Moog Inc.

Good day and welcome to the Moog fourth quarter and year-end FY 2021 earnings conference call. Today's conference is being recorded. At this time, I'd 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 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 November 5th, 2021, our most recent form 8K filed on November 5th, 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 documents, A copy of today's financial presentation is available on our Investor Relations webcast page at www.mob.com. John?

Thanks, Anne. Good morning. Thanks for joining us. This morning we'll report on the fourth quarter of Fiscal 21 and reflect on our performance for the full year. We'll also provide our initial guidance for Fiscal 22. As usual, I've organized my headlines into three broad categories, first macroeconomics, Second, microeconomic, focused on our end markets. And third, some Mooc-specific topics. Starting with the macro outlook. The macro trends which affect our business have continued to evolve this quarter. Vaccines versus Delta continues to dominate the COVID news, with reopenings around the world shifting the balance of power between these competing drivers. More folks are returning to the office, while embracing a new world of hybrid work. Businesses are seeing surging orders but constrained by labor availability and the effects of the newly coined grace resignation. The description of inflation has evolved beyond transitory to longer lasting with an uncertain timeline for aversion to the norm. And finally, challenges in the supply chain have moved well beyond electronic components and new car deliveries to impact almost every element of global trade. Turning to our major end markets, Defense and space remain strong on continued government spending. The Chinese demonstrated the hypersonic missile capability in August, which has been described as a Sputnik moment by some in the military. Given this great power rivalry, it would seem that defense and space spending should remain elevated for the foreseeable future. Our industrial markets continue to strengthen, although it's hard to distinguish between panic ordering and real underlying demands. Commercial air traffic is improving, and global travel is starting to open up. Balancing this optimism, Boeing continues to face hurdles as they await 737 approval from the Chinese authorities and work with the FAA to get 787 deliveries back on track. Finally, our medical markets are humming along nicely. Mode Q4. Coming into the quarter, we forecast an EPS of $1.20, just a minus 15 cents. Our headline results of $1.07 include $0.18 of charges, compensated by $0.08 of tax benefit. The $0.08 of charges were results of our continuing portfolio refinance. They included $0.09 associated with product line exits, with the remainder mostly restructuring charges at various sites around the globe. Our adjusted results of $1.17 was slightly below our midpoint, but well within our range. Last quarter we described supply chain constraints and labor challenges as watch items for the future. This quarter we started to feel the impact more directly on our business. Cash in the quarter brought our total for the year to over 100% conversion. Looking back on the full year, the following headlines stand out. First, the year turned out much better than we had anticipated 12 months ago. Last year at this time, we projected that COVID would be with us throughout fiscal 21, and therefore we were anticipating a year similar to the second half of fiscal 20. That projection would have resulted in fiscal 21 sales of $2.73 billion and earnings per share of about $3.50. We finished the year with sales of $2.85 billion, $120 million higher, and earnings per share of $4.87. COVID was with us throughout the year, but despite this, Each of our core markets did a little better than forecast, and we maintained a tight lead on expenses. Second, strong cash flow this year funded our balanced capital allocation spend. We spent approximately $130 million on capital expenditures, $80 million on acquisitions, $32 million on dividends, and $30 million on share repurchases. We finished the year with our balance sheet in great shape, providing us with all the flexibility we need to continue to invest next year. Third, we continue to refine our product portfolio throughout the year, exiting businesses and consolidating operations. This activity cuts across all three of our operating segments and included exiting four product lines. We also closed five sites and consolidated production into larger operations. We anticipate that this portfolio journey will accelerate over the coming year. Fourth, a new administration in Washington has shifted the debate from tax reductions to spending increases. Defence spending continues to be well supported on both sides of the aisle, and new opportunities in green initiatives are starting to emerge. Fifth, as the year progressed, it became clear that COVID was not going away with the arrival of a vaccine, and that the supply chain and labour shortages were new challenges we would need to contend with. The discussion around working from home versus in the office shifted to hybrid working arrangements, and we introduced a new flexible working policy to our workforce. This is perhaps the most dramatic shift in working conditions for a generation. Finally, as I do every time of this year, I'd like to recognize the contribution of all our employees around the world for their continued dedication to serving our customers. Now let me provide some more details on the quarter. Sales in the quarter of $724 million were 2% higher than last year. Excluding the impact of foreign exchange and acquired sales, Underlying organic sales were flat. Sales were up in aircraft controls, about flat in industrial systems, and down marginally in space and defense. Taking a look at the P&L, our gross margin was up significantly on improved mix, particularly in aircraft. Our lead was also up on higher investment in new technologies and the additional engineers at our Genesis acquisition. SG&A expenses were up as we returned to a more normal operating environment after the crisis management last year. Interest expense was down marginally on lower rates. Our effective tax rate of 19% this quarter was unusually low on some special items. The overall result was net income of $35 million, up from an adjusted net income last year of $26 million, an earnings per share of $1.07, up 32% from the adjusted EPS last year. Looking at the full year fiscal 21, in comparing full year fiscal 21 with fiscal 20, We need to remember that fiscal 20 included only two quarters of COVID conditions, whereas fiscal 21 was a full year of COVID conditions. With that backdrop, fiscal 21 turned out much better than we had anticipated 12 months ago. Full year sales of 2.85 billion were just 1% lower than last year. We had no single digit sales changes in each of our three operating groups, with sales up in space and defense, but down slightly in aircraft and industrial systems. Gross margin for the year was higher on strength in the aircraft business. R&D and SG&A were both higher, reflecting the same story as we saw in the quarter. Increased investments and a move away from crisis management. Interest expense was lower on lower rates. Last year, we incurred significant restructuring charges as we resized the business. We also incurred a pension settlement charge as we annuitized half of our defined benefits plan. Adjusting for these charges last year, This year's net income was up slightly, and diluted earnings per share were 1% higher. Fiscal 22 outlook. For next year, we're projecting sales of $3 billion, an increase of 6% over fiscal 21. We anticipate growth in each of our operating groups, with the strongest gains in commercial aircraft and in military ground vehicles. Full year margins of 10.3% will be up about 80 basis points, and earnings per share of $5.50 plus or minus 20 cents will be 13% higher than fiscal 21. We forecast that cash flow next year will moderate from the very strong performance of the last couple of years as we invest more in growth. Now to the segments. I'd remind our listeners that we've provided a three-page supplemental data package posted on our website, 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 fourth quarter of 298 million were 8% higher than last year. This quarter, the commercial business drove the increase. Commercial OEM sales were up on the acquired sales of Genesis. Lower OEM sales to Boeing on the A7 were compensated by higher A350 sales to Airbus. Sales into the commercial aftermarket customers were up 25%, driven primarily by higher 787 activities. Sales on business jets doubled to $7 million, but from a low point 12 months ago. On the military OEM side, higher funded development and the acquired sales from Genesis more than compensated for lower F-35 sales, yielding a 12% increase in total. The military aftermarket was down 16% from a very strong Q4 last year. Aftermarket sales were lower across most of our major platforms, including the F-35, F-18 and the B-22. On a more positive note, the military aftermarket showed a modest recovery from the low points of Q2 and Q3 this year. Aircraft fiscal 21. Full year sales of 1.16 billion were down 4% from last year. Sales of the military applications were up 8% for the year, while sales to commercial customers were down over 20%. On the military side of the house, strong OEM sales compensated for a weaker aftermarket. OEM sales were up across a range of programs, including the F-35 and some foreign military platforms. Higher funded developments and the acquired sales of Genesis also contributed to the growth. Sales into the military aftermarket went down across a broad range of programs, with the biggest reductions in the F-35 and B-22. Turning to the commercial side, OEM sales were 26% lower than last year, while aftermarket sales were down a more modest 7%. Comparing our commercial sales to fiscal 19 before COVID hit, we see the dramatic impact of the pandemic on our business. Sales to OEM customers were down 50% from 2019, from 540 million to just over 270 million in 21. Aftermarket sales fared better, down from 141 million in 19 to 106 million in 2021, a drop of 25%. Aircraft margins. Margins in the quarter were 8.8%, up from an adjusted margin of 2.7% last year. The higher sales and improving commercial aftermarket more than compensated for weaker military aftermarket sales. Full-year margins of 8.3% were up from adjusted margins of 7.6% last year. This year's margins included almost 100 basis points of additional R&D spending as we invested in the next generation of military platforms. Aircraft fiscal 22. We're projecting fiscal 22 sales of 1.25 billion, up 7% from this year. The strength is on the commercial platforms, with OEM sales up on the 737, business jets, the E2, and a full year of Genesis. We're also anticipating that the commercial aftermarket will continue to strengthen across our portfolio of platforms. In contrast, military OEM sales will be more or less in line with this year, with higher helicopter sales compensating for lower F-35 sales. We anticipate military aftermarket sales will be up on higher F-35 and B-22 activity. We're encouraged by the uptick in the fourth quarter in the military aftermarket and are modeling that this run rate will continue through fiscal 22. With stronger sales and an improving mix, we're forecasting full-year margins in fiscal 22 of 10.1%, up 180 basis points from fiscal 21. Turning down to space and defense, sales in the fourth quarter of $200 million were 3% lower than last year. This is the first time in five years that we've had a down quarter year over year. This quarter, sales were marginally lower in both our space and our defense markets. On the space side, lower revenue on launch vehicles, hypersonics, and satellite engines was partially compensated by increased activity on our integrated space vehicles product line. Defense sales were down on lower tactical missile production and continued challenges in our security business. On the plus side, sales on missile defense, turret systems, and its naval applications were slightly higher. Base and defense fiscal 21. Full year sales of $799 million were 4% higher than last year. Over the last six years, sales in this business have more than doubled. The growth in fiscal 21 was all in the space market. The biggest driver was our new integrated space vehicles business, which more than doubled from a year ago to $60 million. We also saw double-digit growth in our avionics product line to over $50 million. Defense sales were down 2% in the year, driven by lower tactical missile warps and challenges in the security business. Space and defense margins. Margins in the quarter of 8.6% were disappointing. Our space and defense sector has had a tough second half of this fiscal year, after several years of strong margin performance. Similar to the third quarter, we saw some cost growth in several of our fixed price development contracts across both end markets. In addition, we incurred $2.5 million of impairment charges as we exited certain products and contracts arrangements. Taking together these pressures depressed margins by 300 basis points in the quarter. As is always the case, we believe we've captured the impact of all future cost increases within the quarter. Full year fiscal 21 margins of 11.1% were lower than prior years as a result of the second half impacts described above. Based on defense fiscal 22, our forecast for fiscal 22 projects another year of double digit sales growth. Defense will lead the way with sales up 14% from fiscal 21. The growth is primarily in our vehicles product line across both US and foreign programs. We also anticipate stronger component sales for our slipperless. Space sales will be up 5% as a result of the continued growth in our integrated space vehicles product line. We're predicting operating margins of 11.5% in fiscal 22. This is up from fiscal 21, but not back to the level we enjoyed a few years ago. There are two reasons for this. First, we're cautious after the experience of the last six months. Second, we're seeing a mixed shift in the business to newer, more integrated product offerings. On the defense side, it's our turret business, and on the space side, it's our satellite bus offerings. Combined, these new product lines are delivering most of the sales growth in fiscal 22, but as with many new business endeavors, they are at slightly lower margins than our legacy business. Turning out industrial systems, sales in the fourth quarter of 226 million were more or less in line with last year after adjusting for foreign exchange movements. Sales were up in industrial automation, energy, and simulation tests, but sharply lower in medical. Industrial automation sales were up 11% on strength across the portfolio. We see the nice rebound in this business over the last six months as the global economies have started to recover from COVID. Energy sales were up on increased offshore production activity. Simulation and test sales were up slightly on some project work in the material test area. Core flight simulation sales were down slightly from a year ago. Our medical pump business was marginally lower, but the aftereffects of the COVID surge slowly worked their way out of the supply chain. In addition, sales of components into sleep therapy and medical imaging were lower. Industrial systems fiscal 21. Full-year sales of $892 million were 2% lower than last year. Adjusting to the impact of foreign currency gains, underlying sales were down almost 5% on the year. Three of our four major markets were weaker, with industrial automation being the exception with modest growth. Industrial automation makes up half our segment sales. Sales into this industrial automation market dropped significantly with the onset of COVID in our third quarter last year. They remained depressed for about nine months, and since the second quarter this year, we've seen a recovery as investment in capital goods has ramped up to niche surging demand. This quarter, our core hydraulics and electric components business was up across most of the portfolio at end markets. Energy sales for the year were down as oil prices remained subdued. Simulation and test sales were depressed, all attributable to flight simulation, where our annual sales for full flight simulators were down almost 30% from the prior year. Finally, medical sales were lower, as anticipated, as the COVID surge we enjoyed in fiscal 20 waned. On a more positive note, fiscal 21 sales into medical applications were 12% higher than our pre-COVID fiscal 19 sales. Industrial margins. Margins in the quarter of 8.5% included almost 200 basis points of restructuring and impairment charges. In the quarter, we continued our portfolio refinements, selling a small product line and closing a site in Asia. Full year margins of 9.6% were down from fiscal 20 on the lower sales volume and inefficiencies associated with 12 months managing through COVID. Industrial systems fiscal 22. Our first look at fiscal 22 suggests modest sales growth over last year. We anticipate that our industrial automation and energy markets will be flat with this year, while both simulation tests and medicals should be higher. Industrial automation sales will remain flat as modest underlying growth is negated by the portfolio refinements we're going through. Our growth in this market is primarily limited by our ability to ramp production rather than a shortfall in demand. Both supply chain and labor constraints are impacting our ability to grow sales. Our energy market has been pretty stable over the last few years as the price of oil has remained muted. The recent surge in oil prices may have a longer-term impact on our business if prices remain elevated. However, given the long cycle in this industry, we're not anticipating any material impact in our fiscal 22. Simulation and test sales will be higher on additional auto test work and a modest recovery in flight simulator violence. We continue to anticipate a very slow recovery in the flight simulator market over several years. Finally, sales into medical applications will be higher on additional component sales with the biggest increase in motors for sleep therapy products. We're forecasting full year margins next year of 9.5% in line with fiscal 21. Investments in new electric vehicle applications and our continued journey to refine our portfolio are suppressing margin expansion this coming year. These activities should start to pay dividends as we get into fiscal 23 and beyond. Summary guidance. In fiscal 21, we learned to live with the pandemic through a full 12 months and delivered much better results than we had imagined going into the year. Looking forward to fiscal 22, we're optimistic that the pandemic will continue to recede. However, we anticipate we will be living with the effects of the pandemic on both the supply chain and labour market for all of this coming 12 months. Based on what we know today, we're optimistic about our business and are forecasting both top and bottom line growth. Looking at our five major markets in fiscal 22, we believe defence and space will remain strong industrial markets will continue to improve, commercial aircraft will show nice recovery, and medical will return to modest growth. In normal circumstances, we believe our projection for the coming year accurately balances the risks and opportunities we're seeing. However, we're living through extraordinary circumstances, and it is very difficult to quantify the potential impact of supply chain disruptions and labor challenges. Our forecast assumes some level of continued disruption in line with the trends we've seen in the last two quarters. Additional risks include rising inflation and the impact of the vaccine mandate on our ability to deliver products to our customers. On the positive side, should COVID continue to recede and the supply chain constraints start to unwind, we could see upside in our industrial and commercial aircraft businesses. After 18 months of the pandemic, our strategy remains unchanged from pre-pandemic times. We're a technology company focused on solving our customers' most difficult technical challenges. Customer intimacy is at the core of our strategy, and we believe long-term relationships with our customers drive long-term value. We focus on our core technologies of motion and fluid control while serving a wide range of end markets which benefit from our expertise. Capital allocation is focused first and foremost on growth, both organic and via acquisitions. We believe this is the best way to generate long-term shareholder value. We will also return capital to shareholders through our dividend policy and use our share buyback program opportunistically. Finally, our culture of trust and collaboration has stood the test of time and carried us through the extraordinary challenges of the last 18 months. We're optimistic about our future while remaining realistic about the challenges. In fiscal 22, we anticipate sales of just over 3 billion and earnings per share of 550 plus or minus 20 cents. These results represent an increase of 6% on the top line and 13% on the bottom line. We believe the year will start slowly and accelerate sequentially. For Q1, we anticipate earnings per share of $1.10 plus or minus 15 cents. Now, let me pass it to Jennifer to provide more color on our cash flow and balance sheet.