Moog Inc. — FY2013 Form 10-K
Business context and reporting period. Moog designs and manufactures precision motion and fluid controls for aerospace and defense and industrial markets through five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. The fiscal year comprised 52 weeks and ended September 28, 2013. Figures below are in U.S. dollars; unless stated otherwise, amounts are for the full fiscal year.
Financial results and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $2,610.3 million | $2,469.5 million |
| Gross profit / margin | $783.8 million / 30.0% | $745.3 million / 30.2% |
| Operating profit / margin | $227.5 million / 8.7% | $273.4 million / 11.1% |
| Net earnings | $120.5 million | $152.5 million |
| Diluted EPS | $2.63 | $3.33 |
| Operating cash flow | $251.3 million | $214.3 million |
| Capital expenditures | $93.2 million | $107.0 million |
- Sales rose 6%, while net earnings and diluted EPS each fell 21%. Gross margin was nearly flat, but operating margin contracted.
- Cash and cash equivalents were $157.1 million; working capital was $924.1 million and the current ratio was 2.28. Cash was primarily held outside the U.S.
- Long-term debt was $604.1 million and short-term borrowings were $105.1 million, including $100 million under the receivables securitization program. Net debt to capitalization was 26.4%, down from 32.1%.
- Total assets were $3.24 billion and shareholders’ equity was $1.54 billion. Twelve-month backlog was $1.30 billion, versus $1.28 billion a year earlier.
Material changes and unusual items
- Aircraft Controls sales increased 10% and operating margin improved to 12.0%, supported by commercial aircraft growth, particularly Boeing programs.
- Components sales rose 11% and operating margin increased to 16.5%. Space and Defense Controls sales rose 10%, but margin fell to 6.4%; Industrial Systems sales declined 7% and margin fell to 7.1%.
- Medical Devices sales increased 5%, but the segment recorded an operating loss of $35.5 million, including a $38.2 million non-cash goodwill impairment and a $7 million loss on the sale of its Buffalo Ethox operations. Management was exploring strategic options, including a possible sale of the segment.
- Other pressures included $14.1 million of restructuring expense, higher R&D expense ($134.7 million, up 16%), and acquisition-related technical challenges in Space and Defense Controls. The impairment charge reduced net earnings by $24 million after tax, or $0.52 per share.
- FY2013 fourth-quarter net earnings were $15.6 million, compared with $41.8 million in FY2012’s fourth quarter; quarterly diluted EPS was $0.34 versus $0.91.
Outlook, risks and contingencies
- FY2014 outlook: Management expected sales to rise 2% to approximately $2.67 billion, operating margin to reach 12.4%, net earnings of $180–$189 million, and diluted EPS of $3.90–$4.10. It forecast growth in Components and Space and Defense Controls; flat or near-flat sales in Aircraft Controls and Industrial Systems; and a slight decline in Medical Devices. Planned capital expenditures were approximately $105 million.
- Management expected improved profitability from restructuring, operational efficiencies, lower Aircraft Controls R&D, and segment margin recovery. Components margin was expected to moderate.
- Government funding and contract termination are significant risks: U.S. government contract sales were 31% of FY2013 sales, and foreign government sales were 8%. Management could not reliably estimate the impact of sequestration, but warned it could affect sales, operating profit and cash flow, particularly military aftermarket demand.
- Boeing represented 14% of FY2013 sales. International customers represented 41% of sales. Other key exposures include cyclical aerospace and industrial markets, foreign exchange, competition, supplier and subcontractor performance, fixed-price contract cost overruns, pension assumptions, cybersecurity and the multi-year ERP implementation.
- Revenue on long-term contracts accounted for 33% of sales and uses percentage-of-completion estimates; 90% of that contract revenue was from fixed-price contracts. Contract loss reserves were $44.2 million.
- The $900 million U.S. revolving credit facility matures in March 2018; the securitization program, with $100 million outstanding, was scheduled to mature in March 2014 and could be extended by agreement. The largest scheduled long-term debt maturity was approximately $595 million in 2018. The company reported covenant compliance and $496 million of unused borrowing capacity.
- Management stated that pending legal proceedings were not expected to have a material adverse effect and that environmental remediation reserves were adequate. The filing does not quantify a clear maximum exposure for these matters.
Important facts for investors to verify
- Whether the FY2014 earnings and margin outlook was achieved, especially the projected margin recovery in Space and Defense Controls and Industrial Systems.
- Progress and financial implications of the Medical Devices strategic review, and the assumptions underlying its goodwill valuation.
- Performance and cost estimates on fixed-price, percentage-of-completion contracts, including the adequacy of the $44.2 million contract loss reserve.
- Cash-flow quality: FY2013 operating cash flow benefited substantially from higher customer advances; assess whether this benefit is recurring.
- Debt refinancing and repayment capacity ahead of the 2018 maturity, plus renewal or replacement of the receivables securitization facility.
- Exposure to U.S. defense budget cuts, Boeing concentration, foreign exchange movements, and pension funding assumptions.