Moog Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Defense End Market: Secular increase in defense spending in U.S., NATO, and Indo-Pacific; U.S. budget reconciliation added $150B to defense budget with priorities aligned to Moog's capabilities; NATO's 3.5% GDP defense spending target creates opportunities.
• Commercial Aerospace: Customers with strong backlog; aftermarket benefits from increased airline activity, wide-body fleet utilization, and long-term support contracts.
• Industrial Markets: Relative stability with bookings exceeding sales and backlog growth; industrial automation resilient, medical segment growing.
• Tariffs: Impact of tariffs on steel, aluminum, and imports from key regions; mitigation actions taken, now incorporated into guidance.
• Initiatives: Customer focus (e.g., Paris Air Show, contract renewals); ESG efforts recognized with EcoVadis bronze medal; financial strength through margin enhancement, 80/20 capability, portfolio simplification, and footprint rationalization; acquisition of COTSWORKS to build optoelectronics capabilities

Segment Performance

• Commercial Aircraft: Sales of $219 million, up 16% y-o-y. Aftermarket sales at record level due to high fleet utilization; OE sales flat due to disruptions on some narrow-body and business jet programs. Contributed ~22.6% to total sales.
• Space & Defense: Sales of $288 million, up 11% y-o-y. Strong defense demand, particularly in satellite components and missile controls. Contributed ~29.7% to total sales.
• Military Aircraft: Sales of $225 million, up 8% y-o-y. Growth driven by FLRAA program ramp-up. Contributed ~23.2% to total sales.
• Industrial: Sales of $240 million, down 4% y-o-y due to divestitures. Core Industrial Automation resilient, medical segment growing with Moog gaining market share. Contributed ~24.7% to total sales

Guidance

• Sales: Projected at $3.8 billion, an $80 million increase from 90 days ago. Increased in all segments: Space & Defense +$15M, Military Aircraft +$20M, Commercial Aircraft +$20M, Industrial +$25M.
• Operating Margin: Projected at 12.8%, down 20 basis points due to tariff pressures; underlying business stronger than previous guidance.
• Adjusted Earnings per Share: Projected at $8.25, +$0.05 from 90 days ago, offset by tariff pressure.
• Free Cash Flow: Moderated to 30%-50% conversion range due to working capital needs; expect stronger fourth quarter cash flow

Risks

• Tariffs: Continued uncertainty in trade policy and tariff regime, impacting costs and margins.
• Supply Chain Disruptions: Disruptions/delays in production for certain business jet and narrow-body programs affecting sales/margins.
• Market Competition: Intense competition in defense and aerospace markets impacting market share and pricing

Question and Answer

• Q: Can you hear me? A: Yes, we can.
• Q: Great quarter and nice to see the guidance up even with the tariff headwind. I was wondering if we could first talk about the defense budget and the new NATO spending targets. I was wondering if you could talk about what share you expect to have of that higher spending? Do you think you maintain what you have now? Or do you think you can gain share with all those new programs that are being launched may have your content in it? A: Thanks, Jon, for the question. I mean I think it's a real positive for us with the plus up that was put through in that budget. The areas that are prioritized are areas that we have -- we're well aligned with in terms of our capabilities and our technologies. And I think that will result in strong growth within our business, continued strong growth. So I think we're in an exceptional time within our business. There's also, I would describe a greater sense of urgency coming through from all of our customers to increase rate. Specifically, if I talk about the missile side of the business, we are getting direct feedback from our customers that they need to accelerate the pace. All the recent conflicts are continuing to deplete the amount of missiles that the U.S. has. I mean you saw that in recent news about Ukraine, where we paused shipments from the U.S. to Ukraine for a period of time relating to our own stocks being depleted. That is definitely driving higher levels of demand. That is coming through specifically in our missile side of the business. We see missiles this year probably being up overall more than 20% on a piece of business that's now constituting 20% of our Space and Defense activities. So yes, we see meaningful pressure coming through, positive pressure to build capacity and to build production. And then I think the strategic stuff that's being underpinned within that budget includes space-based assets, which we are well positioned to hypersonics, of which we're on 5 of 6 different programs at the moment, and so have a great position there to win CCAs and next-generation aircraft. And if I think about CCAs, we're working with a handful of different partners, both established primes and new entrants into that market. We have a great relationship going with Kratos on the Valkyrie product. So there's great potential to further enhance our business as a consequence of that elevated level of defense spending, Jon. I feel really confident about it.
• Q: Can you hear me? A: Yes, Jon.
• Q: Great quarter and nice to see the guidance up even with the tariff headwind. I was wondering if we could first talk about the defense budget and the new NATO spending targets. I was wondering if you could talk about what share you expect to have of that higher spending? Do you think you maintain what you have now? Or do you think you can gain share with all those new programs that are being launched may have your content in it? A: Thanks, Jon, for the question. I mean I think it's a real positive for us with the plus up that was put through in that budget. The areas that are prioritized are areas that we have -- we're well aligned with in terms of our capabilities and our technologies. And I think that will result in strong growth within our business, continued strong growth. So I think we're in an exceptional time within our business. There's also, I would describe a greater sense of urgency coming through from all of our customers to increase rate. Specifically, if I talk about the missile side of the business, we are getting direct feedback from our customers that they need to accelerate the pace. All the recent conflicts are continuing to deplete the amount of missiles that the U.S. has. I mean you saw that in recent news about Ukraine, where we paused shipments from the U.S. to Ukraine for a period of time relating to our own stocks being depleted. That is definitely driving higher levels of demand. That is coming through specifically in our missile side of the business. We see missiles this year probably being up overall more than 20% on a piece of business that's now constituting 20% of our Space and Defense activities. So yes, we see meaningful pressure coming through, positive pressure to build capacity and to build production. And then I think the strategic stuff that's being underpinned within that budget includes space-based assets, which we are well positioned to hypersonics, of which we're on 5 of 6 different programs at the moment, and so have a great position there to win CCAs and next-generation aircraft. And if I think about CCAs, we're working with a handful of different partners, both established primes and new entrants into that market. We have a great relationship going with Kratos on the Valkyrie product. So there's great potential to further enhance our business as a consequence of that elevated level of defense spending, Jon. I feel really confident about it.