MOOG Inc. — Q3 2021 Form 10-Q
Business context and period: Moog designs and manufactures precision motion and fluid-control systems for aerospace, defense and industrial markets. This filing covers the three and nine months ended July 3, 2021; comparisons are with the periods ended June 27, 2020. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $707.4 million, up 8% | $2,127.7 million, down 2% |
| Gross profit / margin | $190.6 million / 26.9% (23.1% prior year) | $580.2 million / 27.3% (26.2% prior year) |
| Net earnings | $36.1 million, versus a $12.6 million loss | $122.7 million, up 41% |
| Diluted EPS | $1.12, versus a $0.39 loss | $3.80, up from $2.59 |
| Operating profit by segment | Aircraft Controls $20.5 million; Space and Defense Controls $21.3 million; Industrial Systems $23.0 million | $208.2 million total, versus $172.9 million |
Quarterly revenue gains reflected continued growth in Space and Defense Controls and recovery in Aircraft Controls and Industrial Systems. YTD sales remained below the prior year, mainly because COVID-19 continued to weigh on commercial aircraft and certain industrial markets. Quarterly gross margin benefited from higher volume and the absence of the prior-year inventory write-down; excluding that write-down, management said margin improved modestly. YTD results also included a $5.8 million pension curtailment gain.
Cash flow and investment: Nine-month operating cash flow was $230.6 million, versus $187.8 million. Investing cash outflow was $162.6 million, including $77.6 million for the Genesys acquisition and $88.6 million in capital expenditures. Financing cash outflow was $62.7 million, including $24.1 million in dividends and $26.7 million in treasury-share purchases.
Liquidity and debt: Cash and restricted cash totaled $91.7 million at July 3, 2021. Debt carrying value was $926.7 million, including $56.1 million classified as current. Unused borrowing capacity was reported at $745 million, including $705 million under the U.S. revolving facility after standby letters of credit. The company reported compliance with debt covenants, net debt to capitalization of 38%, and $541 million of capacity to increase net debt under its leverage covenant. The receivables securitization facility, with a $56 million balance, matures October 29, 2021.
For the nine-month period, dividends declared and paid were $0.75 per share. The company declared a further $0.25 quarterly dividend after quarter-end.
Material changes and developments
- Quarterly Aircraft Controls sales rose 9%; commercial aircraft sales improved year over year, while military aftermarket sales declined. YTD segment sales fell 7%, largely due to commercial aircraft weakness.
- Space and Defense Controls sales increased 11% for the quarter and 6% YTD, led by space programs. Segment operating margin declined amid higher costs on firm-fixed-price development contracts and an unfavorable mix.
- Industrial Systems sales increased 3% for the quarter, led by industrial automation, but declined 3% YTD. Medical sales moderated from the prior-year pandemic-related surge; simulation and test and energy remained pressured.
- 12-month backlog was $2.0 billion, up 21% from $1.7 billion a year earlier, with increases across all markets.
- Moog acquired Genesys Aerosystems for $77.6 million, net of acquired cash. It also agreed to sell its Navigation Aids business to Thales; the transaction remained subject to regulatory review and customary closing conditions.
Outlook, risks and contingencies
Management forecast 2021 sales of approximately $2.815 billion and diluted EPS of $4.85–$5.15. The outlook assumes stronger military aircraft and space markets, recovery in industrial automation, and continued weakness in commercial aviation, medical, and simulation and test. Management expected full-year operating margin to benefit from the absence of $71 million of prior-year COVID-related charges; earnings were also expected to benefit from the absence of a prior-year $121 million non-cash pension settlement charge, partly offset by a higher effective tax rate. The filing cautions that COVID-19 effects and market conditions remain uncertain.
Key exposures include prolonged weakness in international air travel and wide-body aircraft production, defense-program funding and government-contract risks, suppliers and production conditions, foreign-exchange movements, and cost overruns on fixed-price development contracts. Management noted that customer disputes or further unplanned delays and cost growth could require additional loss provisions. Contract reserves were $66.0 million at July 3, 2021. Pending legal and environmental matters were not expected by management to have a material adverse effect; the company also had $32.4 million of standby letters of credit outstanding.
Important facts for investors to verify
- Whether commercial aviation recovery and the resulting aircraft production and aftermarket demand support the 2021 sales and EPS outlook.
- Whether firm-fixed-price development programs, particularly in Space and Defense Controls, require additional contract loss reserves.
- Completion and financial effects of the proposed Navaids divestiture, and the final purchase-price allocation for Genesys.
- Renewal or replacement of the securitization facility before its October 2021 maturity and continued availability of stated borrowing capacity.
- Whether working-capital movements and backlog convert into sustained operating cash flow and recognized revenue; backlog is not guaranteed revenue.
- Potential further effects of COVID-19, supply-chain conditions, foreign currencies, pension assumptions and tax-rate changes.