Moog Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018; comparisons are with the three and six months ended April 1, 2017. Moog designs and manufactures precision motion and fluid controls for aerospace, defense and industrial markets. Its three reporting segments are Aircraft Controls, Space and Defense Controls, and Industrial Systems.
Financial results
| Metric | Three months ended Mar. 31, 2018 | Year-over-year | Six months ended Mar. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Net sales | $689.0 million | Up 9% | $1,316.6 million | Up 8% |
| Gross margin | 28.0% | Down from 29.3% | 28.6% | Down from 29.3% |
| Net earnings attributable to Moog | $14.0 million | Down 56% | $15.3 million | Down 76% |
| Diluted EPS | $0.39 | Down from $0.88 | $0.42 | Down from $1.73 |
| Operating cash flow | Not separately reported for the quarter | $45.2 million | Down from $121.7 million |
Second-quarter operating profit by segment was $33.5 million for Aircraft Controls, $16.8 million for Space and Defense Controls, and a $6.1 million loss for Industrial Systems. Sales increased in all segments. Foreign currency translation added approximately $15 million to quarterly sales and $23 million to first-half sales.
Balance sheet, cash flow and liquidity
- At March 31, 2018, cash and cash equivalents were $255.5 million, down from $368.1 million at September 30, 2017. Current assets were $1,586.3 million and current liabilities were $668.9 million.
- Long-term debt was $907.4 million, excluding current installments; total debt carrying value was $910.2 million. Net debt to capitalization was 34%, compared with 33% at fiscal year-end. Moog reported compliance with its debt covenants.
- Cash flows for the first six months were $45.2 million from operations, $89.8 million used in investing and $79.4 million used in financing. Investing included $43.9 million of capital expenditures and $42.1 million for acquisitions.
- The $1.1 billion revolving credit facility had $480 million outstanding. The filing reports $586 million of unused capacity, but borrowing capacity under the leverage covenant was limited to $466 million. The $130 million receivables securitization facility was fully drawn.
Material changes and unusual items
- Wind pitch control exit: Moog concluded it had no viable business model in this Industrial Systems business and planned to phase out participation over six months. The second-quarter restructuring charge was approximately $31.4 million, including $7.3 million of inventory write-downs, $14.5 million of non-cash asset-related charges, $7.4 million of severance and $2.1 million of other costs. The charge reduced gross profit and drove Industrial Systems to a quarterly operating loss.
- Tax effects: The six-month effective tax rate was 79.2%, including a $31.3 million transition tax on foreign earnings and a $15.9 million provision for taxes on undistributed earnings, partly offset by an $9.0 million deferred-tax remeasurement benefit. Management said accounting for the Tax Cuts and Jobs Act remained provisional. Excluding the Act’s special effects, the first-half effective tax rate was 29.2%.
- Other comparisons: Prior-year other expense included $13.1 million of losses on divestitures of non-core Space and Defense Controls businesses. First-half 2018 earnings also reflect weaker Industrial Systems results and higher pension-related cash outflows. Moog acquired VUES Brno for approximately $62.7 million, including assumed debt, on March 29, 2018.
- Moog early adopted ASU 2018-02 and reclassified $47.1 million of stranded tax effects from accumulated other comprehensive loss to retained earnings; this was an equity reclassification, not an operating earnings charge.
Outlook, management commentary and risks
Management’s fiscal 2018 outlook called for sales of approximately $2.687 billion, up 8%, and operating profit of $261 million, up 4%. Expected segment sales were $1.195 billion for Aircraft Controls, $557 million for Space and Defense Controls, and $934 million for Industrial Systems. Management projected a 48% effective tax rate and diluted EPS of $2.47–$2.87, midpoint $2.67, including restructuring and special tax effects. Excluding those effects, it forecast a 26.7% tax rate and diluted EPS of $4.20–$4.60, midpoint $4.40.
Management expected growth from military OEM sales, industrial automation, space programs and favorable currency, while anticipating lower legacy Boeing OEM sales and continued mix and cost pressures in some programs. It expected fiscal 2018 capital expenditures of approximately $95 million and dividends of approximately $18 million. The filing notes sensitivity to economic cycles, defense funding and contract awards, fixed-price contract cost overruns, backlog conversion, Boeing demand, supplier performance, foreign exchange, pension assumptions, acquisition integration, taxes and debt covenants.
Moog stated that pending legal and environmental matters were not expected to have a material adverse effect, while warning that customer claims, disputes or further contract cost growth could require additional loss provisions. It had $47.4 million of standby letters of credit outstanding. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Key facts investors should verify
- Whether the wind pitch control exit and related restructuring are completed on schedule and whether further charges or cash costs arise.
- Actual results against the fiscal 2018 guidance, particularly the difference between reported and adjusted EPS and the final Tax Act impact.
- Whether operating cash flow recovers from the first-half decline, given pension contributions, working-capital needs and planned capital spending.
- Debt covenant headroom and available borrowing capacity, which is lower under the leverage covenant than stated unused facility capacity.
- Execution and profitability of fixed-price development contracts, backlog conversion, and demand trends in defense, commercial aerospace and industrial markets.