Moog Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Delivered strong financial results with record sales, improved operating margin, and earnings per share, net of prior year's Employee Retention Credit, and achieved free cash flow in line with plan.
• Year-to-date revenue up 3% on prior year, expecting revenue increase in the second half with 12-month backlog trends varying by segment.
• Adjusted operating margin up 40 basis points year-to-date, expecting stronger second half performance from Defense due to secured pricing.
• Addressed trade policy and tariffs, discussing mitigations like utilizing US-Mexico-Canada Agreement, adjusting imports/re-exports, and price adjustments.
• Highlighted end market conditions: Defense sees strength with DoD budget increase and alignment with defense priorities; Commercial Aerospace has strong order books but struggles with production throughput; Industrial market outlook stable.
• Initiatives: Focus on customer focus with Voice of the Customer activities, innovation with products like METEOR satellite and CURLIN 8000 infusion pump, and financial strength through 80/20 strategy to optimize operations.

Segment Performance:

• Military Aircraft: Sales of $214 million in the second quarter, up 6% compared to the second quarter of the prior year.
• Commercial Aircraft: Sales of $216 million, up 4% year-over-year.
• Space and Defense: Sales of $270 million, up 1% year-over-year, reaching a record level, reflecting broad-based defense demand.
• Industrial: Sales of $234 million in the second quarter, down 7% from the same quarter a year ago, with half the decrease due to divestitures completed at the start of the fiscal year and other product exits.

Guidance:

• Reiterating prior guidance for sales ($3.7 billion), adjusted operating margin (13.0%), and adjusted earnings per share ($8.20, ±$0.20).
• Projecting free cash flow near low end of prior range due to near-term pressure on physical inventories related to Airbus A350 ordering patterns, but expecting significant cash flow generation in the back half with strong collections on receivables and inventory management.
• Estimating potential $10 million to $20 million net pressure on operating profit guidance for FY '25 from tariffs, with Commercial Aircraft and Industrial most impacted, Space and Defense less so, and Military Aircraft negligible.
• Projecting third quarter earnings per share to be $2, ±$0.10, noting potential impact from tariffs.

Risks:

• Tariffs: Uncertainty around trade policy and tariffs, particularly on steel, aluminum, and imports from countries like Costa Rica, Philippines, Mexico, EU, Canada, and UK. Potential impact on operating profit, with Commercial Aircraft and Industrial most exposed, Space and Defense less so, and Military Aircraft negligible. Risks include retaliatory tariffs, further escalations, and non-tariff-related trade constraints.

Question and Answer: Q: Michael Ciarmoli asked about Commercial OE revenue growth, A350 details, and cash flow.

A: Jennifer Walter responded that Commercial OE was $135 million and aftermarket was $81 million in the quarter. Airbus' changed ordering patterns reduced A350 sales guidance, with inventory holding pressure on cash, expected to recover in FY '26. Cash flow in the back half driven by receivables collections and inventory management.

Q: Kristine Liwag inquired about tariff exposures, sharing pain with customers, and direction of flows.

A: Patrick Roche explained exposures in Commercial (supply chain, aluminum/steel imports, offshore manufacturing), Industrial (Costa Rica manufacturing), and Space/Defense (imports from Mexico/Costa Rica). Mitigations include using US-Mexico-Canada Agreement, proper import/export administration, and pricing adjustments.

Q: Jonathan Tanwanteng asked about 787 and A350 exposure to China, next-gen programs like Golden Dome.

A: Patrick Roche stated no anticipated impact from China on deliveries, as orders are likely redistributed. On next-gen, Moog is a leading supplier of primary flight controls for sixth-generation aircraft, with capabilities relevant to Golden Dome involving missile defense, space assets, and counter drone defenses.

Q: George Bancroft asked about country exemptions for aerospace and defense parts offsetting counter tariffs.

A: Patrick Roche mentioned ongoing negotiations and potential carve-outs for certain industries, which could mitigate tariff impacts.

Q: Ed (for Gautam Khanna) asked about Commercial aftermarket color and tariff risk.

A: Jennifer Walter said Commercial aftermarket has been strong with robust repair activity and flight hours, offsetting some A350 ordering pattern impacts. Patrick Roche characterized tariff exposures as including steel/aluminum, Costa Rica manufacturing, and imports from EU, Mexico, Canada.