Moog 2026 Q3 Earnings Call

Thank you for joining Moog's Third Quarter 2026 Earnings Release Conference Call. I'm Aaron Astrachan, Director of Investor Relations. With me today are 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 materials provided. Lastly, our comments today may include statements related to expected future results and other forward-looking statements which are not guaranteed. 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.

I'm happy to turn the call over to Pat.

Good morning. Welcome to the earnings call. We delivered a robust third quarter with record sales up 15% on prior year. Our 12-month backlog was up 23% on prior year. Our adjusted operating margin demonstrates consistent operational performance. Our record-adjusted earnings per share reflect solid operating performance augmented by tariff refund and tax benefits. In addition, we delivered another quarter of very strong free cash flow generation. Demand remains strong across the portfolio. Defense is benefiting from increased investment, commercial aerospace is supported by long-term customer backlogs and strong aftermarket activity, and industrial is benefiting from growth in data center cooling. The result is a business with better momentum and better financial quality than a year ago.

This quarter is another clear demonstration that both our strategy and our execution are translating into stronger financial outcomes. Let's turn our attention to the end markets and macro environment, starting with defense. We're experiencing a generational inflection in defense demand both in the U.S. and in Europe. The debate in the U.S. national security expenditure for 2027 is not whether it should increase, but by how much. The key priority areas of relevance are missile replenishment, space-based capabilities, and aircraft procurement. The demand signals are clear, and the momentum is building around the required industrial investment. The critical concern now is the expansion of industrial capacity. This is an environment where qualified content, long-term customer relationships, and operational execution matter. In that context, we're well-positioned on missile actuation and controls, space systems, defense components, and selected next-generation platforms.

We will continue to invest in the capacity and capabilities that allow us to convert this step change in demand into delivered performance. The commercial aerospace market continues to expand. Aircraft order backlogs remain robust, supported by increasing passenger demand. Production is steadily increasing as bottlenecks continue to be addressed. We have good long-term visibility of increasing original equipment rates, while the elevated fleet age and constrained new aircraft availability continue to support strong aftermarket activity. Industrial markets over the last six months in both the U.S. and Europe have been solid. Demand tied to energy, semiconductors, and medical has been positive. AI data center infrastructure investment has created exceptional demand for data center cooling products. Our largest end markets are favorable, with long-cycle structural growth drivers. Scaling to support growth is our primary focus. We are actively managing facility expansion, workforce availability, and supply chain capacity to deliver.

Turning attention to the three leadership priorities that guide our work: customer focus, people, community, and planet, and financial strength. Foreign defense opportunities were a common theme at recent trade events in the U.K. and France, providing evidence of strong near-term European growth opportunities for us. We had a strong presence at the Farnborough International Airshow, creating the opportunity to advance discussions with customers, suppliers, and investors. The show focused attention on European defense demand, the strength of commercial aircraft backlog, and the ability of the aerospace and defense industrial base to scale. Within Military Aircraft, we reaffirmed, extended, and expanded distribution partnerships that enhance our global aftermarket reach. We announced new certification and direct foreign military orders for our avionics product line. Within commercial aircraft, we enhanced our aftermarket support network through partnership and added additional airline approvals for engine accessory repairs.

Eurosatory in Paris provided similar opportunities to engage with defense partners. With record attendance and increasing international presence, there was a recognition of the urgency to rapidly build capability shaped by the Ukrainian war. There was a strong focus on execution to deliver European rearmament, drones and counter-drone systems, missiles, ammunition, armored vehicles, and industrial capacity. We announced the European collaboration to combine our field-proven remote integrated weapons platform with a robotic combat vehicle. We also recently demonstrated an enhanced counter-drone system integrating third-party radar, our own AI-assisted fire control, and our remote integrated weapons platform. Continued investment in AI data centers is fueling high demand for our data center cooling pumps. We will have almost quadrupled revenue within a year. We addressed the demand surge through active management of our supply base, optimization of our manufacturing process, and the addition of production lines.

We prioritize maximizing our production yield, efficiency, and flow before investing in those additional lines. The data center cooling pump production ramp demonstrates what is possible and gives confidence for the anticipated high-volume missile production ramp ahead. Across our markets, the theme is consistent: the urgent need to scale capacity to meet strong customer demand. We're well-positioned to deliver. We were already a proven incumbent with strong operational performance. We now have the advantage of a simplified business creating a strong foundation to scale and grow. Now turning to people, community, and planet. Talent is a key ability to scale capacity. Our Western New York Training Center, which opened in 2025, is delivering real impact. To date, we've onboarded 200 production staff, trained almost 40 machinists, and certified skills of 1,400 new and existing staff.

The center is reducing the time to proficiency by many weeks, which is critical as we ramp. We're extending this model to other campus locations that are experiencing significant growth. We remain disciplined in our execution and steadfast in achieving our goals. Our Baguio operation received awards for excellence in hazardous waste management and excellence in environmental compliance and stewardship. These actions are pragmatic. As our markets shift towards higher demand and greater production requirements, our workforce capability, structured knowledge management, and environmentally responsible operations are key enablers of our ability to ramp. Now turning to financial strength. The key financial measures are robust. Higher sales, strong adjusted margins, and strong free cash flow. Simplification informed by 80/20 continues to be the key enabler. Space and defense has prioritized focus and improved execution by means of portfolio reviews down to product line level.

Military Aircraft has tailored 80/20 to drive business decisions for multi-year programs. Commercial aircraft is using segmented P&L in decision-making around transitions and focus factory activities. Industrial continues to demonstrate site-level improvements while now looking for group-wide opportunities. We are clear about where we win, disciplined in how we work, selective about where we invest, and able to turn attractive market demand into improved financial performance. Now let me turn briefly to guidance. We're updating our fiscal 2026 guidance to reflect our view of market conditions and our performance in the third quarter. We're increasing revenue guidance to reflect our success meeting increased demand. We're increasing adjusted operating margin and earnings per share to reflect tariff refunds and tax impacts, in addition to solid operational performance, and we're increasing cash flow conversion to reflect lower capital expenditure.

The broader message is that fiscal 2026 is shaping up to be another outstanding year. We will deliver substantial revenue growth reflecting the acceleration in demand and outstanding financial results reflecting our effective execution. We remain focused on delivering the year and continuing to build financial strength. With that, let me hand over to Jennifer for a detailed breakdown on the quarter and our updated fiscal 2026 guidance.

Thanks, Pat. Our financial performance this quarter was very strong. We had record sales and adjusted earnings per share and robust operating margin and cash generation. Before I get into the details of our performance, I wanted to highlight an item that occurred in the quarter and that is included in the adjusted results that I'll talk through. We recognize the benefit related to the recovery of previously paid IEEPA tariffs in our adjusted results. We incurred these tariffs in the second half of FY 2025 and the first half of FY 2026. There's a $30 million benefit included in operating profit for the tariff refund this quarter, and that represents 270 basis points of operating margin and about $0.70 of earnings per share. There are other items that we excluded from our adjusted results in the third quarter.

The net benefit that we excluded this quarter was $1.02 per share. We completed a comprehensive review of our domestic R&D tax credit and refined our methodology so that it better reflects the breadth of our innovation activities. The benefit attributed to prior years was $35 million. We also excluded an $8 million one-time tax benefit related to ongoing legal entity simplification initiatives. In addition, we excluded $13 million of charges that were largely associated with simplification activities. I'll now talk through our third quarter results excluding these adjustments. Sales in the third quarter of $1.1 billion were 15% higher than last year's third quarter. Sales increased in each of our segments, with three of our segments increasing in the high teens and the other in the high single digits.