Good morning, ladies and gentlemen, and welcome to the Moog Second Quarter Fiscal Year 2025 Earnings Conference Call. This call is being recorded on Friday, April 25, 2025. I would now like to turn the conference over to Aaron Astrachan. Please go ahead.

Good morning, and thank you for joining Moog's Second Quarter 2025 Earnings Release Conference Call. I am Aaron Astrachan, Director of Investor Relations. With me today is Pat Roche, our Chief Executive Officer; and Jennifer Walter, our Chief Financial Officer. Earlier this morning, we released our results and our supplemental slides, both of which are available on our website. Our earnings press release, our supplemental slides and remarks made during our call today contain adjusted non-GAAP results. Reconciliations for these adjusted results to GAAP results are contained within the provided materials. Lastly, our comments today may include statements related to expected future results and other forward-looking statements, which are not guarantees. Actual results may differ materially from those described in our forward-looking statements and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings. Now I'm happy to turn the call over to Pat.

Good morning, and welcome to our earnings call. We've just delivered another quarter of strong financial results. The results are reflective of our unrelenting focus on improved business performance. We achieved record sales and drove improved operating margin and earnings per share, both net of prior year's Employee Retention Credit. In addition, we delivered free cash flow in line with our plan. We feel positive about the outlook for our business. Year-to-date, our revenue is up 3% on prior year, and we expect an increase in revenue in the second half with a 12-month backlog, up sequentially in our Defense businesses, steady in Industrial, and slightly down in Commercial. Year-to-date, our adjusted operating margin, excluding Employee Retention Credit, is up 40 basis points on prior year, and we expect stronger performance in the second half from our Defense businesses due to secured pricing. Finally, we expect to see significant free cash flow generation in the back half, as previously indicated, arising from our actions to optimize net working capital. Given the prominence of the trade policy in the current environment, I want to address tariffs before talking further about our business. The new administration is driving change at a remarkable pace and on multiple fronts. Of the many changes enacted by executive order, the most significant relate to trade policy and tariffs. Since these changes have created a climate of uncertainty, I want to spend some more time discussing the potential impacts and our mitigations. Over many decades, our organization has optimized its manufacturing footprint and strategic supply chain to best meet the needs of our customers in an environment of global trade that was relatively free of tariffs. In addition to investing in our U.S. manufacturing operations, we have also built up world-class manufacturing facilities in the Philippines, India, Ireland, Costa Rica, Germany, and the U.K. In addition, we developed overseas supply chain partnerships that have served us well for decades. This strategy allowed us to access exceptional talent and created economic benefit for Moog and its customers. The changes in U.S. tariffs within the last 100 days, but especially since April 2, alter the context in which we operate. We recognize that this situation is fluid and that it will be some time before tariff uncertainty is reduced. Based on the tariffs in effect today and our operations and supply chain footprint, we would be most impacted by tariffs that apply to the import of steel and aluminum to the import of goods from around the world, especially from our facilities and suppliers in Costa Rica, the Philippines, Mexico, the European Union, Canada, and the U.K. In our assessment, we've assumed a 25% tariff on steel and aluminum, a 10% country tariff during the 90-day pause corresponding to our third quarter and the higher reciprocal rate for the fourth quarter and the 145% tariff on China. We've not attempted to estimate second-order effects on pricing or on the economy or disruption to supply chain and material availability. In response, we've taken immediate and specific actions to mitigate the impact of these tariffs on Moog. These steps include maximum utilization of the U.S.-Mexico-Canada Agreement, the effective administration of import and re-export of goods that, by necessity, must return to the U.S. for a payer and price adjustments where appropriate to reflect our new cost base. We will continue to assess our manufacturing footprint and strategic supply chain to ensure that we can deliver for our customers and perform for our shareholders. We will not act in haste given the risk of disrupting these highly efficient supply chains that are critical to the global aerospace industry and to our many customers. These strategic choices will be given due consideration over a longer period during which we expect more stability around tariffs. We see these tariffs as a potential risk in our business that is otherwise continuing to deliver extremely well. In addition, we believe that our end markets are supportive of further strengthening. So let me describe each of our end markets, starting with Defense. We continue to see strength in our Defense businesses, both short term and long term. The Department of Defense budget for 2025 increased with the continuing resolution approved by Congress. And there have been indications that the President's 2026 budget request will be in excess of $1 trillion. Our portfolio of products and capabilities is well-aligned with the administration's key defense priorities such as sixth-generation fighters and collaborative combat aircraft, nuclear deterrents, and elements that could be integral to Golden Dome such as hypersonics, space vehicles, missiles, and counter-drone defense. In addition, increased international defense spending accessed through our extensive European operations provides further opportunities for growth. On Commercial Aerospace, our customers have strong order books but struggle with consistent production throughput. We've worked with our customers to maintain a stable production plan that supports our actual needs. Both wide-body OEMs are still intent on ramping in the near future. On the aftermarket side, we continue to see the benefits of increased airline activity. The Industrial market outlook has been stable over the last couple of quarters, and our bookings in the second quarter continue to support that view. In summary, end market conditions continue to favor a significant portion of our business. Now let me turn to the initiatives that are driving our strong underlying operational performance as a business. Firstly, on customer focus. The focus of the 40th Space Symposium was space as a warfighting domain. This highlights the significant emerging opportunities for Moog for both components and complex systems of systems. We showcased our METEOR satellite with flight-proven, radiation-hardened electronics and hydrogen propulsion for high-thrust avoidance maneuvers. We also have delivered units to the national security space missions. We also highlighted significantly enhanced computational capabilities in our space avionics, the addition of graphical processor units enable sensor data to be processed on orbit, an example of edge computing. While continuing the space theme, we are delighted to see that United Launch Alliance's Vulcan rocket has successfully completed two certification launches and has been recently certified under the National Security Space Launch program. Sustainability and digitization work focused on the 34th Bauma Construction Exhibition, which is one of the largest trade shows in the world. We showcased our TerraTech electric traction and actuation solutions and our ZQuip modular energy system for construction equipment. We were pleased to be recognized by Compact Equipment magazine as having one of the show's top 10 equipment breakthroughs. We launched our next-generation CURLIN 8000 infusion pump at the 34th National Home Infusion Association Conference. This high-performance intravenous pump will be the mainstay of our market-leading IV business for decades to come. This demonstrates our commitment to the IV market given the decade-long journey through development and certification. These examples across various end markets highlight our continued investment in innovation to meet the evolving needs of our customers. Our innovation successes drive our steady organic growth. In addition, to further strengthen our relationship with our strategic customers and expand our business with them, we've continued to roll out our Voice of the Customer activities. This work is providing valuable customer-specific insights and our response to the feedback has indeed increased business with those customers, reinforcing the value of this work. Finally, turning to financial strength. We continue to embed 80/20 as part of how we work. Our priority is driving deeper integration at the sites that have been through the first round of simplification. We're applying 80/20 to address specific operational and business challenges at site level. For example, reducing inventory through better flow, simplifying the supply chain using 80/20 analysis, enhancing profitability based on insights from segmented P&L analysis, clarifying investment strategy at lower levels in the organization and differentiating support for strategic customers to expand the business with them. In all cases, lessons learned and best practices are shared across the organization such that we can accelerate further improvement. Now let me turn to the guidance for fiscal '25. We are driving business development and operational improvement in line with our long-term goals. We've performed well in the first half of the year and have confidence in the business outlook for the second half. Therefore, financial performance of the business is in line with our prior guidance. Tariffs present a potential risk that could impact our full-year results. The high level of uncertainty around the tariff landscape leads to a range of possible outcomes. We will provide an estimate of that impact. And with that, let me hand over to Jennifer for a detailed breakdown on the quarter, an update on our guidance and an estimate of the impact of those tariffs net of our mitigations.

Thanks, Pat. Our financial performance in the second quarter was strong with a record level of sales, solid adjusted operating margin, and adjusted earnings per share and free cash flow as we had projected. We continue to simplify our business. As a result, we took $7 million of charges largely associated with our simplification activities in the second quarter. I'll now talk through our second quarter adjusted results, which exclude these charges. Sales in the second quarter of $935 million were just above last year's second quarter. Military Aircraft and Commercial Aircraft sales were up nicely, and Space and Defense sales were up marginally exceeding their prior record while Industrial sales were down due to our simplification efforts. In Military Aircraft, sales of $214 million were up 6% over the second quarter of last year. Activity on the FLRAA program began to ramp midway through FY '23 and increased steadily through FY '24 driving the sales increase this quarter. Commercial Aircraft sales of $216 million increased 4% over the same quarter a year ago. Aftermarket sales were particularly strong driven in part by strong fleet utilization on the A350 program. The aftermarket sales increase was partially offset by lower sales on certain business jet and narrow-body programs for which our customers have experienced disruption and delays in production. Space and Defense sales were $270 million, up 1% over the second quarter last year. Our sales this quarter were at a record level, reflecting broad-based defense demand. Industrial sales were $234 million in the second quarter, down 7% from the same quarter a year ago. Half of the decrease relates to the divestitures we completed at the beginning of this fiscal year. Other purposeful product exits also contributed to the sales decrease. We'll now shift to operating margins. Adjusted operating margin was 12.5% in the second quarter, which is down from 13.6% in the prior year. It should be noted, however, that the second quarter is up 40 basis points, excluding the benefit of the Employee Retention Credit. This margin expansion is due to strength in Industrial. Industrial operating margin was 13.4% in the second quarter, up 90 basis points. This increase is attributable to benefits from simplification initiatives, including the divestitures completed at the beginning of this fiscal year. These benefits were offset partially by last year's Employee Retention Credit benefit. Military Aircraft operating margin was 12.0% in the second quarter, 140 basis points lower than in the second quarter last year. Last year's second quarter included two one-time benefits, the Employee Retention Credit and the sale of a mature product line that we exited as part of our simplification efforts. The lack of these items this quarter was partially offset by stronger business performance in this year's second quarter. Commercial Aircraft operating margin was 11.8%, down 20 basis points from the second quarter last year. Our operating margin was pressured by customer production delays on certain business jet and narrow-body programs. Aftermarket strength offset these pressures. In Space and Defense, operating margin decreased 330 basis points to 12.6%. This was driven by the benefit from the Employee Retention Credit in last year's second quarter. Putting it all together, adjusted earnings per share came in at $1.92, down 12% compared to last year's second quarter or up 3%, excluding last year's Employee Retention Credit benefit. The increase is attributable to higher operating margin. Let's shift over to cash flow. In the second quarter, we generated $2 million of free cash flow. This quarter turned out as we had planned. Earnings were strong. Cash used by net working capital requirements decreased significantly, and capital expenditures ran low compared to our planned run rate for the year. We secured customer advances on multiple defense programs as planned, halted the growth in physical inventories, and faced anticipated pressure on receivables due to the timing of collections. Capital expenditures of $38 million were generally in line with recent spend levels. We're continuing to invest in facilities and equipment to support longer-term growth opportunities. With respect to capital allocation, we returned capital to shareholders in the form of share repurchases and dividend payments. We repurchased roughly 290,000 shares of our stock in the second quarter, spending about $60 million, bringing our total year-to-date spend to $100 million. In addition, we spent $9 million on our dividend policy, which remains unchanged. Our leverage ratio was 2.6x as of the end of the second quarter, nicely within our target range of 2 to 3x. We'll now shift over to our updated guidance for this year. Our underlying business is strong. We're reiterating guidance on sales, adjusted operating margin, and adjusted earnings per share from 90 days ago for our underlying business with just minor adjustments. Sales are projected to be $3.7 billion, the same as previously guided with a shift within Commercial Aircraft. OE sales on A350 are projected to slow, reflecting Airbus' current ordering patterns, while aftermarket sales continue to be robust. We're projecting an operating margin of 13.0% with some puts and takes that net out. We're reflecting a reduction in Military Aircraft due to the mix in that business and an increase in Commercial Aircraft on stronger aftermarket sales, both realized and expected. Earnings per share is projected to be $8.20, plus or minus $0.20. We're now projecting free cash flow to be near the low end of the range we shared 90 days ago due to near-term pressure on physical inventories related to a change in Airbus' ordering patterns on the A350. We expect significant cash flow generation in the back half of this year with a considerable amount of cash generation in the third quarter and further improvement in the fourth quarter. The timing of collection on receivables will be a significant driver of our cash flow generation. The other key driver is physical inventories, which will reduce as a result of our planning and sourcing initiatives. We acknowledge the potential for pressure on our results from tariffs. We expect that Commercial Aircraft and Industrial will be impacted the most with a lesser impact in Space and Defense and negligible impact in Military Aircraft. In Commercial Aircraft, we have an extensive global supply chain. Industrial is exposed to tariffs within our medical business that sources from our facility in Costa Rica. Within Space and Defense, our supply base includes countries that are subject to tariffs. Military Aircraft supply chain in the U.S. is predominantly U.S.-based and therefore not meaningfully impacted. We are taking appropriate steps to significantly mitigate the impact on our business. After considering the actions we're taking to offset these risks and assuming current conditions persist, we're estimating the potential for $10 million to $20 million of net pressure on our operating profit guidance for FY '25. Our estimate does not account for retaliatory tariffs and potential further escalations nor does it include effects of negotiations to remove tariffs. It does not factor in the impact of second-order effects, non-tariff-related trade constraints, recessionary pressures, or other disruptive shocks to the supply chain or the economy. We expect third quarter earnings per share to be $2, plus or minus $0.10. This projection may be impacted by tariffs. Fiscal year '25 is shaping up to be another strong year with growth in sales, continued operating margin expansion, and enhanced free cash flow generation. And now I'll turn it back over to Pat.

Thank you. Our second quarter delivered strong financial performance and halfway through the year, we're in good shape. We're guiding that the business will continue to perform well based on our view of the markets and our success in driving business improvement. We have actions in place to limit the potential impact of tariffs on our business. And with that, let me open up the floor to questions.

Your first question is from the line of Michael Ciarmoli from Truist Securities.

Jennifer, just housekeeping first. Do you have the Commercial OE revenue growth and Commercial aftermarket growth in the quarter?

Yes. So our Commercial OE for the quarter was about $135 million, and our aftermarket was $81 million. That compares to OE of $140 million last year and $67 million of aftermarket.

Okay. Perfect. Could you provide more details about the A350? What were your shipping numbers and what are you expecting? Will there be a destock period? Does this situation resolve towards the end of the year? What kind of signals are you receiving from Airbus?

Airbus has altered their ordering patterns, which we noticed during the third and fourth quarters of last year, and we caught up to some extent at the start of this year. This isn't a new development for us. For the A350, we've lowered our sales guidance. Our net sales guidance in the Commercial sector remains flat due to a decrease in Commercial Original Equipment, primarily from Airbus, balanced by strong performance in the aftermarket. These factors offset each other. We currently have built up inventory and receive very short-term orders from Airbus, which influences how we manage those orders. Given the current timing and their ordering trends, we anticipate holding onto some inventory longer, which will affect our cash flow. This cash pressure will be evident in the latter half of fiscal year '25, but we expect to recover in fiscal year '26. This situation is impacting our sales compared to what we had originally projected, leading us to retain inventory for a longer period. It's primarily a timing issue.

Got it. And then just the last one I had, just on the cash. I mean, even at the low end, the 50% conversion, I mean, it implies, I guess, $300 million or so cash generation second half. I don't really ever recall you guys doing anything that significant over 3Q, 4Q. Any other puts and takes? I mean, it sounds like 3Q will be stronger, but should we expect an even stronger fourth quarter? And is sort of the tariff kind of unknowns captured in that?

So the tariff unknowns are not captured in that, but we have a couple of major drivers. What we'll see as we go into Q3 is benefit coming through collections on receivables. So we had tough collections on receivables in Q1 and in Q2. And in Q2, we had that planned. It was anticipated. So we have that timing in our favor as we look into Q3. So that's something that we're feeling comfortable with such that that will be our major driver for cash flow generation very strong Q2 to Q3. We'll hold that level of collections as we move into Q4, and we'll see a number of things actually helping us out in the back part of the year. First of all, we've got a higher guide on our earnings in Q4 versus Q3. So that's helping. We also have some benefits that are coming in physical inventories. We're looking for next quarter and Q3 to be about similar to our halting of growth in physical inventories like we had this quarter, have that repeat in Q3 as well and actually generate some cash from physical inventories as we move into the back part of the year. We've got a number of things that are happening on that, Michael. Manufacturing efficiencies, we're reducing cycle time. We still have a long way to go on kind of opportunities there, but we're making progress, and that's actually helping contribute. Inventory management as we're limiting incoming inventory, hitting milestones so that we can bill and collect. Those are all things that are going to drive that physical inventories. And then we've got just some timing and some other things like payables that we're projecting at the end of the year to get us to where we historically are.

Your next question is from the line of Kristine Liwag from Morgan Stanley.

I was curious about the current situation with tariffs, given the uncertainty surrounding them. Could you provide insight into where you believe your exposures lie, particularly in relation to importing? Additionally, based on your conversations with customers, how might the impact be distributed? Are they adhering strictly to contractual agreements, or are there negotiations about passing costs through? Any guidance on how this situation might unfold would be appreciated, understanding that it is still early and uncertain.

Yes, I'll address that. We have a broad external supply chain and manufacturing sites globally, which affect our businesses in varying ways. We anticipate the Commercial segment will experience the most significant short-term impact from the tariffs, followed by the Industrial sector, with the Space and Defense group facing minimal effects and the Military Aircraft group nearly none. For example, in our Commercial business, the aerospace sector relies heavily on a global supply chain. We are particularly exposed to tariffs on aluminum and steel imports, as their supply chain movements incur additional charges returning to the U.S. Additionally, we work with offshore manufacturing partners, particularly in electronics from Mexico, which also contribute to cost pressures. In our Industrial segment, our Costa Rica manufacturing site is crucial for our medical pumps and accessories, making it subject to tariffs upon entering the U.S. Our Space and Defense and Industrial businesses rely on long-term partnerships in Mexico and Costa Rica for labor and partially finished products, which could also be subject to tariffs. Overall, approximately a quarter of our tariff exposure arises from steel and aluminum, while the rest stems from imports from our suppliers and intercompany transactions, totaling around $200 million in imports. Regarding mitigations, we ensure compliance with the U.S.-Canada and U.S.-Mexico-Canada trade agreements for goods moving across North America to minimize tariff impacts. For repair goods in the Commercial Aerospace segment, we must manage imports carefully for re-export to avoid unnecessary tariffs. When cost increases arise from offshore partners, we may need to adjust our pricing to customers, which will only affect specific parts of our business.

Great. A lot to digest there. Maybe another question on the 787. Boeing from this quarter, they talked about that they're at 5 per month and going to 7 per month later. And it looks like from their perspective, all 787 KPIs could look green and look good. So I guess for you guys, you were delivering at a higher pace than they were producing for the past few quarters. I was wondering where are you now? And when they do get to 7 per month, when would you start seeing that uplift in volume for you?

Typically, we work a few months ahead. Once we are confident in operating at a higher rate, that increase will reflect in our manufacturing operations. I would say we are maintaining a relatively stable production rate this year, which matches our actual needs.

Your next question is from the line of Jon Tanwanteng from CJS Securities.

Could you discuss your exposure to the 787 and A350 in relation to China, both internationally and with regard to deliveries back to the U.S. from Airbus? Is there any risk to deliveries that you have considered in your guidance? We've observed China refusing deliveries of 737s. Is there a similar risk for you, and how can we address that? Does it matter if Boeing or Airbus can sell planes to other buyers?

Yes. Thanks for the question, Jon. We are not anticipating an impact from that on our business. There is quite an extensive backlog on both of the OEMs on the wide-bodies. It's likely that it's a redistribution of orders that happens as a consequence of any trade restrictions having an impact on their ability to ship into China. I think it was reported earlier in the week that Boeing actually moved aircraft out of China to reuse them for other customers during the course of the week. And so we don't expect to see any impact of that flowing through, Jon.

Okay. Great. I was wondering if you could touch a little bit on next-gen programs at all. I think you mentioned Golden Dome. I didn't hear if you mentioned F-47. I think I might have missed that if you did. Are you competing on that? Or is there an opportunity there that might be substantial?

Yes. Regarding the sixth-generation aircraft, we are a leading supplier of primary flight controls for military aircraft, and we have a solid development pipeline. This program is restricted, so we cannot speculate on the suppliers for the F-47. However, we possess capabilities that are relevant for these types of aircraft. You mentioned Golden Dome, which currently does not have a defined architecture. It likely requires a mix of different assets to be effective, including ground missile defense and space assets to monitor situations and assist in decision-making for intercepting incoming missiles. There may also be a need for counter-drone defenses. We believe this initiative impacts various products and technologies where we hold a position. For instance, our RIwP turret used in drone defense could be involved. Additionally, our missile programs, such as Hellfire, Javelin, and TAC-3—which we received a significant order for from Lockheed Martin earlier this year—would likely be relevant. Our FAD missile program might also contribute. On the space side, our vehicles aimed at defense applications are well-suited for such roles. A combination of these technologies and products could be integrated into Golden Dome once it is defined, which we consider a positive opportunity for us.

Got it. And then lastly, at a high level, how do you perceive or reconcile, I guess, the recent commentary that there might be a $1 trillion defense budget compared to prior commentaries of looking for 8% reductions in reallocations? And how does that square with your longer-term outlooks and targets?

So I think I reflected back in the previous quarter that the threats or the issues that we face in terms of national security didn't change. And so from my perspective, it's a reflection of the necessary investment that is there to ensure you are able to provide for national security. So I think it's a reflection of the reality when you're dealing with large near-peer threats.

Your next question comes from the line of Tony Bancroft from Gabelli.

Congratulations on the great quarter and all the great work you've done, Pat, Jennifer, and Aaron. I wanted to quickly ask about the articles you've seen recently, particularly one this morning regarding countries exempting aerospace and defense parts from counter tariffs. There's also been a report about the French aerospace industry from last week. Can you provide any additional insights on this? You mentioned it briefly before, but perhaps you could share more details on the potential implications?

Welcome to the call. There is a lot of uncertainty surrounding tariffs. We have tried to model potential outcomes based on known imports and current tariff rates, but these can change frequently. Therefore, there is no certainty in the situation. Ongoing negotiations will occur on a country-by-country basis, and there will be efforts to advocate for exemptions for certain industries, as seen with the automotive sector. Such developments could certainly help alleviate the range we have indicated.

Your last question comes from the line of Gautam Khanna from TD Cowen.

Actually, this is Ed in for Gautam. I just have a couple of questions. One is on the bump you gave Commercial for Commercial aftermarket, could you give a little more color on what you're seeing in the aftermarket and the positives and if there's any offsetting negatives that you see out there? And the second question is on the potential net tariff risk of $10 million to $20 million. Could you remind me sort of exactly what that's addressing?

I'll start with the first one on the Commercial aftermarket. So our Commercial aftermarket has been really strong this year. If I go not just to this quarter, but I go to a quarter ago, we were strong both in spares and repairs. We had strong repair activity, lots of flight hours, lots of activity going on there. Spares in the past, we'd also seen last quarter in particular, the shift from some of our customers from time and materials over into longer-term contracts that they actually provision some spares for was really strong. Looking at this quarter, this quarter is really on the repair side, rather. The repairs activity continues to be strong. It continues to be robust. The flight hours are strong and up. We're seeing it on the newer wide-body aircraft platforms such that we're expecting it to increase from our previous guide. So that's the offset to some of the A350 ordering patterns that I had mentioned. So definitely, Commercial aftermarket is helping us from a margin perspective on the Commercial business, and it's the repair activity that continues to be robust, and we see it continuing in the future to be robust.

And then Ed, welcome. If I think about the tariffs, I mean, our exposure on the tariff side is steel and aluminum. That's one of the big elements. And then I guess, if we look at Costa Rica being one of our plants importing a lot of materials into the U.S. on the medical business. After that, I would say, some exposure to Europe. We have a manufacturing plant in Ireland, another one in Italy that bring product in, which supports our Space and Defense group. And then Mexico, some subcontracting going on there, Canada, some sourcing of sensors and materials that go into some of our military products. So that's how I'd characterize the impact. So it's the commodity tariff that's a large element and then those countries that I called out specifically contributing to it.

There are no further questions at this time. I'd like to turn the call over to Pat Roche for closing comments. Sir, please go ahead.

Thank you. So that concludes our earnings call. It was a solid quarter, a positive outlook, and managed tariff risk. I appreciate you taking the time to listen to the update on the business, and I look forward to providing another update in 90 days' time. Thank you.

This concludes today's conference call. Thank you very much.