Fourth Quarter Conference Call, Fiscal Year 2020



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 6, 2020 our most recent Form 8K filed on November 6, 2020 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 document, a copy of today's financial presentation is available on our investor relations webcast page at

Good morning.  Thanks for joining us.  This morning we’ll report on the fourth quarter of fiscal ’20 and reflect on our performance for the full year.  Given the continuing uncertainty we all face as a result of the pandemic, we’ll not be providing detailed guidance for fiscal ’21 today.  Instead, we’ll provide color on what we’re seeing in our various end markets and our operating assumptions as we head into a new year.

I’ve organized my headlines into 3 broad categories - first macroeconomic, second microeconomic and third Moog specific topics. 



From a macroeconomic perspective, fiscal ’20 was a tumultuous year.  Early in the year we worried about trade disputes with China and the potential impact of a hard Brexit.  Unrest in the Middle East was also on our radar.  Then COVID hit, and the last 6 months have been dominated by the impact this pandemic is having across the globe and speculating about when we’ll see a recovery. 

Looking to the microeconomic, our diversity across end-markets was a significant strength in a period of great uncertainty.  Half of our business is in the defense and space markets and these markets were essentially unaffected by the pandemic.  Our medical market was very strong all year, as demand for specialty equipment to help COVID patients buoyed our sales.  Our industrial markets slowed as we went through the year, although our geographical diversity of end customers helped alleviate the impact.  Finally, our commercial aircraft business was hit very hard with both OEM and aftermarket customers feeling the brunt of global travel restrictions.

Turning to Moog specific comments, the fourth quarter was a good quarter overall compared to the same quarter a year ago, particularly given the operating conditions this year.  Sales were up in our defense, space and medical markets, but lower in industrial applications and down over 50% in our commercial aircraft market.  Adjusted margins of 8.3% and earnings per share of $0.81 were respectable.   We had another outstanding quarter for free cash flow, and we reinstated our dividend and bought back 600,000 shares.  We incurred impairment and restructuring charges totaling $15 million as we continued to align our operations with the demand predictions from our customers.  We also completed a major transaction to de-risk our DB pension plan, transferring half the assets and liabilities to an insurance carrier at a very favorable rate.  We incurred a non-cash charge of $121 million or $2.85 per share for this transaction.  Jennifer will describe this in more detail later on our call. 

Looking back on the full year the following headlines stand out. 

1)    First, it was a year of records, divided into 2 halves.  The first half was characterized by record sales, record net earnings and record earnings per share.  In the second half we generated record free cash flow.  Our response to the pandemic dominated our third and fourth quarters as we shifted our attention from sales and earnings to leverage and liquidity.  Our intense focus on expense reduction and cash flow generation resulted in lower leverage at the end of the year than 6 months ago when the pandemic hit.  We incurred over $70 million in charges associated with restructuring, impairments and asset write downs.

2)    Second, we refinanced our balance sheet in our first quarter – extending the term of our revolving credit facility and selling $500 million of high yield bonds at 4.25%.  At the time, we were just following our usual strategy of getting the money before we needed it.  In hindsight, it was brilliant timing. 

3)    Third, we followed our historical capital allocation policy.  We completed one acquisition early in the year, and returned excess capital to our shareholders through our dividend and buyback programs.  We paused these activities during the third quarter as we assessed the situation but, as cash flow improved, we returned to a balanced capital allocation in the fourth quarter.  Over the course of the full year, we repurchased almost 3 million shares.  Between dividends and share repurchases, we returned over $240 million to our shareholders in fiscal ‘20.  

4)    Fourth, as we’ve mentioned many times, our diversity across end markets provided stability and continued strong operating performance throughout the year.

5)    Finally, and most importantly, I believe you see the true strength of a company during times of adversity.  On that measure, fiscal ’20 was a record year for our company in every way.  The employees of the company across the globe did an outstanding job managing through an unprecedented crisis.  It was definitely not the year we planned for 12 months ago and to say it was a challenge would be an understatement.  However, our long-term strategy of diversity across end markets and financial prudence served us well.  As I do at this time each year, I would like to express my thanks for the dedication and commitment of our 13,000 employees around the world who made this all happen. 

Now, let me provide some more details on the quarter. 


Q4 Fiscal ‘20

Sales in the quarter of $707 million were 8% lower than last year.  Sales were up in Space & Defense but lower in Aircraft and Industrial.  Taking a look at the P&L, our gross margin was down on lower sales and under-utilized facilities.  R&D was down as our engineering teams moved to funded development projects.  SG&A expenses were also down on cost containment measures.  Interest expense was lower, the net result of lower rates but slightly higher debt levels.  We incurred $6 million of restructuring in the quarter and incurred a non-cash charge of over $120 million associated with annuitizing half of our DB pension plan.  Our effective tax rate in the quarter of 21.8% resulted in GAAP earnings per share of -$2.40.  Excluding the pension charge, restructuring and asset impairment impacts, adjusted earnings per share were 81c. 


Fiscal ’20

Full year sales of $2.88 billion were 1% lower than last year.  Sales were way up in Space & Defense, about flat in Industrial Systems and lower in Aircraft.  Similar to the fourth quarter, gross margin, R&D, SG&A and interest expense were all lower as a result of the change in operating conditions in the second half.  We incurred a total of $38 million in asset impairment charges, $23 million in inventory write downs and $11 million in restructuring charges, all in the second half.  Combined with the DB pension settlement charge, the net result was $0.28 per share for the full year.  Excluding these one-time charges, adjusted full year net earnings were $157 million and earnings per share were $4.81. 


Fiscal ’21 Outlook

As we look to fiscal ’21, we’re planning that COVID will be with us through the full year.  In terms of our major markets, we believe defense and space will remain strong.  We also think our medical market will be strong, but will perhaps soften slightly after the surge of demand in the initial stages of COVID.  We’re not anticipating any recovery in our industrial markets from the level in the second half of ’20.  Finally, we’re hopeful that the commercial OEM business will stabilize at the advertised rates from the OEM’s and that the aftermarket may see a modest recovery towards the second half of the year.  At this stage, we’ve not made any assumptions about significant shifts in U.S. policy in terms of tax, trade or defense spending.  

Now to the segments.  I’d remind our listeners that we’ve provided a 3-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. 



Aircraft Q4

Sales in the quarter of $275 million were 19% lower than last year.  It was a contrasting story between military and commercial.  Military sales were up over 20% in both the OEM and aftermarket.  Higher sales on the F-35 to Lockheed drove the OEM beat while strength across the entire portfolio of platforms drove the aftermarket beat. 

On the commercial side, OEM sales to Boeing were off 50% and OEM sales to Airbus were off 70%.  On a slightly more positive note, or perhaps less negative note, sales into the commercial aftermarket were “only” down by 34% this quarter.  In the present environment, our usual comparisons with Q4 last year are not particularly relevant, while comparisons with last quarter are perhaps more insightful.  Compared with our third quarter, sales to commercial OEM customers in Q4 are up 6%, while sales to our commercial aftermarket customers are up over 30%.  It’s definitely too early to tell if this is a trend, but perhaps they indicate that Q3 was a floor.  

Aircraft fiscal ‘20

Full year sales of $1.21 billion were down 7% from last year.  Similar to the quarter, it’s a story of 2 very different markets.  It’s also a story of two very different 6-month periods.

On the military side of the house, sales were up 16% relative to last year.  We saw strength in every quarter of fiscal ’20, with second half sales up 6% over the first half.  OEM sales were up on strong F-35 activity as well as higher funded development.   Aftermarket sales were up across the portfolio, with the largest contributor being the F-35 as the active fleet grows.

Commercial sales were down over 30% from last year.  In the first 6 months of the year, commercial sales actually grew marginally from the same period last year.  However in the second 6 months, as the global travel industry collapsed, our commercial sales fell by almost 60% from the prior year.  The drop was across all OEM and aftermarket customers. 

Aircraft Margins

Adjusted margins in the quarter of 2.7% include about 200 basis points of charges on fixed price development programs.  Demand from our commercial customers remained volatile in the quarter as they re-plan their production and continue destocking.  In the quarter, we incurred $4 million in restructuring charges as we continued to size our business for the latest projected demand from our customers. 

Adjusted margins for the year were 7.6%.  Adjusted margins dropped from close to 11% in the first half to only 3.6% in the second half.  We incurred a total of almost $60 million in restructuring, asset impairments and various other write offs in the second half – all attributable to the COVID impact on our commercial business.

On a more positive note, we continued to see the shift from internal R&D to funded development work throughout the year.  For all of fiscal ’20, R&D was down $10 million relative to last year while funded development was up over $20 million over the same period. 

Aircraft fiscal ‘21

We cannot predict what will happen over the coming 12 months, but we can share our planning assumptions as we look to fiscal ’21.  On the military side we’re assuming the demand for our products will remain strong and that our operations, and suppliers, will continue to operate effectively.  On the commercial OEM side, we’re working to the production schedules our major customers have published, while recognizing that there remains considerable risk in that outlook.  For the commercial aftermarket, we’re assuming a modest pick-up in demand in the second half of the year. 


Space and Defense

Space and Defense Q4

Sales in the quarter of $207 million were 9% higher than last year.  The strength was all on the Space side of the house, with sales up 40% from a year ago.  We saw strength across the entire portfolio of space products including hypersonics, propulsion, avionics and satellites. 

Defense sales were down 5%  as a result of a much softer security market and lower sales on missile programs.  The security market has been particularly hard hit by the pandemic as on-site installations have ground to a halt.

Space and Defense fiscal ‘20

Full year sales of $770 million were up 13% from fiscal ’19.  Space was the major driver of the growth, with sales up 34% year over year.  We saw growth in every product line within space.  We’re benefiting from increased government spending both on military applications, such as hypersonics, and civil missions at NASA to put humans back on the Moon.  There is also increasing commercial interest in space from tourism to launch vehicles for low-cost satellites.  As the space market evolves, we’re gaining share in many of our product categories and increasing our scope of content on new platforms. 

Defense sales were up marginally year over year.  Higher sales on ground vehicles and into naval systems compensated for lower sales in security applications.  Sales of components used in missile steering applications were in line with a very strong fiscal ’19. 

Space and Defense Margins

Margins in the quarter of 14.2% were very strong.  We’re particularly pleased with this margin performance in the face of a global pandemic and at a time when we’re experiencing elevated levels of lower-margin funded development work.  

Full year adjusted margins of 13.3% were up from 13% last year.  Again, this is an outstanding performance given the challenging conditions through the year. 


Space and Defense fiscal ‘21

At the moment, we’re assuming that fiscal ’21 will be somewhat similar to fiscal ’20 with continued strength in both the space and defense markets.  We do not, however, anticipate we’ll see a continuation of the explosive growth in the space market we enjoyed in fiscal ’20.  


Industrial Systems


Industrial Systems Q4

Sales in the quarter of $225 million were 4% lower than last year.  Excluding the impact of forex and acquired sales, underlying organic sales were down almost 10% from the prior year.  Sales were higher in 1 of our 4 markets.  Sales into medical applications were up on strong demand for both our IV and enteral product offerings.    Energy was down on lower investment in off-shore oil exploration, industrial automation was down as the combined effects of the pandemic and a general slowing in capital investment hit, and simulation & test sales were down primarily on depressed demand for flight simulators. 

Industrial Systems fiscal ‘20

Full year sales of $909 million were just 1% lower than last year.  However, there was a significant shift in the mix through the year.  Medical was the bright spot for the year, with sales up 20% on strong demand for our pump products and for various components used in breathing equipment.  Sales into our energy markets were up slightly, the result of the acquired sales from our GAT acquisition.  Sales into industrial automation were already slowing as we entered fiscal ’20 and that slowdown accelerated in the second half as COVID hit.  Finally, sales into simulation & test markets were down across all major submarkets including aero test, auto test and flight simulation. 


Industrial Systems Margins

Adjusted margins in the quarter were 9.7%, down from last year on a less favorable mix and factory inefficiencies across the footprint as a result of the big shifts in demand by submarket.  In the quarter, we incurred $11 million of charges, a combination of restructuring and asset impairments as we look to resize the business and consolidate our activities. 

Adjusted full year margins were 10.3%, with the average margin in the second half down almost 200 basis points from the average margin in the first half. 

Industrial Systems fiscal ‘21

The industrial business is probably the most difficult to predict given the range of end markets we serve.  As we look into the coming year, we’re assuming no recovery in demand for our energy, industrial automation or simulation & test products.  We believe the world will continue to struggle with the effects of COVID and recovery in investment will only begin in fiscal ’22.  For our medical products, we expect another good year, although we think demand will moderate from the highs we saw in fiscal ’20 as the surge in demand for COVID-related equipment wanes. 


Summary Guidance

Fiscal ’20 was an extraordinary year by any measure.  Our employees around the world rose to the occasion and delivered an outstanding performance.  As we close up the year, our company is strong and well positioned to continue to weather the COVID storm through fiscal ’21.  Over the coming 12 months, our planning reflects continued strength in the defense, space and medical markets, continued weakness in the industrial markets and a stabilizing of demand in the commercial aircraft market.  Overall, a year somewhat similar to the second half of fiscal ’20.

Over the last 6 months, we’ve resized our business to align with the future demand.  Our liquidity is strong and our leverage is in our comfort zone.  After one quarter of capital conservation in Q3, we’re back to a more balanced capital allocation strategy this coming year, including actively seeking acquisitions which complement our internal strategy and drive our growth.  We’ll also invest in programs and innovations which will fuel our long-term organic growth and continue to invest heavily in improving our operations. 

Despite the challenges around us, we remain very optimistic about our business and the future potential.  Our long-term strategy of technology focus, market diversity and financial prudence paid off handsomely in fiscal ’20.  Fiscal ’21 will be a year of renewed investment to prepare ourselves for the recovery we believe will come in fiscal ’22, and to position us to take advantage of growth opportunities. 

Now let me pass you to Jennifer who will provide more color on our cash flow and balance sheet.  

Thank you, John. Good morning, everyone.

We had another incredibly strong cash flow quarter, making the back half of this year a record in free cash flow generation.  We achieved these results during a time filled with uncertainty and pressures in some of our end markets.  Our company-wide initiatives that are focused on cash conservation and liquidity continued to contribute to our strong cash performance.

Free cash flow in the fourth quarter was $73 million, bringing the total for the year to $191 million.   Free cash flow conversion, adjusted for charges associated with the pension settlement and the pandemic, was nearly 300% in the fourth quarter and over 100% for the year.

At the outset of the pandemic in the March timeframe, we made significant adjustments to our major capital deployment activities.  We paused our M&A pursuits, halted share repurchases, suspended our dividend and delayed certain capital expenditures.  We also took measures to slow our incoming inventories to be in line with expected demand.  In addition to these cash relief measures, we also actively reduced expenses to mitigate the impacts to our operating margins.

We continue to focus on cash preservation and cost management.  However, we have resumed investments in a measured and balanced way, as our strong financial position affords us these opportunities.

The $73 million of free cash flow for Q4 compares with a decrease in our net debt of $37 million.  During the fourth quarter, we repurchased about 600,000 shares of our stock for $37 million and resumed paying our quarterly dividend.  For the full year, free cash flow of $191 million compares with an increase in our net debt of $105 million.  We repurchased 2.9 million of our shares for $215 million, paid $54 million for the acquisition of GAT and paid $25 million of dividends.

Net working capital (excluding cash and debt) as a percentage of sales at the end of Q4 was 28.4%, about the same level as a quarter ago. Robust collections, including on defense contracts, were offset by increasing inventories, continuing the trend we experienced earlier in the year.

Capital expenditures in the fourth quarter were $18 million, about the same level as in the third quarter and down from a $27 million quarterly run rate in the first half of the year.  We actively managed and prioritized our spend, focusing on compliance and business critical projects.  Depreciation and amortization totaled $21 million, continuing at a fairly constant level throughout the year.

At the end of Q4, our leverage ratio, which is net debt divided by EBITDA, was 2.4x, the same as a quarter ago.  The effects of lower trailing twelve-month adjusted EBITDA and our share buyback activity was offset by strong free cash flow generation.

At quarter end, our net debt was $845 million, including $85 million of cash.  The major components of our debt were $500 million of senior notes, $362 million of borrowings on our U.S. revolving credit facilities and $69 million outstanding on our securitization facility. 

We have nearly $700 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0x on a net debt basis. Our leverage is based on trailing-twelve month adjusted EBITDA and has been impacted by the decline in our business related to the pandemic.  Based on our leverage, we could have incurred an additional $552 million of debt as of the end of our fourth quarter.  We are confident that our existing facilities provide us with adequate liquidity to successfully navigate through these uncertain times.

This past quarter, we took a meaningful step out of being in the pension business, significantly reducing our exposure by settling about half of the liability for our largest defined benefit plan.  That plan is in the U.S. and has been closed to new entrants for more than a decade.  We fully funded this plan in 2018 and adjusted our investment strategy accordingly to reduce our exposure.  In the fourth quarter, we purchased an annuity for retirees who are receiving benefits in the plan, and we took advantage of favorable market conditions to obtain attractive pricing.  Our retirees continue to receive their same benefits, and a reputable insurance company now carries the obligation.  With this transaction, we settled $486 million of the plan’s projected benefit obligation, which triggered settlement accounting.  This resulted in a $121 million non-cash charge as we accelerated unrecognized losses held in equity into our earnings.  We remain fully funded in this plan and are in the process of adjusting the plan’s investment portfolio to address the plan’s remaining participant base.

Cash contributions to our global retirement plans totaled $12 million in the quarter, compared to $10 million in the fourth quarter of 2019.  Global retirement plan expense in the fourth quarter was $21 million, up from $18 million in the fourth quarter of 2019.  For the full year, cash contributions to these plans were $46 million and expense was $79 million.  Expense for 2021 is expected to be $72 million.  The decrease in expense next year includes a modest benefit resulting from shifting assets in the U.S. plan after settling a substantial portion of that obligation.

Our effective tax rate, excluding charges associated with the pension settlement and the pandemic, was 28.3% in the fourth quarter compared to 21.2% in the same period a year ago. The higher adjusted rate in this year’s fourth quarter primarily reflects an earnings mix change this year and lower state tax accruals in the U.S. last year.  For all of 2020, our adjusted tax rate was 20.9% compared to 23.1% in 2019.  The lower tax rate in 2020 reflects an increase in foreign tax credit utilization associated with our 2019 tax return filing, a reduction in rate related to taxes accrued on accumulated earnings in one of our foreign jurisdictions, and legal entity restructuring that reduced withholding taxes previously accrued in another foreign jurisdiction.

As we look forward, we are well positioned to invest in our business.  We expect free cash flow to be respectable in 2021.  We may see shorter-term pressures on inventories as we continue to adjust to changing demand from our customers.  However, the benefits associated with our efforts to create operational efficiencies in our business will outweigh these pressures later in 2021.   With respect to capital expenditures, we are beginning our ramp up from the constrained levels of the back half of 2020.  After just a quarter or two of pausing some key capital deployment activities, we’ve returned to a well-balanced capital allocation.

With that, we’ll turn it back to John for any questions you may have.