Moog Inc.

Good day and welcome to the Moog Third Quarter FY 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ann Lurr. Please go ahead.

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 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 july 30th to 2021 our most recent form 8k filed on july 30th 2021 and in 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 via www.moog.com. John?

Thanks, Anne. Good morning. Thanks for joining us. This morning we report on the third quarter of fiscal 21 and affirm our guidance for the full year. Overall, it was a relatively quiet quarter with the business performing pretty much to plan. I'll follow my usual format today, starting with the headlines under the three headings of macroeconomic factors, market trends, and Moog's specific items. The macroeconomic factors affecting our business have not changed markedly over the last quarter, although the state of play has evolved. Vaccines have become widely available in the developed world, facilitating a partial return to pre-COVID behaviours. As a result, economic activity is picking up across most major markets. However, the emergence of the Delta variant, combined with vaccine hesitancy in large portions of the population, give reason to remain vigilant and a reminder that the dangers of COVID are far from over. In the U.S., federal spending on COVID relief, infrastructure, and green initiatives would set the budget tone for several years to come. Higher taxes and potentially more constrained defense budgets seem inevitable. Supply chains continue to tighten for a range of commodities, with electronics topping the list. Finally, inflation is reported to be transitory, although the experience at both the business and personal level would suggest it could be longer-lasting than the Federal Reserve is projecting. Turning to our major markets, all five markets continue to perform pretty much in line with expectations. Government spending on defence remains strong. Commercial air traffic has recovered nicely over the last 90 days, with domestic travel leading the way, while international travel has remained muted. Capital spending on industrial automation has accelerated, as companies scrambled to build capacity to meet burgeoning demand. The space market remains very exciting, with billionaires floating in zero gravity, and investors piling into stacks with valuations firmly anchored in outer space. Finally, medical markets have returned to a more normal situation post-COVID. On the home front, it was a solid quarter for the business. Earnings were in line with our April forecast, and cash flow was strong. Remember, the Q3 last year was the first full quarter of COVID, and we incurred $56 million of restructuring and impairment charges. In our text today, comparisons are to adjust it Q3 FY20 numbers, excluding these charges. Sales this quarter were up 8% from last year, primarily driven by stronger commercial aircraft and space results. Earnings per share were up 20% from the adjusted numbers last year, and free cash flow conversion was almost 175%. We started to see our employees return to the office, particularly in the U.S., and we're developing our plans for future flexible working. We believe the future of work will be different from the past and that companies that provide flexibility can gain both a productivity and talent advantage. The supply chain for various commodities is an increasing concern. To date, we've managed through the challenges and not yet experienced any significant disruption in our operations. It will, however, remain a watch item for the coming quarters. With three quarters in the bank, we're tweaking our sales forecasts through the end of the fiscal year and keeping our earnings per share forecast unchanged. All in all, steady as she goes. Now let me move to the details, starting with the first quarter results. Sales in the quarter of $707 million were 8% higher than last year. Sales were higher in all three segments, and up across all major markets with the exception of medical. In the medical market, our business remains strong, but sales have moderated from the surge in demand we saw this time last year. Taking a look at the P&L, gross margin was up slightly from an adjusted number last year on the higher sales and positive impact of last year's restructuring activities. R&D was up as a result of the Genesis acquisition and slightly higher investments in our industrial business. SG&A was down as a percentage of sales. Interest expense was lower on reduced debt levels and lower rates. The effective tax rate this quarter was 25.7%, resulting in net income of $36 million, an earnings per share of $1.12 up 19% and 20% respectively from the adjusted numbers last year. This is 21 outlook. With three quarters behind us, we're on track to meet our full year EPS guidance of $5 per share plus or minus 15 cents. Relative to our outlook at the end of Q2, we're forecasting slightly lower sales in our military aircraft market and slightly higher sales in our industrial markets. Taken all together, we're expecting full-year sales of $2.82 billion, down marginally from our forecast of 90 days ago, and slightly higher margins to achieve our $5 per share projection. Now to the segments. 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 aircraft. Sales in the third quarter of $272 million were 9% higher than last year. In each of the last four quarters, we've reported strong military sales compensating for lower commercial sales. This quarter, we saw a reversal in that pattern, with higher commercial sales compensating for marginally lower military sales. Comparing with the same quarter last year, military OEM sales continued their strong performance, with sales up 19% from a year ago. Higher funded development, combined with the acquired sales of Genesis, made up half the increase, with the remaining coming across a wide range of programs both domestic and foreign. OEM sales on the F-35 were more or less in line with last year. Similar to last quarter, the military aftermarket was down markedly from a very strong performance a year ago. The reductions were across a broad range of programs, including lower spares ordering on the F-35. We've seen a general slowdown in our military aftermarket over the last four quarters, which we believe is the result of our DOD customers working off a build-up of inventory in the early phases of COVID. On the commercial side, OEM sales were up sharply from the low points of the pandemic last year. The majority of the increase is the result of acquired sales from our Genesis acquisition. Sales in both our wide-body and narrow-body programs are up marginally from last year. Remember that sales on these programs are accounted for under ASC 606 and are driven by a combination of orders from our customers, our internal build rate, and the level of our inventory receipts. Each of these factors has moved significantly over the last year, but on a positive note, despite Boeing 787 delivery challenges, our internal build rate for our widebodies has been steady for several quarters now and reflects the stable demand profile from our customers. The commercial aftermarket was up over 50% from a year ago. Last year's third quarter was the low point in the pandemic, and we've seen a nice recovery over the last four quarters across our complete aftermarket portfolio. On a sequential basis, Q3 sales were down about 10% from Q2, and weaker military and commercial OEM sales. Military aftermarket sales were in line, while the commercial aftermarket was slightly higher. Margins in the quarter were 7.5%, up over 300 basis points from the adjusted margin last year. Margins were also up slightly on a sequential basis as our operations continue to improve despite the headwind of lower sales. Aircraft fiscal 21. We're updating our forecast from 90 days ago to reflect our experience through three quarters. We're reducing our military forecast by $40 million, divided equally between the F-35 OEM and the military aftermarket. On the commercial side, we're keeping the total sales forecast unchanged, and refining the mix, increasing the aftermarket by 10 million, while reducing the OEM by the same amount. Taken all together, we're forecasting full year sales of 1.14 billion, down 5% from fiscal 20. Despite the lower sales forecast, we're increasing our full year operating profit marginally, yielding full year margins of 8.6%. Turning now to space and defense, sales in the quarter of $205 million were 11% higher than last year. This quarter, we enjoyed nice growth in both the space and defense markets. The space business continued its strong performance over the last few years. The sales increase in Q3 was fueled by the initial activity on the NASA VIPER program, higher avionics sales, and continued growth in our integrated space vehicles prototype. Defense sales were up from a relatively weak quarter a year ago. Two, three sales of 119 million were 8% higher than last year. We saw sales increases on vehicle and naval applications, as well as in our components business across a broad range of platforms. Sales on missiles and into security applications were lower. Sales in the quarter were more or less in line with the average quarterly sales of the last 10 quarters. Based on defense margins, Margins in the quarter were 10.4%. This margin performance is down from the results we've enjoyed over the last few years. In the quarter, we experienced cost growth on some of our space development programs, which depressed margins by about 200 basis points. More generally, we're seeing a shift to more funded development work in this business. A positive trend, which bodes well for the long term, but tends to depress margins in the shorter term. Based on the Fed's fiscal 21, We're leaving our full-year sales projection unchanged at $795 million. We're also leaving the mix between space and defense unchanged. Given the lower margin in Q3 and the continued mixed shifts to fund the development work, we're moderating our full-year margins outlook to 11.8%. Turning now to industrial systems. Sales in the quarter of $230 million were 3% higher than last year. All of the gain was from foreign exchange movements, and real sales were actually down about 1%. This quarter, we saw significant shifts in two markets. Sales of industrial automation were up nicely, while sales of the medical applications were down. Energy and simulation test sales were more or less in line with last year. Starting with industrial automation, the post-pandemic GDP recovery across much of the globe is fueling investments in capital equipment. This recovery has been much faster than typical historical cycles and is creating shortages in many product categories. As a result, companies across a range of industries are scrambling to expand production capacity and the resulting increase in capital investments is fueling stronger orders for our automation components. This increase in industrial automation is being mirrored by a decrease in our medical business. Last year, we saw a huge increase in orders for our medical pumps and components, as healthcare providers rushed to acquire equipment to meet the demands of COVID. This COVID-driven demand surge has now passed and our sales have settled back down to a more normal moment. In our energy market, our sales level has been pretty stable for a couple of years as oil prices have averaged around $60 per barrel. Finally, our simulation and test business saw stronger test sales compensating for weaker flight simulation sales. We've not yet seen a rebound in our flight simulation business, despite the recovery in air traffic over the last few quarters. For all of fiscal 21, we estimate that our flight simulation business would be down 40% from our fiscal 19 total. Margins in the quarter were 10% up 90 basis points from adjusted margins last year. Industrial systems fiscal 21. For the full year, we're increasing our sales projection by $15 million from last quarter to use full year sales of $880 million. The additional sales are all in our industrial automation markets, reflecting the continued strength we're seeing in this business. We're keeping our projection for full year margins unchanged at 10%. Summary guidance. As we enter the last quarter of our fiscal year, we're on track to meet our EPS guidance of $5 per share. We're looking forward to bringing more of our employees back to the workplace and rebuilding relationships with our customers and suppliers with in-person meetings. We're adopting a flexible approach to working, which will allow for a smooth transition from COVID conditions to a future which better meets both the needs of the business and the interests of our employees. Economic activity across the globe is strengthening, giving us confidence for the future. However, the spread of the Delta variant remains a real concern. and could force us to take a step back on our reopening plans at any time. In addition, both inflation and supply chain constraints will be watch items for the coming quarters. For now, we believe these risks are muted and that our business will continue to perform well. Looking at our fiscal 21 forecast by our five end markets clearly shows the impact of the pandemic over the last two years. Through the pandemic, we've described our markets in the following terms. Defense, Space and medical have been strong, industrial has been pressured, and commercial aircraft has been the hardest hit. The numbers bear this out. Comparing fiscal 21 to our pre-COVID fiscal 19, we see total sales are down only 3%. However, our mix has moved significantly. Over this two-year period, defence went from 37% of sales to 44%, and space went from 8% to 12%. Medical is up 1 percentage point to 9%, while industrial is down from 24% to 22%, and commercial aircraft is down 10 percentage points to only 13%. We've managed successfully through this transition and look to further recovery in both industrial and commercial aircraft as we move into fiscal 22. Turning now to capital allocation, we continue to invest in organic growth opportunities and pursue acquisitions which meet our interests. The M&A market has become much more active over the last few quarters, and we've looked at many more deals than a year ago. We're not sure the risk profile of acquisition targets has changed materially from a few years back, but free money and the hunt for yields have changed the prices dramatically. We remain cautious in our assessment of value, and as a result, find ourselves walking away from many deals. We'll continue to look, but we're also comfortable that we have alternative options for allocating capital to create long-term shareholder value. The full year fiscal 21, we're forecasting sales of 2.82 billion, down $25 million from 90 days ago on lower military after aircraft activity. We're forecasting earnings per share of $5 at the midpoint of our range unchanged from 90 days ago. This results in earnings per share in the fourth quarter of $1.20 plus or minus 15 cents. Our range of plus or minus 15 cents is slightly higher than our pre-COVID norm and reflects the continued uncertainty around the Delta variant, supply chain disruption, and the threat of inflation. Overall, we're feeling good about the year and looking forward to providing guidance on fiscal 22 in our next earnings call. Now, let me pass it to Jennifer to provide more color on our cash flow and balances.