Moog Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014 (52 weeks). This is an annual filing, not a standalone fourth-quarter report. 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.
Financial results and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2.648 billion | $2.610 billion |
| Gross margin | 30.1% | 30.0% |
| Net earnings | $158.2 million | $120.5 million |
| Diluted EPS | $3.52 | $2.63 |
| Operating cash flow | $287.1 million | $251.3 million |
| Capital expenditures | $78.8 million | $93.2 million |
- Sales increased 1%; net earnings rose 31%. Management attributed earnings growth in part to the absence of FY2013’s Medical Devices goodwill impairment and divestiture loss, lower interest expense, and share repurchases.
- Operating margin was 10.4%, compared with 8.7% in FY2013. The prior-year result included a $38.2 million goodwill impairment charge.
- Cash and cash equivalents were $231.3 million; working capital was $941.3 million and the current ratio was 2.30. Cash flow benefited from favorable receivables collections and lower inventory, partly offset by higher pension contributions and payment timing.
- Senior debt was approximately $774 million and securitized debt was $100 million. Net debt to capitalization increased to 32.3% from 26.4%, primarily due to share repurchases. The company reported $334 million of unused borrowing capacity and compliance with its credit-facility covenants.
- Moog repurchased approximately 4.0 million shares for about $273 million. It paid no cash dividends in FY2014 or FY2013 and reported no current plan to do so.
Material changes and segment performance
- Aircraft Controls sales rose 5% to $1.118 billion, led by commercial aircraft growth, while operating margin declined to 10.4% from 12.0% amid higher R&D, ERP start-up, and restructuring costs.
- Space and Defense Controls sales were essentially flat at $395 million; operating margin improved slightly to 6.6% from 6.4%.
- Industrial Systems sales were flat at $591 million, while operating margin improved to 9.8% from 7.1%, reflecting restructuring savings and cost controls.
- Components sales increased 2% to $425 million, helped by the Aspen acquisition; operating margin eased to 15.3% from 16.5%.
- Medical Devices sales fell 18% to $120 million, including declines in pump and set sales and the effect of the 2013 Ethox divestiture. The segment returned to an $11 million operating profit after FY2013’s impairment and divestiture charges.
- Foreign-currency translation contributed $17 million to sales growth. Boeing represented 16% of FY2014 sales; U.S. Government contract sales represented 29%.
Outlook, risks, and unusual items
- For FY2015, management projected sales of approximately $2.66 billion, net earnings of $180 million, diluted EPS of $4.25, and an operating margin of 11.5%. It expected sales growth in Components, Industrial Systems, and Space and Defense Controls; flat Medical Devices sales; and a slight decline in Aircraft Controls sales.
- FY2014 restructuring expense was $12.9 million, principally in Aircraft Controls and Space and Defense Controls. Management expected about $16 million of savings in FY2015. A $5 million Industrial Systems technology investment write-down and a $7 million call premium on redeemed notes were among FY2014’s other expenses.
- Key exposures include cyclical aerospace, defense, and industrial demand; U.S. defense budget reductions and contract termination; fixed-price contract cost overruns and estimates; supplier and subcontractor performance; Boeing customer concentration; foreign exchange; pension assumptions and funding; debt and variable interest rates; product liability; cybersecurity and a multi-year ERP transformation; and environmental and other legal contingencies.
- FY2014 backlog expected to convert within twelve months was $1.340 billion, but orders may be modified, delayed, or terminated. Contract loss reserves were $36 million. Management said pending legal proceedings and environmental matters were not expected to have a material adverse effect; outcomes remain uncertain.
- Management reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2015 sales, operating-margin, net-income, and EPS guidance was achieved, especially the projected 11.5% operating margin.
- Whether restructuring savings materialized and whether segment margins improved as expected, particularly in Space and Defense Controls and Industrial Systems.
- Whether Aircraft Controls growth and Boeing-related sales remain strong, and how defense spending, program delays, and commercial aftermarket demand affect results.
- Cash-flow sustainability beyond favorable collection and inventory timing, alongside planned FY2015 pension contributions of approximately $62 million and capital expenditures of about $100 million.
- Debt levels, borrowing availability, refinancing or extension of the receivables securitization facility (then scheduled to mature in February 2015), and sensitivity to interest rates.
- Medical Devices demand and the sensitivity of goodwill valuations; the filing said certain reporting units’ impairment headroom was vulnerable to higher discount-rate assumptions.