and medical markets would remain strong. We predicted no recovery in our industrial markets, and finally we were optimistic that our commercial OEM business would stabilise and we might see a slight recovery in the aftermarket towards the end of the year. With one quarter under our belts, we think our assumptions still largely hold true. On the COVID front, the good news of a vaccine has been tempered by the surge in cases in Europe and the US and the slow pace of vaccine delivery. Taken together, we believe we continue to have to deal with the effects of COVID throughout our fiscal year. Relative to the second half of fiscal 20, our defense, states and medical markets are holding up as we expected. Our industrial markets have actually weakened in the first quarter, but we think we may have hit the bottom in Q1 and could see a slow improvement through the rest of the year. Finally, our commercial OEM customers continued to reduce their production forecasts, although we believe they are now settling down, and the commercial aftermarket actually strengthened in the first quarter. Given the quarterly variation we see in the commercial aftermarket, it's too soon yet to determine if this is a trend. All in all, we think the year will continue to unfold much as we thought 90 days ago. Now to the segments starting with aircraft. Sales in the first quarter of $287 million were 16% lower than last year. It's the same story as the last few quarters, with strength on the military side and weakness on the commercial side. Military OEM sales were very strong this quarter on higher F-35 activity, robust foreign military sales, and strength in our funded development programs. The military aftermarket was more or less in line with last year. On the commercial side, OEM sales were down almost 60% from a year ago. Sales to both Boeing and Airbus were down on every platform, ranging from 40% lower on the A320 to over 90% lower on the 737. Sales on our two flagship programs, the 787 and the A350, were down between 50 and 60%. Business jet sales were down almost 70%. The commercial aftermarket was down a third, with weakness across the complete portfolio. Comparing Q1 to the run rate of the second half of fiscal 20, we saw strong growth in our military OEM platforms, driven by the same three items mentioned above, the F-35, foreign military sales, and funded developments. The military aftermarket was lower after a very strong finish to fiscal 20. On the commercial side, the commercial OEM business was steady, signalling a gradual stabilising of demand, while the commercial aftermarket was up on higher 787 and A350 activity. Aircraft margins, margins in the quarter of 9.7% were lower than a year ago as a result of the lower commercial sales. The good news is that margins were up nicely from the adjusted margins of the previous two quarters as a result of an unusually positive mix. This mix was the result of particularly strong foreign programs in Q1. We don't anticipate our mix would be quite so favorable as we move through the next few quarters. Aircraft fiscal 21. Coming into the year, we described our outlook for aircraft as follows. We were assuming continued strong demand from our military customers Stabilization of our commercial OEM demand and a modest pickup in the commercial aftermarket towards the back half of the year. As of today, those assumptions are unchanged. From an external perspective, we're seeing continued strength on the military side. The long-term commercial OEM demand is still moving downwards, but seems to be gradually settling. While the commercial aftermarket was strong in Q1, sales were within the normal quarterly volatility we see in this end market. Internally, we're managing through increased pressure on our operations capacity as a result of higher COVID cases. Finally, the completion of the Genesis acquisition will add about $40 million to the aircraft segment sales this year, split 50-50 between military and commercial. As I said before, given the impact of first-year accounting, the acquisition will have a negligible impact on operating profit. Turning now to space and defense, Sales in the first quarter of 188 million were in line with the first quarter of last year. Sales into space applications continued very strong, up over 20% from a year ago. We had growth in our NASA work, across our hypersonic programs, and integrated space vehicles. Defense sales were 11% lower than last year. We served four sub-markets within our defense sector, with two up this quarter and two down. Sales on military vehicles and its naval applications were up in the quarter, while sales of missile steering systems as well as its security applications were down. Our security business has been particularly hard hit by the pandemic, as much of that business requires onsite installation work, and this has slowed to a standstill over the last nine months. Comparing this quarter with the run rate of the second half of fiscal 20 shows that the space business is right in line. While the fence is slightly lower, It's still within the normal quarterly variation we might expect. Margins. Space and defense margins in the quarter of 12.2% continue to be healthy, albeit down somewhat from the last few quarters. As in our other businesses, we're seeing some increased pressure on operational efficiency as a result of higher COVID cases across our facilities. Space and defense fiscal 21. Coming into the quarter, our assumption was that we'd see continued strength in both the space and defense markets as we move through fiscal 21. This helps prove for the first quarter and continues to be our operating assumption as we look out over the coming three quarters. Turning now to industrial systems. Sales in the first quarter of 209 million were 9% lower than last year. We experienced sales declines in three of our four major markets. with medical providing the only growth, up 3% from a year ago on higher pump sales. Sales into energy markets were marginally lower, driven by lower sales of components into exploration applications. Sales into industrial automation were down over 10%, with weakness across the entire portfolio of products. This is our biggest sub-market and continues to be pressured from the combined effects of the industrial slowdown in Europe and the US, compounded by the impact of COVID. Finally, sales at the simulation and test markets were down almost a third, with flight simulation particularly hard hit as a result of the drop in airline activity. Compared to the run rate of the second half of last fiscal year, industrial systems were down a further 7%, with weakness in each of our sub-markets. Simulation test was hardest hit as sales to our flight simulation customers continued their quarterly sequential decline since Q2 last year. Sales and medical applications were also lower as surge demand for COVID-related components waned. Industrial assistance margins. Margins in the quarter of 9.5% were lower than last year on the lower sales and the impact of COVID. Margins were in line with the average adjusted margins of the previous two quarters. Industrial systems fiscal 21. Our sales assumption coming into the year was flat sales in our energy, industrial automation, and Simulation and Test Markets. We also predicted that our medical market would remain strong, albeit down somewhat from the highs we saw in the recent quarters as demand for COVID-related equipment slowed. After one quarter, medical sales are in line with our thinking, up from a year ago and down from the second half. Although sales into our other three sub-markets continues to weaken in the first quarter, we were encouraged by an improving book-to-bill ratio. Therefore, for the full year, our sales assumptions remain unchanged. Summary guidance. It's been a good start to the year. We've adapted our business practices to live with COVID and our customers, our suppliers, and our internal operations continue to function. We managed our way through some efficiency impacts in the first quarter as a result of increased infections across our footprint. The good news is that vaccines are on their way. The less good news is that the pace of distribution is slower than we might have hoped. Therefore, we continue to plan for COVID restrictions across our business for the remainder of the fiscal year. Looking at our five major markets, defense, space, and medical remain strong. Industrial continues to soften in the first quarter, and our commercial business stabilized relative to the previous six months. This quarter, we allocated our capital to growth with the acquisition of Genesis in our aircraft segment. Our overall approach to capital allocation remains unchanged. Our priorities are organic investments, coincident growth, and return to shareholders, with all decisions based on long-term value creation. As we emerge from COVID over the coming year, we're optimistic that we'll see more acquisition opportunities than in the recent past. The present financial markets are providing easy access to almost free capital, which seems to be driving acquisition prices into the stratosphere. From our perspective, plentiful free money does not change the underlying economics, and risks inherent in any acquisition and we intend to remain disciplined in our approach to valuations. Therefore, we remain cautious not to overpay. As we look to the coming three quarters, we continue our hybrid working practices with most of our staff working remotely. Over the last nine months, we've learned how to live with COVID and have reconfigured our business to ensure the company remains strong and that we're in a position to invest in growth. Looking to the future, we continue to pursue our long-term strategy of technology-focused, diverse end markets, strong balance sheets, internal investments, and complementary acquisitions. Now let me pass it to Jennifer, who will provide more color on our cash flow and balance sheets.