Moog Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 2, 2011; comparative periods ended July 3, 2010. Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $583.0 million | $536.8 million | $1,711.6 million | $1,542.4 million |
| Gross margin | 29.0% | 29.1% | 29.3% | 29.1% |
| Earnings before taxes | $45.6 million | $40.0 million | $134.7 million | $104.9 million |
| Net earnings | $33.8 million | $29.2 million | $97.9 million | $75.8 million |
| Diluted EPS | $0.73 | $0.64 | $2.13 | $1.66 |
- For the nine months, operating cash flow was $123.2 million, versus $135.0 million; capital expenditures were $52.2 million, versus $44.7 million. Cash at period-end was $127.3 million.
- At July 2, total assets were $2.916 billion and shareholders’ equity was $1.271 billion. Total borrowings, including notes payable and current debt installments, were approximately $750.9 million. The company reported net debt to capitalization of 33%, down from 36% at October 2, 2010.
- Available borrowing capacity was $547 million, including $531 million under the U.S. revolving credit facility. The $900 million facility matures in 2016; Moog reported compliance with its covenants.
Changes versus comparable periods
- Nine-month sales rose 11% and net earnings rose 29%; diluted EPS increased 28%. Quarterly sales increased 9% and net earnings increased 16%.
- Growth was led by Industrial Systems and Aircraft Controls. In the quarter, Space and Defense Controls and Components sales declined. Components also had lower nine-month sales and operating profit.
- Management said gross margin was broadly stable: higher volume and favorable mix were offset by additions to contract loss reserves, primarily in Aircraft Controls. Nine-month contract-loss reserves were $23 million higher than the prior-year period.
- Operating cash flow declined as increased working-capital needs, particularly inventory and receivables, offset higher earnings and non-cash charges. Investing outflows increased with acquisitions and capital spending.
Segments, outlook and management commentary
- Q3 segment sales and operating margins: Aircraft Controls $220.7 million and 10.4%; Space and Defense Controls $79.7 million and 11.0%; Industrial Systems $156.4 million and 8.9%; Components $87.9 million and 15.2%; Medical Devices $38.2 million and 3.0%.
- Management’s 2011 outlook was sales of $2.30 billion, operating margin of 10.7%, net earnings of $132 million and diluted EPS of $2.85. It expected sales to increase in all segments except Components.
- For 2012, management forecast sales growth of 9% to $2.52 billion, net earnings of $152 million and diluted EPS of $3.25. The filing’s 2012 operating-margin statement is internally inconsistent: it says approximately 11.1% compared with 10.7% “in 2011” but also repeats “in 2011” as the comparison year.
- Aircraft Controls benefited from commercial aircraft demand, aftermarket sales and higher backlog. Management cautioned that unusually high military aftermarket orders in Q3 were timing-related and not expected to persist at that level. Higher loss reserves affected several commercial programs, including the Boeing 787 and G250.
- Medical Devices sales improved after shipments resumed on an infusion pump following a voluntary software-related recall. Recall-related warranty costs weighed on nine-month segment results; management expected the segment to remain loss-making for 2011, with improvement forecast for 2012.
- During the nine months, Moog acquired Crossbow Technology, a military aftermarket business, and Animatics. Purchase-price allocations were substantially complete, but Crossbow’s remained preliminary. Acquisition cash outflows were $38.5 million.
Risks, contingencies and unusual items
- Key risks include cyclical commercial aerospace and industrial demand, dependence on government funding and major customers, competitive pricing, fixed-price contract overruns and program delays, and customer or supplier performance.
- Other disclosed risks include debt and covenant constraints, pension funding needs, foreign exchange exposure, acquisition integration, potential goodwill impairment, and product quality, recall, liability and regulatory risks in medical devices.
- Goodwill was $746.1 million. The latest annual impairment test, conducted in fiscal 2010, found no impairment; management said each reporting unit’s fair value exceeded carrying value by more than 10%. Program delays, weaker demand or unfavorable contract terms could reduce estimated values.
- Management reported no material off-balance-sheet arrangements and no material changes to contractual obligations or market-risk disclosures. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether full-year sales, margin and EPS guidance was achieved, and whether the 2012 margin comparison was a drafting error.
- Progress and financial effects of Aircraft Controls contract-loss reserves, particularly on the 787 and G250 programs.
- Infusion-pump recall, warranty and remediation costs, and the timing of Medical Devices’ return to profitability.
- Cash conversion and working-capital trends, especially inventory and receivables growth relative to sales.
- Acquisition performance and final purchase-price allocation for Crossbow, alongside debt, covenant headroom and pension funding needs.