Moog Inc (MOG.A) 2026 Q1 法說會逐字稿

Ladies and gentlemen, thank you for joining us, and welcome to the Moog Inc. first quarter fiscal 2026 earnings conference call. (Operator Instructions) I will now hand the conference over to Aaron Astrachan, Head of Investor Relations. Aaron, please go ahead.

Good morning, and thank you for joining Moog's first quarter 2026 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. Our 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 started fiscal '26 with an outstanding quarter. We delivered exceptional revenue growth of over 20% relative to prior year, underpinned by record quarterly sales in all segments. We increased 12-month backlog by 30%, setting another record. We also improved adjusted operating margin relative to prior year and delivered record earnings per share.

Our focus is on delivering for our customers and driving ongoing continuous improvement in pursuit of excellence. Our results are reflective of continuing success in driving both operational and financial performance.

Now let's turn our attention to end markets and the macro environment, starting with Defense. The Defense market continues to be very strong. We are already seeing increased Defense spending by governments in the US, Europe, Australia and Japan, with further increases expected. In addition, there is an urgency to expand industrial capacity in these regions.

Recent US government announcements demonstrate strong commitment to raise production rates. These announcements make public the need, which has underpinned our recent elevated levels of business investments. This positions us very well to respond to increasing production demands.

Moving to commercial aerospace. Our customers have strengthened backlogs and our intent on driving increased production rates. We continue to see consistency in their production and have confidence in their growth plans. We are maintaining a production plan that supports our customers' needs. On the aftermarket side, we continue to benefit from increased airline activity and aging fleet, increased wide-body fleet utilization and our ability to maintain a strong aftermarket position through excellent customer service.

Finally, within industrial markets, we're seeing signs of recovery. This is reflected both in stronger book-to-bill and continued growth in our 12-month backlog over three successive quarters. We see particular strength in demand for data center cooling pumps and medical pumps and sets. Overall, end market conditions are very favorable for our business.

Now turning attention to our leadership priorities, starting with customer focus. We're pleased to have our operational performance, officially recognized by another important customer. We received BAE Systems Gold Supplier of the Year Award for 2025, recognizing 100% quality and 100% on-time delivery performance. Our pursuit of operational excellence enables us to meet our customers' requirement, which drives our organic growth.

Our strong customer value proposition was further reflected in several notable bookings and contract awards. We secured over $1 billion in Commercial Aircraft orders across several platforms, reflecting future growth in OE production. We secured an additional order for over $100 million for the PAC-3 missile program and see further potential given the recent contract between Lockheed Martin and the US government. We also received over $50 million of missile orders across PAC-2 and FAD programs.

In addition, we won a new space vehicle contract for over $100 million for our existing Meteor satellites. These orders account for close to half of what was a record Space and Defense segment bookings quarter. As we look to further develop our value proposition, we have strengthened our leadership team with the addition of a new C-suite role, namely that of Chief Strategy and Corporate Development Officer.

This role will focus on ensuring the robustness of our business development plans and the strategic alignment of our acquisitions. Our ability to proactively pursue acquisitions and to follow through with effective integration will enhance our ability to create value. We will continue to have a balanced approach to capital allocation.

Now turning to our employees and communities. We believe that our unique culture is a critical asset. It defines our identity, supports the attraction and retention of extraordinary talent and enhances collaboration with our customers. I'm exceptionally proud that we have been recognized by Glassdoor with a 2026 Best Places to Work Award, which ranks Moog in the top 100 large employers in the US. This is a testament to our focus on creating a work environment that is rewarding for our employees and empowers them to make their best contribution.

In addition, we were proud to receive the inaugural Business of the Year award from the Buffalo Niagara partnership, our Regional Chamber of Commerce. We were also recognized for our impressive recovery efforts in Tuxbury with Team of the Year award from the local business community.

Our financial performance continues to strengthen with solid growth and consistent focus on pricing and simplification. Our pursuit of continuous improvement is built on 80/20 principles. Having deployed 80/20 to all our significant manufacturing locations, our focus now is on further enhancing the maturity of 80/20 across the organization and to embed its principles into our management practices. The following practices are important to exemplars.

Portfolio reviews are shaping our focus on the profitable businesses that we want to invest in and grow. This is happening at site, business units and division levels and is informed by segmentation analysis. Portfolio reviews drive our decisions to sell our exit products, sites and businesses and are an ongoing process allowing us to move resources to where they can have the most impact.

Voice of the customer feedback directs our continuous improvement actions. We want to enhance the experience of those important customers, which will drive our success and create an even more clearly differentiated offering. We are specifically responding to our customers' needs for greater agility and capacity to meet increased demand. Pricing reviews are integral to our business process and are happening at all levels in the organization. They are data-driven and informed by our simplification and segmentation analysis. Our pricing activities are ensuring that we are fairly compensated for the value that we create for our customers.

Now let me switch over to the work we're doing to optimize our balance sheet. Last quarter, I highlighted an opportunity to reduce trade net working capital requirements in our Commercial Aircraft business. This structural improvement is being achieved through the simplification of our global manufacturing and supply chain network and reshaping the relationship with our suppliers. We are committed to achieving these initiatives with the same deal that we have brought to our margin enhancement journey.

I'm pleased to share that over the last quarter, we have made considerable progress. I'll share a couple of examples. We are shifting suppliers from long-term discrete purchase orders with fixed quantity and delivery dates to a more agile arrangement based on rolling forecast and short fixed commitment window. This approach allows us to respond to changes in customer demand more effectively and share the burden of customer demand changes more equitably between us and our suppliers. This action is about 2/3 complete.

We also used these strategic negotiations to optimally align material supply to production plan needs, ensuring that we're not carrying excess inventory materials to -- sorry, access to requirement. This builds on prior work and has already reduced expected material receipts for 2026, in line with our annual plan, an impact measured in tens of millions of dollars. We've made progress on these structural issues, and we'll further build on this strong focus.

Now turning to the full year. We've updated our guidance for fiscal '26 reflecting our excellent performance in the first quarter and a more positive market outlook. We've increased sales and adjusted earnings per share and held adjusted operating margin and free cash flow conversion unchanged. With this updated guidance, FY26 will be a year of double-digit year-over-year sales growth, further expansion in adjusted operating margin, strong growth in adjusted earnings per share and improved free cash flow conversion.

And with that, let me hand over to Jennifer for a detailed breakdown on the quarter and our updated fiscal '26 guidance.

Thanks, Pat. Before I get into our financial performance, I'd like to remind everyone about the revisions we disclosed in our FY25 year-end financial statements.

As previously described, we identified an error related to the accounting for a certain group of Commercial Aircraft aftermarket contracts. Accordingly, we revised certain prior period annual and quarterly financial statement amounts to reflect the correction of this error, as well as other previously recognized immaterial out-of-period items in the period in which they originated. The comparative prior year numbers we'll discuss today are those revised amounts. Additional detail can be found in supplemental schedules posted on our website.

Now turning to our financial performance. We had another outstanding quarter. We beat our plan for sales, adjusted operating margin, adjusted earnings per share and free cash flow. We took $7 million of charges in the first quarter that we've adjusted out of the operating profit numbers that we'll describe. Over half of the charges were associated with M&A activity with the balance related to simplification efforts and a program termination.

I'll now talk through our first quarter results, excluding these charges. Sales in the first quarter of $1.1 billion were 21% higher than last year's first quarter. Each of our segments had a record level of sales and were up double-digit percentages. The largest increase in segment sales was in Space and Defense. Sales were a record $324 million, up 31% over the first quarter last year, reflecting broad-based Defense demand. Demand was particularly strong for missile control and satellite components.

Commercial Aircraft sales of $268 million increased 23% over the same quarter a year ago. The increase was driven by volume on major production programs, as well as aftermarket associated with strong fleet utilization. Pricing also contributed to the sales growth. In military aircraft, sales of $247 million were up 16% over the first quarter last year. In the first quarter, we had a significant V-22 spares order that contributed to the strong sales increase. In addition, activity on the MV-75 program continued to increase.

Industrial sales were $261 million in the quarter, up 14% over the same quarter a year ago. Sales grew within the expanding data center cooling market. We also had particularly strong sales within Industrial Automation this quarter. In addition, sales of Enteral cleaning and IV sets were also strong, reflecting current demand.

We'll now shift to operating margin. Adjusted operating margin in the first quarter was 13.0%, up 90 basis points from the first quarter a year ago or up 220 basis points, excluding tariff pressure. Excluding this pressure, each of our segments were up nicely, reflecting operational strength.

Base and Defense operating margin was 14.8% in the first quarter, up 280 basis points. The increase was driven by profitable sales growth, offset partially by increased business capture, product development and operational readiness investment. Industrial operating margin was 14.1%, a 100 basis points above that of the same period a year ago. Business optimization and sales growth drove our operating margin upwards, while tariffs pressured our margins.

Military aircraft operating margin was 11.9% in the first quarter, up 60 basis points from the first quarter last year. We benefited from the strong aftermarket sales, which was offset by a less favorable OE sales mix. Commercial Aircraft operating margin was 10.6%, down 120 basis points from the first quarter last year. The decrease was driven by tariff pressure. Operating margin benefited from increased volume and pricing benefits. Putting it all together, adjusted earnings per share came in at $2.63, up 37% compared to last year's first quarter. The increase reflects the higher operating margin and sales level, offset partially by the impact of tariffs.

Let's shift over to cash flow. Although we plan a slow start to the year, free cash flow came in better than expected. In the first quarter, we used $79 million of free cash flow. Growth in our physical inventory consumed cash, and we were negatively impacted by the timing of payments, including the normal timing of compensation payments. Capital expenditures were at about the same level as the quarterly average from last year and are expected to pick up in the rest of this year. We continue to invest in our facilities to support our strong growth opportunities.

Our leverage ratio was 2.0x as of the end of the first quarter, putting us at the low end of our target leverage of 2 to 3x. Our capital deployment priorities center around organic growth and will pursue strategic acquisitions to complement our existing portfolio, as Pat already mentioned. We strive to have a balanced capital deployment strategy over the long term.

We'll now shift over to our updated guidance for the year. We're increasing our 2026 guidance for sales and adjusted earnings per share from what we provided a quarter ago, and we're affirming our guidance on adjusted operating margin and free cash flow conversion. We're increasing our sales guidance for three of our segments. In Space and Defense, we're increasing our guidance by $30 million to reflect new orders and strong first quarter sales. We're increasing guidance for Commercial Aircraft by $15 million to reflect production ramps on narrow-body programs, as well as strong first quarter aftermarket sales.

We're also increasing guidance for Industrial by $15 million, and this largely reflects strong demand for data center cooling pumps. We're holding our adjusted operating margin in FY26 at 13.4%, a 40 basis point increase over FY25. We're adjusting segment operating margins slightly in two of our segments based on first quarter performance.

We're increasing our operating margin for Space and Defense to 13.9% and moderating our operating margin for military aircraft to 13.8%. We're increasing our FY26 adjusted earnings per share guidance by $0.20 to $10.20 plus or minus $0.20. The increase reflects sales growth beyond what we had initially projected. For the second quarter, we're forecasting earnings per share to be $2.25 plus or minus $0.10.

Finally, turning to cash. We're still projecting free cash flow conversion to be about 60%, an improvement over FY25. Next quarter, we expect to generate free cash flow at least equal to the amount that we used in the first quarter. Timing of payments, including the normal timing of compensation payments used cash in the first quarter but won't do so in the second quarter. In addition, we'll consume less cash for physical inventories as we continue to reschedule material receipts within Commercial Aircraft.

We had an incredible start to the year with our strong first quarter financial performance, and we'll continue to build on our financial strength in fiscal year 2026. We'll achieve a record level of sales, further expand our operating margin and make meaningful progress towards generating strong free cash flow.

And now I'll turn it back to Pat.

So we delivered an outstanding first quarter financial results. We've improved our guidance based on the continuing strong performance in the robust market. And with that, let me open the floor to questions.

(Operator Instructions) John Tanwanteng, CJS Securities.

And then congrats on a great start to the year. I was wondering if you could comment on just the guidance increase for the year. A little bit less on both the revenue and the earnings versus what you beat in Q1, but, I was wondering if you could give us any color on that, if there's any nuances that we missed, maybe some timing items that were pulled in or maybe 1x items that was sustainable. Help us understand the mismatch there.

Yes, Tom, I'll take that. Yes, we did increase our guidance for EPS by $0.20 for the year. And while we beat our Q1 guidance by about twice that. We did have a very strong first quarter performance, as we've described, and we've reflected that in our guidance.

In particular, it came in strong sales. We had strong sales in Space and Defense, overall strength of that business. In Commercial Aircraft related to production and aftermarket activity and in industrial, certain areas within industrial automation. So that part has been carried forward and reflected in our guidance for the year, but we also had some pull-ins from later in the year. And these are largely Defense-related things. And I'd attribute it to military readiness.

For instance, the V-22 spares order, that is something that reflects basically a year's worth of orders that came in, in just the first quarter. And we saw similar types of things within our Space and Defense business as well. So these latter examples for military readiness are largely pull-ins from later in the year and just reflect timing. So we have reflected the true increases for the year that we achieved in Q1 for the full year.

Okay. Great. That's really helpful. And then second, could you just talk about the decrease in the military aircraft margin outlook, what's going on there? I'm not sure if you went into that.

Yes. What we did is we just reflected our Q1 performance and make sure that we took that into consideration as we were going for, for the full year. So previously, we had it at 14.3%, we decreased it to 13.8% as we achieved 11.9% in the year. So basically, it's just fine-tuning it to based on our results for the first quarter. And that's offset by some of the increase that we saw in our Space and Defense business. So we are holding our operating margin for the company at the 13th quarter that we had previously guided to.

Okay. And then finally, just on the better cash flow in the quarter. Was that a result of your better net working cash -- excuse me, net working capital initiatives or maybe lower CapEx? Or was that just a function of higher earnings?

It was -- I would say, it's attributable to our physical inventories. We had slowed down the material receipts that we had talked about this quarter and last quarter. We had done a nice job on that, and we saw that come through in our results this quarter, and we look forward to continuing those efforts and building upon those as we move throughout the year as well.

Michael Ciarmoli, Truist Securities.

Jennifer, Pat, just on the Commercial Aircraft margins, I know you called out tariff pressure, but is there any other headwind there? I mean, you guys are making really good progress across the portfolio. And I know the aircraft side seems to be the one that's got more of the tariff-related pressure. We saw a year-over-year decline there. And I think that it's probably a couple of quarters since a couple -- more than a couple of quarters that has been down to 10.6%.

Anything else going on in that segment that's giving you sort of a challenge in driving those margins higher? Or is it really just all tariffs and some mix?

Tariffs is about 300 basis points of the impact on this quarter compared to a quarter ago when we didn't have the tariff impact. So without debt, that business is up very nicely. So operationally wise, we're seeing this increased sales volume and pricing benefits come through really nicely. So that business overall is performing great. The tariff pressure is what -- why we're seeing that downtick there.

And that tariff pressure was particularly high in quarter one. We have, as you know, aftermarket repairs coming back from airlines around the world and some of the costs associated with tariffs on that were higher than we had anticipated within the quarter. Not all of those airlines were completing the paperwork in the necessary manner for us in order to bring them in into a bonded area avoiding the tariff, and we're tightening up on that process and helping our customers make sure that they are compliant. So that should go down in subsequent quarters, but it was a relatively significant hit in this quarter.

Okay. And that was my next question. What else could you do to mitigate this tariff. So it sounds like you just mentioned a paperwork getting them into some bonded areas. Is there anything else? I mean, is it as simple as just pricing? Or are there other levers you can pull to offset that headwind?

Well, we're actually doing quite a number of things. We have some supply chain routes around the world, which end up bringing product, I would say, unnecessarily into the US and back out to our customer who is outside of the US. So we've changed around some of our supply chain. We're now using one of our facilities in the UK with a Belgian supplier and then the product gets delivered to France. And so it never comes into the US. That actually is single-digit million saving for us in tariff costs. And so we're pursuing all of those avenues, Michael.

Okay. And then just moving on, I guess, I can't recall a bookings quarter this strong for you guys. I know you called out some of those major Defense programs. But then I noticed that the 12-month backlog didn't really go up nearly as much as the total bookings.

So how much of those $2.3 billion are beyond 12 months? I know you mentioned PAC-3, presumably, that's going to spread over a couple of years. But maybe if you could just give a little bit more color on the bookings and kind of the backlog trends.

Yes. I mean we're really pleased with the bookings, Michael, because I think they reflect that we're doing the right things for the customer, and it's building a solid book of business for us. And so yes, they are at an exceptionally high level. If I characterize that $2.3 billion, about half of that was the Commercial Aircraft business, and that was C919 order that stretches out for a number of years. And some increased engine valve orders that were in there as well and also reflecting the progression of our wide-body OE sales going forward as well.

So there was -- it was reflecting that whole increase in both narrowbody, widebody and engines on the commercial side. About 1/4 of the orders were Space and Defense group related and those orders that brought orders in Space and Defense group to a record level.

And what was driving that was -- or a lot of it was PAC-3 over $100 million order for PAC-3, adding to the $100 million-plus order we had a year ago on PAC-3, plus a space vehicle order ordering Meteor satellites you know about those from our previous calls, but that was good to get a follow-on order on those. And then about 60% of it was military aircraft group, and that was reflecting both current platform programs that we're working on and new aircraft or new developments that are moving into production.

Got it. That's helpful. And just the last one, Jennifer, what's sort of the expectation for working capital and maybe physical inventory for the remainder of the year?

Yes. So we're going to -- so as we look into '26, some of the things that we'll see within working capital is we are going to see positive advances. So that will be a positive for us. We will see some growth in receivables and physical inventories associated with business growth, but we are mitigating that with the activities that Pat has described there.

Gautam Khanna, TD Securities.

I was curious on the V-22 order and just in general, are you seeing an uptick in Defense orders in the current quarter? I'm just curious like as -- was that a surprise that you got that order all at once? Is there any change in kind of customer activity that's worth noting one way or the other?

I'm not sure that there's too much of a change. This one did happen to be basically what we had expected to have in orders for the year get accelerated into the quarter. So it is an acceleration. On the military side, we are seeing a little bit of acceleration in moving things to the left. We're positioned well so that we can accommodate these orders and take care of that.

I don't know that it's too much of a change, but we are seeing that really in the Defense side. As I mentioned earlier, I think it's really just determined by military need for readiness and just making sure that suppliers like us are positioned well, and we are positioned well to meet those needs.

And if I step back from just that specific case, I mean, there is a sense of urgency in the Defense side of the business to actually accelerate capacity for missile programs, specifically replenishing an arsenal that was heavily depleted. And as Jennifer has said, on readiness, making sure that all the assets that you have are able to be deployed. I think that's a general trend pulling things into the left.

Yes. To follow up on that point, Pat, I was just curious like we are seeing these contracts or framework agreements anyway, be negotiated with some of the Defense prime contractors. I'm curious how advanced are your conversations with those primes to kind of get capacity up and perhaps that slowed down to you guys? I'm just curious how far advanced are those talks?

So how I would characterize it is this need to build capacity has been apparent for at least 18 to 24 months. And when we've been leading on missile programs over that period, we've been asked the question again and again, what would you need to do to double your capacity or to quadruple your capacity. So it has been well flagged through the industry.

I think the announcement of the seven-year frame agreement with Lockheed Martin makes it really public that there's this government imperative to increase those production volumes. And so we've been planning through that, and we've been making investments in our business that are supportive.

Once we think about the PAC-3 program, we run that through our Salt Lake City facility. Over the course of the last couple of years, we've freed up space in that facility by selling a Navaids business a few years back, as you remember, that space is now completely free and available for new work to be in loaded into that facility.

That will be the PAC-3 activity. We've decided to invest in a circuit card assembly line in that plant as well in support of programs like PAC-3 and other missile programs, and those capital investments are all within our current planning. So we're looking forward to seeing a level of volume coming on those programs, Gautam.

That makes a lot of sense. And just last one, Jennifer, what was the total company price realization year-over-year in the quarter?

Did you say for pricing benefit?

Yes.

Yes, we haven't given out the pricing benefit year-over-year. But as we look to it, it is -- it does contribute nicely. It's not half of the amount that we're doing. It's definitely volume and demand is being the biggest part. And then I would say it's complemented by price increases that we're securing throughout our book of business.

(Operator Instructions) Kristine Liwag, Morgan Stanley.

Good morning, everyone. And it's wonderful to see some of these strong sales signals converting to orders. I was wondering on PAC-3, can you just let us know how much this is as a percent of company sales? Or if not PAC-3, how we think about overall missiles as the size for Moog?

So if I think about our missiles business, in '25, it was over $200 million, and it was growing at about 20% a year. In '26, we expect it to be more than a $0.25 billion business for us within that space in Defense group.

Great. That's helpful color, Pat. So I was wondering, with the record, I guess, novel contracts at Lockheed signed with the Department of Water for the PAC-3 and the FAD. I mean, it seems like we're in the beginning stages of this new acquisition reform that's providing multiyear outlook and capacity is growing 300%, 400%, 500%. I was wondering how you should -- how we think about what this could mean for your business? And is that the growth trajectory that you could potentially see as we get more of these deals signed?

We're very optimistic about it, Kristine. We feel that we have been demonstrating over the last couple of years, a really strong commitment to this business. We're delivering really well operationally. As you know from the last quarter, we got an award from Lockheed Martin for 100% on time, 100% quality.

In this quarter, we announced the BAE systems have given us an award. Also that was on a missile program. So we are really effective at delivering. And if people are looking for increased capacity and throughput, no better place to go than some places, delivering 100% downtime. So I think we're well set up to meet the needs of our customers in these programs.

In terms of our capacity to accommodate it, I just mentioned the Salt Lake City factory. We have the floor -- the square footage available there to meet the expanded needs that we see coming even if it is 2 or 4x current levels on those programs. And our exposure across missile programs is really broad. So we're all focused on PAC-3 here, but FAD is also a program that is experiencing significant growth. We have content on that and hope to increase scope on that. Plus Standard Missile 2, Standard Missile 3, Standard Missile 6, Prism, Tomahawk, to name just a few. So it is a really positive upside for us, Kristine.

Super exciting. And if I could squeeze a third question about data center cooling, can you talk about what exactly you're supplying? How big could this business be for you? And what's the margin profile of data center cooling?

So in 2025, it was about $25 million of sales. We expect that to double in 2026 in terms of what we manufacture. It is a pump that is used to circulate the cooling fluids through the long rack of processors and servers that are used in these data centers. So it's a critical component within the cooling system. It goes into what's called a cooling distribution unit, which is at the end of the server line. We have multiple pumps within that for redundancy reasons.

Our pump has some highly differentiated features associated with it, which improved its reliability and maintainability in the environment. We've gone from producing at a rate of about 200 a week of these pumps at the beginning of '25 to over 500 a week by the end of '25, and our customers would like us to double the volume on those pumps. And so we're standing up a second production line and boosting capacity in our existing facility.

There are no further questions at this time. I will now turn the call back to CEO, Pat Roche, for closing remarks.

So that concludes our earnings call. I appreciate you taking the time to listen to our update on the business, and I look forward to providing an update again next quarter. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.