Fourth Quarter Conference Call, Fiscal Year 2017


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 3, 2017 our most recent Form 8K filed on November 3, 2017 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 ’17 and reflect on our performance for the full year.  We’ll also provide our initial guidance for fiscal ’18. 

Before I dive in, I wanted to explain a change in our organizational structure and the associated reporting going into fiscal ’18. At the end of September, Larry Ball retired. Larry was the segment President in charge of our Components segment since Moog acquired this business from Northrup Grumman in 2003. Over his 14 year tenure, Larry grew the business from $130 million to over $500 million, and delivered excellent financial results year after year.  We’ll miss Larry and we wish him well in retirement. Going forward, we’ve decided to reorganize the Components segment into its 2 major markets – A&D and Industrial – and to align these markets with the other segments which serve similar customers and applications. Therefore, from the start of fiscal ’18, we’re integrating the A&D markets into our Space & Defense segment and the Industrial markets into our Industrial Systems segment.  There is no change to our Aircraft segment. 

In our remarks today, and our supporting data pack, we describe the fiscal ’17 results in each of the 4 operating segments as in the past. However, when we describe our outlook for fiscal ’18, we’ll provide guidance for only 3 segments next year.  Over time, we believe this change will improve our service to our customers, leverage our capabilities more fully and simplify our reporting. 

Now, let me start with the headline numbers and then offer some thoughts on the year.

  • First, it was a good quarter financially.  Sales were up 5%, operating margins were 10.7%, the highest of the year, and we enjoyed a lower than projected tax rate to yield earnings per share of $1.07.  This brings our full year result to $3.90/share, 15 cents ahead of what we projected 90 days ago.    
  • Second, it was another quarter of positive free cash flow to end the year at just over 100% conversion ratio. 
  • Finally, we’re providing a first look at fiscal ’18 today.  We’re projecting sales of $2.62 billion up 5% and 100 basis points of operating margin expansion, but a higher tax rate.  The net result will be a 5% increase in earnings per share to $4.10, plus or minus 20 cents. 

As we reflect back on fiscal ’17, the following highlights stand out.

  1. First, it was another year of first flights with Moog hardware.  This year we watched the first flights of the Airbus A350-1000, the Embraer E195-E2, The Boeing 787-10 and the Comac C919.  In September, the 787 celebrated its one millionth flight – all safely completed with Moog flight controls.  Our long-term investment in R&D to become the premier flight control supplier continues to come to fruition. 
  2. Second, fiscal ’17 was a better year for most of our markets after a tough fiscal ‘16.  We enjoyed organic growth in most of our businesses.  Our commercial aircraft business continued to grow, our defense businesses improved and our oil related businesses stabilized.  We experienced some continued challenges in our industrial businesses outside the US, but, as the year closed, we started to see the order book firm in this market.  
  3. Third, we continued to shape our portfolio for the future, divesting our European space facilities and selling off a product line we acquired as part of our additive manufacturing acquisition.  In parallel, we acquired Rotary Transfer Systems, an investment that strengthens our industrial slip ring business in Europe.  
  4.  Finally, to reiterate, our overall results came in stronger than we had projected at the start of the year.  Sales were up 4%, earnings per share of $3.90 were 12% higher than last year and we had another year of healthy cash flow.  The years’ results included write offs associated with our portfolio refinement, as well as the associated tax benefits.  All told, the net impact of both of these effects on earnings per share was negligible. 

After several years of restructuring and cost cutting, fiscal ’17 was the year our businesses started to turn around and our focus shifted to growth. We’re optimistic as we look to fiscal ’18 for continued growth. As always, it was the dedication and commitment of our 11,000 employees around the world that made this all happen, and I’d like to thank them for their hard work. 

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

Q4 Fiscal ‘17

Sales in the quarter of $649 million were up 5% from last year.  Sales were up in Aircraft, Space and Defense and Components but were slightly lighter in Industrial Systems. Taking a look at the P&L, our gross margin was off 80 basis points from last year on a negative shift in the mix in our Aircraft segment.  R&D was about flat with last year, a combination of lower Aircraft R&D, but higher spend in our Space & Defense and Components segments. SG&A was up in the quarter but in line for the year.  Last year we incurred about $12 million of restructuring and impairment expenses in the quarter. Interest expense was level with last year. Our effective tax rate was low again this quarter at 20.8%. The overall result was net earnings of $39 million and earnings per share of $1.07.   

Fiscal ’17

Full year sales of $2.5 billion were up 4% from fiscal ’16.  Sales were up in Aircraft, Space and Defense and Components but lower in Industrial Systems. Full year operating margins of 10.0% were up marginally from last year. We saw margin expansion in Aircraft and Industrial with Components margins about even with last year.  Margins in Space & Defense were negatively impacted by the continued portfolio clean up in that segment.  Earnings per share were up 12% year over year. Free cash flow for the year of $142 million was just over 100% of net earnings, the 5th year in a row where free cash flow conversion exceeded 100%. 

Fiscal ’18 Outlook

For fiscal ’18 we’re projecting sales of $2.62 billion, up 5%.  We anticipate single digit organic growth in each of our segments. Operating margins of 11.0% will be up 100 basis points over fiscal ’17.  Our tax rate in fiscal ’18 will normalize to 31% after an unusually low rate in fiscal ’17. The net result will be earnings per share of $4.10, plus or minus 20 cents.  Free cash flow next year is projected to be $135 million, or about 90% of net income. 

Now to the segments.  I’d remind our listeners that we’ve provided a 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 $284 million were up 7% from last year.  The strength was on the commercial side of the house where sales were up across all product categories.  OEM sales to Boeing and Airbus were higher on the 787 and A350 programs respectively.  We also saw sales increases in our business jet product lines across the Gulfstream and Bombardier platforms.  The commercial aftermarket was up nicely, driven by strength on some legacy platforms. On the military side, higher sales on the F-35 and other fighter programs, coupled with increased funded development work, compensated for lower OEM sales on our helicopter programs.  The military aftermarket was also down from a year ago as a result of a general softness across multiple programs, combined with a temporary parts availability issue on the V-22 program. 

Aircraft Fiscal ‘17

Fiscal ‘17 was a strong year for our aircraft business.  Sales were up 6% organically to $1.12 billion with increases in both the military and commercial books. As expected, the growth continues to be fueled by the volume ramp up on our major programs, the F-35 and the A350.  We saw increases in our business jet product lines and in the commercial aftermarket driven by higher 787 activity. On the military side, growth in funded development programs more than offset lower sales on several foreign platforms. The military aftermarket was lower across a range of programs as several one-time initiatives we enjoyed in FY16 wound down this year.

Aircraft Margins

Margins in the quarter of 10.8% were up 50 basis points from last year, despite an adverse shift in the sales mix. Higher sales on the A350 program, low-margin funded military development and the lower military aftermarket resulted in a lower gross margin that last year. However, significantly lower R&D in the quarter more than offset the adverse sales mix. 

For the full year, aircraft margins of 10.1% are up 80 basis points from last year.  It is a similar story to the fourth quarter with higher sales on lower-margin programs resulting in an overall lower gross margin. However, $13 million of lower R&D expenses and the absence of $7 million in restructuring charges from fiscal ‘16 resulted in an overall improvement over the operating margin from last year. 


Space and Defense

Space and Defense Q4

Sales in the quarter of $101 million were up 4% from last year.  Sales on the Defense side were up nicely on higher sales into military vehicle applications. Space sales were down compared to a year ago as a result of the divestitures we completed during FY17. Excluding the effect of the divestitures, organic sales in the Space market were up 4% on robust satellite avionics business. 

Space and Defense Fiscal ‘17

Full year sales were up 8% from last year. The story for the year mirrors the story for the quarter.  Defense sales were up sharply as a result of record shipments of components for military vehicles. Space sales were about flat with last year, but up 4% organically on strong sales of satellite avionics. 

Space and Defense Margins

Margins in the quarter were 9.9%.  We recently decided to transfer our additive manufacturing capability from Detroit to our campus in East Aurora and we took a charge of $2 million in the quarter as we dispose of some assets we’ve decided not to move. 

Full year fiscal ’17 margins were 9.5%.  These margins include $13 million in charges associated with the portfolio cleanup we performed this year, including selling our European space facilities and divesting a product line we acquired as part of
our additive manufacturing acquisition. Excluding these effects, the underlying operating margins in our Space and Defense business continue to be very healthy. 


Industrial Systems

Industrial Systems Q4

Sales in the quarter of $127 million were 3% lower than last year.  Sales were lower in energy and industrial automation, but up slightly in simulation & test. In the energy market, we continued to see an erosion of our wind market in Brazil, as a result of the GE takeover of Alstom, and in Europe.  Sales to wind customers in China were up marginally, based on the introduction of our new product. In the industrial automation market, sales were generally lower across the various markets we serve.  Finally, simulation & test sales were up with strength in both sub-markets. 

Industrial Systems Fiscal ‘17

Full year sales of $477 million were 7% lower than last year. The energy and industrial automation markets drove the lower sales. In energy, we had significantly lower sales of pitch control systems in both Brazil and Europe while sales to our industrial automation customers were lower across the broad range of markets we serve.  On a positive note, we’re seeing an improving order trend in the industrial automation market which we believe bodes well for the coming year. Test & simulation sales were up marginally over last year. 

Industrial Systems Margins

Margins in the quarter were 8.3% and for the full year were 9.7%. We’re seeing gradual improvements in the margin in this segment, although our on-going investment in the wind energy business continues to put downward pressure on our results.  As we move into fiscal ’18, our strategy in wind will shift from driving growth to improving profitability as our new products gain traction in the market place. 



This is the last quarter we’ll report on the Components segment as a stand-alone entity.

Components Q4

Sales in the quarter of $137 million were up 10% from last year. We saw growth across each of our 3 major markets.  Sales were up modestly in our aerospace and defense markets, with stronger defense vehicle sales more than compensating for slightly lower sales of components for aircraft.  Sales in our industrial markets were up strongly with over 70% of the growth coming from the recent acquisition of Rotary Transfer Systems in Germany.  Within our industrial markets, sales into the energy business were modestly higher than last year, another encouraging sign that this market has stabilized after several years of decline. Finally, sales into the medical markets were up nicely on stronger pump and sets sales. 

Components Fiscal ‘17

Full year sales of $501 million were up 7% from last year.  About 40% of the growth was due to higher sales of our medical pumps and sets, 35% was acquired growth and the remaining 25% was across a broad range of both A&D and non-A&D markets. Given the significant challenges this business faced in fiscal ’16, we’re very pleased that fiscal ’17 has been a return to growth across most of the portfolio.  

Components Margins

We had a strong finish to the year, with margins in the fourth quarter of 13.2% to bring our full year margins of 10.5%. 


Fiscal ’18 Segment Outlook

I’ll now provide a little more color on what we expect in fiscal ’18 for each of our operating segments.  I would remind our listeners that we have 3 operating segments going forward, as we reorganize our Components segment into our Space and Defense and Industrial Systems segments. 

Aircraft Fiscal ‘18 Sales

We’re projecting fiscal ’18 sales of $1.18 billion, an increase of $50 million over fiscal ’17. In recent years our growth has been fueled by the new commercial programs, however, the projected growth next year is primarily on the military side as the F-35 program continues to ramp up and the military aftermarket improves. On the commercial side, despite higher 787 sales, we anticipate our Boeing book of business will be down on lower production rates on our legacy programs, particularly the 777. The A350 program will continue to ramp up nicely, and we anticipate our business jets will be about flat with fiscal ’17. We’re planning for a softer commercial aftermarket as we believe many of our airline customers fulfilled their long-term 787 spares needs in fiscal ’17. 

Aircraft Fiscal ‘18 Margins

We’re projecting a continued steady increase in Aircraft margins in fiscal ’18. Fiscal ’18 margins of 10.6% will be up 50 basis points over fiscal ’17. The margin improvement is the result of lower R&D spending and continued cost improvements on our new commercial OEM programs, offset by a negative shift in the mix as sales on our mature commercial programs are replaced by growth on the A350 program.   

We believe that Fiscal ’17 was the turning point in our aircraft margin story. R&D came down significantly and production costs on our new OEM programs improved nicely. This story will continue in fiscal ’18 and for several more years to come.  We’re projecting R&D at 6.8% of sales in fiscal ’18 with a longer-term target of 5% of sales. We’ll continue to make progress on bringing the cost of production on our new commercial programs down and, as we look out a couple of years, the aftermarket in these new programs will build.  We believe that defense spending is poised to turn up and anticipate that several of our foreign military platforms should recover.  In addition, longer term, our funded military development work of today will turn into new production programs.  Balancing these positives will be an erosion of our commercial legacy book of business, but the net result should be a steady, multi-year expansion of our aircraft margins.

Space and Defense Fiscal ’18 Sales

As I mentioned at the start of the call, we’re combining the A&D activities from our Components segment into the Space and Defense segment going forward. We’re forecasting sales of this combined entity in fiscal ’18 of $547 million, split approximately $200 million in Space and $350 million in Defense. Relative to the equivalent markets in fiscal ’17, Space sales will be 6% higher on strength in launch vehicles and satellite avionics.  Defense sales will be up 2% with higher missiles and security sales compensating for lower vehicle sales. 

Space and Defense Fiscal ’18 Margins

For fiscal ’18, we’re forecasting margins of 11.5%. These margins are up over 130 basis points from the equivalent business in fiscal ’17. However, if we remove the adverse impact of our divestitures from the Space and Defense operating profit for fiscal ’17 then operating margins are more or less in line as we move from fiscal ’17 into fiscal ’18. 

Industrial Systems Fiscal ‘18

Similar to the Space and Defense segment, our forecast for Industrial Systems in fiscal ’18 includes the Industrial activities of our former Components segment. We’re forecasting sales of the combined businesses in fiscal ’18 of $894 million, split into 4 major markets, energy, industrial automation, simulation & test and medical.  We’re anticipating organic sales growth of 6% in total, with growth ranging from 4% to 8% in each of the four major markets.

Industrial Systems Margins

For fiscal ’18 we’re forecasting margins of 11.2%. This represents an improvement of 80 basis points over fiscal ’17 on the back of higher sales and an improving performance in our wind energy business. 


Summary Guidance

Our initial guidance for fiscal ’18 builds on a strong fiscal ’17. We’re optimistic that we’ll see organic growth in each of our major markets next year.  We also believe that we‘ll continue to see that momentum build over the following years as the Aircraft book continues to mature and the portfolio focus in our Space and Defense and Industrial segments plays out. Our focus on top line growth, operating margin expansion and strong free cash flow remains unchanged. 

I’ll finish my year-end comments as I have done in previous years by looking at our business through the lens of the end markets we serve. Those markets are defense, industrial, commercial aerospace, energy, space and medical.

Defense remains our largest single market with about one third of our sales.  Defense spending has gone through a multi-year down cycle but the signs are now encouraging that the cycle is turning and there will be increased budgets in the future. Our flagship F-35 program continues to ramp up and over the last 2 years we’ve won enviable positions on new aircraft programs – most of which we cannot discuss. Our foreign military aircraft programs have been relatively quiet for several years but there are signs of renewed activity.  Our missile business remains strong and we’re investing to expand our scope on military vehicles by providing complete remote turret systems.  Despite the signs that future defense spending will increase, we’re taking a cautious approach and have not factored any significant increase in defense budgets into our FY18 plan. 

Commercial aerospace is our second largest market with about a quarter of our sales. This business has grown dramatically over the last decade, from less than $300 million in 2008 to over $600 million in 2017. Our focus in this business continues to be on execution - completing the development of our major platforms and optimizing the costs on our new production programs.  In fiscal ’17 we saw the R&D expense come down significantly and that trend will continue in fiscal ’18, albeit at a slower pace.  Fiscal ’18 will see a continued ramp on the A350 program and the initial production on the E2 jet.  We’re now on a steady path to improved margins in this business, a trend that will be further helped by the pickup in the aftermarket towards the end of the decade. 

Industrial is our next largest market with just over a fifth of our sales. This business has improved in the US over the last year or so, but our European and Asian businesses have continued to be slow. On a positive note, over the last few quarters we’ve seen a strengthening of our order book outside the U.S. and are therefore optimistic that fiscal ’18 will be a return to growth. Our focus in this business is on expanding our scope of supply in industrial hydraulics and on developing new actuation technologies in our electro-mechanical products.   

Energy, space and medical each represent less than 10% of our sales. 

Our energy market will continue to be a challenge in fiscal ’18. On a positive note, our oil & gas businesses have stabilized and our investment in wind energy has resulted in new products we’re introducing to the market. Over the next year or so we’ll learn if our wind investment strategy will pay off. 

In our space market, we’re primarily focused on future U.S. opportunities. We’re seeing growing interest in our satellite avionics products and are continuing to invest in propulsion systems which can benefit from the growth in the small satellite market. In addition, we remain committed to investing in the Ground Based Strategic Deterrent program. This is a long term play, which could be a significant business for Moog in a decade or so.  

Finally, within our medical market, our medical pumps line performed very well again in fiscal ’17. We’re investing in next generation pump products which we believe will further strengthen our position in this market over the long term.

Our underlying strategy continues unchanged. We’re a motion and controls technology company that looks to create value for our customers by adapting our core products to their specific needs. Customer intimacy is our strength – where our engineers work with our customers’ engineers to solve their most difficult technical challenges.  We apply our products in applications where “performance really matters”, where the cost of failure is high and reliability is a must.  We serve a wide range of diversified markets which provides for financial stability and significant opportunities for long-term growth.  We invest heavily in technology and take a long-term view of these investments.  We seek adjacent acquisitions which complement this strategy.  Our internal initiatives to deliver on our goals have not changed.  They are Innovation, Lean and Talent Development.  Finally, we’re focused on deploying our capital to maximize our shareholder returns over the long term. 

For fiscal ’18, we anticipate sales of $2.62 billion and earnings per share of $4.10, plus or minus 20c.  Similar to previous years, we anticipate a slow start to the year with earnings per share in the first quarter of between 80c and 90c. 

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


Thanks, John.  Good morning.

We finished the year with $18M of Free Cash Flow in the fourth quarter resulting in Free Cash Flow for all of 2017 of $142 million and a conversion ratio of 101%.  This follows strong results that have averaged better than 140% conversion over the previous four years.

The $142 million of Free Cash Flow for the year compares with a decrease in

our net debt of $92 million. The difference is primarily related to the April 2nd acquisition of the Rotary Transfer Systems business from Morgan Advanced Materials with operations based in Europe. Rotary Transfer Systems designs and manufactures industrial slip rings and opens up the opportunity for us to expand our slip ring business internationally.  The business has been managed as part of our Components segment with second half sales in 2017 of $12 million, in line with our projections.


Net Working Capital (excluding cash and debt) as a percentage of sales was 25.2% compared with 25.5% a year ago.  Over the last eight years, we’ve reported a rather steady decline in this working capital metric since we peaked at almost 34% of sales in 2009.

For 2018, we’re forecasting Free Cash Flow of $135 million, reflecting a cash conversion ratio of about 90%.  As we’ve shared previously, over the next year or so we expect to see higher capital expenditures for growth-related investments in facilities for engine propulsion testing and for the production ramp of the F-35 program.  We’re also forecasting that customer advances will begin declining after reaching their current elevated levels.

Capital expenditures in the fourth quarter were $30 million, including $4 million for the purchase of a previously leased facility.  Depreciation and amortization totaled $23 million for Q4.  For all of 2017, CapEx was $76 million while D&A was $90M.  For 2018, we’re forecasting CapEx of $95 million while D&A will be about $90 million.

Cash contributions to our global retirement plans totaled $19 million in the quarter resulting in $92 million of contributions for the full year. This compares with $95 million for all of fiscal ‘16. For 2018, we’re planning to make contributions into our global retirement plans totaling $92 million, the same as in 2017. Global retirement plan expense in 2017 was $63 million compared with $65 million in 2016.  In 2018, our expense for retirement plans is projected to be $58 million.

Our effective tax rate in the fourth quarter was 20.8% compared with last year’s 31.3%.  This year’s Q4 rate included a benefit related to the utilization of a Net Operating Loss for a business restructuring that took place earlier in the year. We had not factored this NOL benefit into our full year tax rate projections last quarter. We were able to recognize this benefit only after all tax uncertainties were addressed, which happened this quarter. The magnitude of this tax benefit in the quarter was $3 million or the equivalent of $.08 per share.  In addition, the mix of our taxable earnings for Q4 came in more favorable than we had forecasted three months ago, helping to lower our final tax rate for all of 2017 relative to expectations.

We’ve reported quite a bit of quarterly volatility in our effective tax rate this year.  In the first quarter of 2017, our tax rate was 17.6%.  In the second quarter the rate was 34.3%.  Our third quarter rate was 17.0%.  And now in our fourth quarter, 20.8%.  The fluctuations – quarter to quarter – are mostly the result of tax benefits that are associated with divestitures whose related losses are included in our operating results.  When we consider the divestiture-related pre-tax operating losses and the associated tax benefits that we reported throughout 2017, the net impact on our 2017 EPS was negligible.

For all of 2017, the effective tax rate was 22.7% vs. 28.5% in 2016 with the decrease mostly related to tax benefits associated with our dispositions.  Removing the effects of the divestiture and the NOL benefit previously mentioned, our effective tax rate for 2017 would have been 27.8%. For 2018, we’re forecasting an effective tax rate of 31.0% reflecting a more normal base rate as we look ahead.

Our leverage ratio (Net Debt divided by EBITDA) decreased to 1.8x compared with 2.2x a year ago.  Net debt as a percentage of total capitalization was 33%, down from 41% last year.  At quarter-end, we had $535 million of available, unused borrowing capacity on our $1.1 billion revolver that terms out in 2021.

Before I pass you back to John, I’d like to highlight that we’re forecasting a very slow start in 2018 for Free Cash Flow.  Despite our forecasted conversion ratio of about 90% for all of 2018, our modeling tells us that our Q1 Free Cash Flow could be rather soft. This will be a timing phenomenon driven by both receipts and disbursements, and the latter quarters in 2018 will make up for this anticipated slow start to the year.

With that, I’d like to turn you back to John for any questions that you may have.