Moog Inc. — Q2 FY2021 Form 10-Q
Reporting period: The quarter and six months ended April 3, 2021; comparisons are to periods ended March 28, 2020. Moog designs and manufactures precision motion and fluid-control systems for aerospace, defense, and industrial markets. Amounts below are U.S. dollars unless noted.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $736.4 million | $765.3 million | $1,420.4 million | $1,520.1 million |
| Gross profit / margin | $199.9 million / 27.1% | $208.1 million / 27.2% | $389.6 million / 27.4% | $419.3 million / 27.6% |
| Earnings before taxes | $62.1 million | $61.5 million | $112.5 million | $128.4 million |
| Net earnings | $48.7 million | $49.7 million | $86.5 million | $99.8 million |
| Diluted EPS | $1.51 | $1.48 | $2.68 | $2.91 |
| Effective tax rate | 21.6% | 19.2% | 23.1% | 22.3% |
Quarterly sales fell 4%, and first-half sales fell 7%. Commercial aircraft weakness and lower sales in legacy industrial markets were partly offset by growth in military aircraft and space. Net earnings declined 2% in the quarter and 13% for the first half. Quarterly diluted EPS rose 2%, helped by fewer weighted-average shares; first-half diluted EPS declined 8%.
Segment operating profit for the quarter was $22.0 million in Aircraft Controls (margin 7.2%), $26.7 million in Space and Defense Controls (12.9%), and $23.8 million in Industrial Systems (10.5%). For the first half, segment operating profit was $49.9 million, $49.7 million, and $43.7 million, respectively. Aircraft Controls profit and margins were notably pressured by commercial aircraft declines.
Cash flow and investment: First-half operating cash flow was $137.4 million, versus $80.7 million; investing cash outflow was $133.7 million, including $77.6 million for the Genesys acquisition and $58.0 million of capital expenditures. Financing provided $1.4 million. Cash, cash equivalents, and restricted cash totaled $91.0 million at period end.
Debt and liquidity: Debt carrying value was approximately $976.1 million, including $71.7 million classified as current; cash was $90.1 million. The U.S. revolver had $396 million outstanding against $1.1 billion capacity. Moog reported $711 million of unused borrowing capacity, including the revolver and other arrangements, and compliance with debt covenants. Net debt to capitalization was 40%.
Receivables were $922.1 million and inventories were $636.6 million at April 3. Current assets were $1.70 billion and current liabilities $827.9 million. Contract advances increased to $256.1 million from $203.3 million at fiscal year-end.
Material changes and operating context
- Aircraft Controls sales fell 11% for the quarter, as commercial aircraft sales declined 38%; military aircraft sales increased 15%. First-half segment sales declined 13%.
- Space and Defense Controls sales increased 7% in the quarter, mainly from space programs; first-half sales rose 4%. First-half margin eased to 12.6% from 13.2%, reflecting sales mix and production-capacity issues.
- Industrial Systems sales declined 2% in the quarter and 5% for the first half. Lower energy, simulation and test, and other industrial demand outweighed medical and some automation growth.
- Management attributed under-utilized facilities and weaker margins across the business to COVID-19-related lower volumes. Twelve-month backlog was $1.9 billion, up 5% year over year, with military aircraft and defense gains partly offset by lower space orders.
- Moog acquired Genesys Aerosystems for $77.6 million net of acquired cash, adding electronic flight instruments and autopilot solutions to Aircraft Controls.
Outlook, risks, and unusual items
- FY2021 outlook: sales of approximately $2.84 billion, net earnings of approximately $162 million, and diluted EPS of $4.80–$5.20. Segment sales outlook was $1.18 billion for Aircraft Controls, $795 million for Space and Defense Controls, and $865 million for Industrial Systems.
- Management expected COVID-19 to persist through FY2021, with no meaningful recovery in industrial markets from the second half of FY2020. It expected military aircraft, space, and medical markets to remain comparatively strong, while commercial aerospace remained weak and the pandemic-driven medical demand surge softened.
- Management expected margins to benefit from the absence of $71 million of prior-year COVID-related charges and earnings to benefit from the absence of a prior-year $121 million non-cash pension settlement charge. These are outlook comparisons, not current-period gains.
- Current-quarter other income included a $5.8 million pension curtailment gain tied to termination of a foreign defined-benefit plan, with no associated tax expense. First-half effective tax rate was 23.1%.
- Contract reserves were $68.5 million. Management cautioned that cost overruns, delays, customer disputes, or changes in estimates on fixed-price and over-time contracts could require additional loss provisions. Unresolved claims and unapproved contract changes recognized as revenue were not material.
- Other risks include prolonged commercial-aircraft weakness, COVID-19 and supply-chain disruption, uncertain government funding, backlog conversion, foreign exchange, pension assumptions, debt covenants and LIBOR transition, and potential impairment of goodwill or other assets. Management reported no pending legal proceeding or environmental matter expected to have a material adverse effect; standby letters of credit totaled $32.9 million.
- The Board declared a $0.25 per-share quarterly dividend on April 29, payable June 1, 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial aircraft and industrial demand recover in line with the assumptions behind the FY2021 sales, margin, and EPS outlook.
- How backlog converts to revenue and whether the $68.5 million contract-reserve balance adequately reflects remaining fixed-price contract risks.
- Whether operating cash generation remains sufficient after capital spending, acquisitions, dividends, and share repurchases, and how debt and available liquidity evolve.
- Whether the expected normalization of COVID-related medical demand, foreign-currency movements, pension costs, or goodwill and asset valuations materially affect future results.