Moog Inc. — Form 10-Q Summary
Business and period: Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets. The filing covers the three and nine months ended June 30, 2012 (fiscal 2012 third quarter), compared with the periods ended July 2, 2011. Balance-sheet comparisons are to October 1, 2011. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $611.2; up 5% | $1,836.8; up 7% |
| Gross margin | 30.0%, versus 29.0% | 30.1%, versus 29.3% |
| Net earnings | $38.9; up 15% | $110.7; up 13% |
| Diluted EPS | $0.85, versus $0.73 | $2.42, versus $2.13 |
| Cash from operating activities | Not separately presented for the quarter | $143.5, versus $123.2 |
- Quarterly earnings before income taxes were $53.4 million. Nine-month interest expense was $25.7 million, down from $27.0 million; the effective tax rate rose to 29.1% from 27.4% for the nine-month period.
- Nine-month investing cash outflow was $110.1 million, including $79.0 million of capital expenditures and $25.7 million for acquisitions. Financing cash outflow was $4.1 million. Cash increased to $139.5 million from $113.7 million at the fiscal year start.
- At June 30, cash was $139.5 million; short-term borrowings were $103.7 million, current long-term debt $0.3 million, and long-term debt $617.4 million. Net debt to capitalization was 31%, versus 34% at October 1, 2011.
- Moog reported $665 million of unused borrowing capacity, including $651 million under its $900 million U.S. credit facility. It was in compliance with its credit covenants. A receivables securitization facility had $94 million outstanding and up to $100 million of capacity; it matures March 4, 2013, subject to possible extensions.
Changes and segment trends
- Sales and gross margin improved year over year. Management attributed margin improvement principally to Aircraft Controls, Industrial Systems, and Medical Devices; segment-level operating profit was $67.6 million in the quarter and $204.6 million year to date.
- Aircraft Controls sales rose 10% in the quarter and 14% year to date, supported by military and commercial aircraft programs; margins improved on higher volume and lower contract-loss reserve additions.
- Space and Defense Controls sales rose 9% in the quarter but were nearly flat year to date. Year-to-date operating profit fell 14%, and backlog declined 12%, reflecting the wind-down of the Driver Vision Enhancer program and other program mix effects.
- Industrial Systems sales were nearly flat in the quarter and rose 6% year to date. Margins improved, but backlog declined 12%; management cited slower incoming orders and macroeconomic uncertainty.
- Components sales rose 3% in the quarter and 4% year to date, while margins declined modestly due to sales mix. Medical Devices sales fell 12% in the quarter; year-to-date sales were down 1%, although the segment returned to operating profit from a prior-year loss that included a voluntary infusion-pump software-upgrade reserve.
- Other comprehensive income was affected by a $21.8 million foreign-currency translation loss in the quarter; comprehensive income was $20.6 million, compared with $44.0 million a year earlier.
Outlook, commentary, and risks
- 2012 outlook: Sales of approximately $2.46 billion, operating margin of 11.3%, net earnings of $152 million, and diluted EPS of $3.31. Management expected growth in most segments, partly offset by a slight Medical Devices decline.
- 2013 outlook: Sales of $2.61–$2.66 billion, operating margin of 11.3%–11.7%, net earnings of $161–$170 million, and diluted EPS of $3.50–$3.70. Management cited strength in most segments but uncertainty in Industrial Systems. This outlook excludes any effect from potential U.S. defense sequestration.
- On July 31, 2012, after quarter-end, Moog acquired In-Space Propulsion for $46 million. During the nine months, it also acquired Protokraft and Bradford Engineering; purchase-price allocations for the 2012 acquisitions were preliminary.
- Management identified potential defense-budget reductions and government program funding, cyclical industrial demand, foreign-currency movements, pricing pressure, competition, supplier performance, fixed-price contract cost overruns, pension assumptions, and acquisition execution as risks. Long-term contracts represented 29% of sales. Management stated that it had no material off-balance-sheet arrangements and believed cash, operating cash flows, and available borrowing capacity would meet operating needs.
- Expected 2012 capital expenditures were approximately $105 million. The filing also notes ongoing product warranty obligations and various legal proceedings, but does not provide a clear quantified exposure for those proceedings.
Important facts for investors to verify
- Whether defense spending or sequestration changes affect the 2013 outlook, which excludes sequestration impacts.
- Whether Industrial Systems orders, backlog, and margins stabilize amid the stated macroeconomic uncertainty.
- Acquisition integration, results, and purchase-accounting effects, particularly for In-Space Propulsion.
- Working-capital trends: receivables and inventories increased from October 1, 2011, while operating cash flow improved year over year.
- Availability and renewal terms of the receivables securitization facility, plus continued compliance with debt covenants.
- Exposure to foreign-currency movements, pension obligations, long-term contract estimates, and potential contract losses.