Moog Inc. — Q3 2015 Form 10-Q Summary
Reporting period: Third quarter and first nine months ended July 4, 2015, compared with the periods ended June 28, 2014. Amounts are U.S. dollars; financial statement amounts are in millions unless otherwise noted. Moog designs and manufactures precision motion and fluid-control systems across aerospace and defense, industrial, and medical markets.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $634.5 | $683.7 | $1,902.3 | $1,977.0 |
| Gross margin | 30.0% | 29.6% | 28.8% | 30.3% |
| Earnings before taxes | $50.7 | $64.7 | $141.6 | $165.1 |
| Net earnings | $36.3 | $48.1 | $103.7 | $117.9 |
| Diluted EPS | $0.94 | $1.08 | $2.59 | $2.59 |
| Operating cash flow | — | $206.8 | $210.0 |
- Quarterly sales declined 7% and nine-month sales declined 4%. Management attributed $31 million of the quarterly and $71 million of the year-to-date sales decline to foreign-currency translation, particularly the weaker euro.
- Year-to-date gross margin fell 1.5 percentage points, primarily from adverse sales mix, including lower military and aftermarket sales in Aircraft Controls and lower energy sales in Components. Quarterly gross margin improved slightly year over year.
- Cash and equivalents were $277.4 million at July 4, 2015, versus $231.3 million at fiscal year-end. Operating cash flow was nearly flat year over year; capital expenditures were $57.7 million. Cash was primarily held outside the U.S. and would be subject to U.S. tax if repatriated.
- Total debt was approximately $1.075 billion, plus $0.4 million of short-term borrowings; long-term debt was $309.9 million higher than at September 27, 2014. Net debt to capitalization rose to 42% from 32%, primarily due to share repurchases. The company reported $420 million of unused capacity, but covenant limits restricted additional borrowing to about $350 million. It was in compliance with its covenants.
- Moog repurchased approximately 7.859 million shares for $549 million cumulatively under its program through July 4, 2015. The nine-month cash-flow statement reports $297.4 million of treasury-share purchases. Lower average shares outstanding helped support EPS despite lower earnings.
Material changes and segment trends
- Sales and operating profit declined in Aircraft Controls, Space and Defense Controls, and Industrial Systems. Components had broadly flat nine-month sales but lower profit; Medical Devices grew sales and profit.
- Aircraft Controls’ nine-month sales fell 3% and operating profit fell 15%, reflecting lower military and aftermarket activity and unfavorable mix. Space and Defense Controls’ sales fell 3% and profit fell 22%, including an $8 million accounting correction recorded in Q2 2015.
- Industrial Systems’ nine-month sales fell 11%, affected by currency, softer economic conditions, and energy-market pressure. Components’ operating profit fell 10%, principally due to weaker marine-energy demand amid lower oil prices.
- Medical Devices’ nine-month sales increased 7% and operating profit increased 65%, supported by higher pump and enteral-set sales, improved mix, and lower operating costs. The segment also recorded a $1 million loss on the sale of two small operations.
- Q3 included $6.6 million of restructuring expense, more than half related to terminating a Space and Defense Controls selling-and-marketing contract. Management expects about $7 million of savings over the next four quarters from these actions. Prior restructuring actions were expected to generate $15 million of 2015 savings; $9 million had been realized through nine months.
Outlook, commentary, and risks
- 2015 outlook: Sales expected to decline 4% to $2.53 billion; operating margin expected at 10.0%; net earnings expected to decline 13% to $138 million; diluted EPS expected to decline 1% to $3.50. Management cited foreign exchange, weaker industrial and energy demand, declining military and space activity, and unfavorable mix. Share repurchases explain why projected EPS decline is less than the earnings decline.
- 2016 outlook: Sales expected to rise 1% to $2.57 billion, operating margin to reach 10.7%, net earnings to increase 7% to $148 million, and diluted EPS to increase 14% to $4.00. Management expects Aircraft Controls growth, including the Airbus A350 ramp, and cost-containment benefits; Components sales and some segment margins remain under pressure.
- Key business exposures include government funding and contract delays or cancellations, fixed-price contract cost overruns and estimates, backlog conversion, Boeing customer concentration, foreign-currency movements, cyclical industrial and aerospace demand, lower oil prices, pension costs, and debt covenants.
- Medical Devices goodwill is particularly sensitive: the prior impairment test showed fair value only 10% above carrying value. Management warns that weaker growth, product delays, market-share shortfalls, or adverse strategic changes could lead to impairment. No material adverse effect was expected from pending legal or environmental matters, but customer contract disputes could result in additional loss provisions with a material impact.
- The company reported no material change in market-risk disclosures, no material off-balance-sheet arrangements, and effective disclosure controls. No clear full-year cash-flow or earnings guidance beyond the stated outlook is provided.
Important facts for investors to verify
- Whether the 2015 sales and margin outlook is achievable given currency effects, segment mix, oil-related demand, and aerospace and defense program schedules.
- Progress on restructuring savings and the impact of the $8 million Space and Defense Controls accounting correction.
- Debt, covenant headroom, interest expense, and the extent to which additional share repurchases affect leverage and per-share results.
- Cash accessibility and potential tax costs of repatriating foreign-held cash.
- Medical Devices goodwill assumptions and developments in contract estimates, customer disputes, and potential loss reserves.