Moog Inc. — Form 10-Q Summary
Business context and period: Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, energy, and medical markets. This filing covers the first quarter of fiscal 2015, the three months ended January 3, 2015, compared with the three months ended December 28, 2013. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 FY2015 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $630.5 million | $643.4 million | Down 2% |
| Gross profit / gross margin | $183.9 million / 29.2% | $199.3 million / 31.0% | Margin down 1.8 percentage points |
| Earnings before taxes | $49.4 million | $46.9 million | Up 6% |
| Net earnings | $35.3 million | $32.1 million | Up 10% |
| Diluted EPS | $0.86 | $0.70 | Up 23% |
| Operating cash flow | $78.5 million | $68.2 million | Up 15% |
Lower sales and gross margin reflected weaker Industrial Systems and Components sales, unfavorable Aircraft Controls mix, and approximately $12 million of adverse foreign-exchange translation. Management also cited about $3 million of higher pension and inventory-obsolescence costs. Earnings benefited from the absence of prior-year debt-redemption and investment write-down charges, a lower effective tax rate (28.7% versus 31.5%), and fewer average diluted shares (41.1 million versus 46.0 million), primarily due to repurchases.
Segment operating profit was $65.7 million, with a 10.4% margin versus $71.7 million and 11.1%. Aircraft Controls profit fell to $24.5 million from $31.8 million; Space and Defense Controls rose to $8.7 million from $7.9 million; Industrial Systems rose to $13.2 million from $12.3 million; Components fell to $14.7 million from $16.2 million; and Medical Devices rose to $4.6 million from $3.6 million.
Cash and cash equivalents were $240.2 million at January 3, 2015, versus $231.3 million at September 27, 2014. Cash flow from investing was negative $20.1 million, including $20.2 million of capital expenditures; management expected full-year 2015 capital expenditures of approximately $100 million. Financing cash flow was negative $39.8 million. Receivables collections helped operating cash flow, while inventory growth and lower accrued expenses were uses of cash.
Interest-bearing debt was approximately $951.6 million at quarter-end, including $100.4 million of short-term borrowings, $551.1 million of senior debt, and $300 million of senior notes. Moog issued $300 million of 5.25% notes due December 2022 and used net proceeds to repay its revolving credit facility. Net debt to capitalization was 36%, up from 32% at fiscal year-end, primarily due to share repurchases. The company reported $548 million of unused borrowing capacity, though covenant limits reduced additional borrowing capacity to approximately $504 million. It was in compliance with its covenants.
Current assets were $1.60 billion and current liabilities $654.1 million. The $100 million receivables securitization facility was scheduled to mature February 13, 2015, and could be extended by agreement. Cash held outside the U.S. was not readily available to repay U.S. debt without repatriation and potential U.S. taxes.
Material changes, outlook, and risks
- Sales and operating trends: Industrial Systems sales fell 7%, Components fell 3%, while Aircraft Controls and Space and Defense Controls were broadly flat. Commercial aircraft growth offset lower military aircraft sales. Foreign-exchange translation, particularly from the euro, reduced sales by about $12 million.
- Share repurchases: Moog reported $122.4 million of treasury-share purchases in the cash-flow statement and said approximately $106 million funded its repurchase program during the quarter. Since the program was amended, it had repurchased approximately 5.5 million shares. The program authorization covered up to nine million shares.
- Currency and comprehensive income: Foreign-currency translation produced a $42.9 million loss in other comprehensive income, contributing to a total comprehensive loss of $1.8 million despite positive net earnings.
- Restructuring: Actions initiated in 2013 and 2014 addressed the business outlook, including sales mix changes and delayed or canceled orders. Management expected $16 million of savings in 2015 and reported $2 million realized through Q1, in line with expectations.
- FY2015 outlook: Management forecast sales down 3% to $2.57 billion, operating margin of 11.4%, net earnings down 1% to $157 million, and diluted EPS up 9% to $3.85, with EPS growth supported by repurchases. Expected segment sales growth in Space and Defense Controls and Medical Devices was offset by anticipated declines elsewhere. Lower oil prices were expected to weigh on marine-energy product demand; unfavorable industrial conditions and currency translation were expected to pressure Industrial Systems.
- Key risks and contingencies: Results are exposed to defense budgets and government contract funding, fixed-price and long-term contract cost estimates, customer order delays, foreign exchange, industrial and oil-market conditions, competition, pension costs, and debt covenants. Management warned that further delays, cost growth, or unfavorable contract-estimate changes could require additional loss provisions with a material impact. It reported no pending legal proceeding expected to materially harm results, and said environmental reserves were adequate. Standby letters of credit totaled $13.9 million.
Important facts for investors to verify
- Whether the FY2015 sales, margin, earnings, and EPS outlook remains achievable as foreign exchange, defense demand, and industrial and oil-market conditions evolve.
- Whether restructuring delivers the expected $16 million in 2015 savings, and whether lower Aircraft Controls margins and inventory-obsolescence costs persist.
- The extension or renewal terms for the securitization facility due February 13, 2015, and available borrowing capacity under the leverage covenant.
- The effect of continued share repurchases on leverage, liquidity, and per-share earnings, alongside the distinction between reported treasury-share purchases and program-funded repurchases.
- Potential additional losses on long-term or fixed-price contracts, and changes in pension funding needs or goodwill impairment risk.
- The extent to which foreign-held cash can support U.S. liquidity, given potential tax costs of repatriation.