Moog Inc. — Form 10-Q Summary
Business context and period: Moog designs and manufactures precision motion and fluid-control products for aerospace, defense, and industrial markets. This unaudited filing covers the three months ended December 31, 2016 (fiscal 2017 first quarter); the comparable period ended January 2, 2016. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $589.7 million | $568.5 million |
| Gross profit / gross margin | $172.5 million / 29.3% | $161.5 million / 28.4% |
| Earnings before income taxes | $36.5 million | $35.7 million |
| Net earnings attributable to Moog | $30.6 million | $26.2 million |
| Diluted EPS | $0.84 | $0.71 |
| Operating cash flow | $50.6 million | $(0.5) million |
| Capital expenditures | $14.8 million | $12.3 million |
Sales rose 4% and diluted EPS rose 18% year over year. The effective tax rate was 17.6%, versus 26.6%; the current-quarter rate benefited from tax effects related to the European space-business sale. Foreign-currency translation reduced sales by $8 million. Other comprehensive loss was $32.4 million, including a $41.5 million foreign-currency translation loss.
At December 31, 2016, cash was $331.7 million, current assets were $1.514 billion, and current liabilities were $566.3 million. Total debt was approximately $1.007 billion, including $585 million drawn on the U.S. revolving facility, $300 million in senior notes, and $120 million under the receivables securitization program. The company reported compliance with debt covenants. It had $506 million of stated unused borrowing capacity, but the leverage covenant limited additional borrowing capacity to $459 million. Management said cash, operating cash flow, and available borrowing arrangements were expected to meet operating needs; most cash was held outside the U.S.
Material changes and segment performance
- Aircraft Controls: Sales increased 6% to $268.5 million and operating profit increased to $23.1 million. Growth included higher F-35 and Airbus A350 activity; twelve-month backlog fell 5%.
- Space and Defense Controls: Sales increased 11% to $92.9 million, while operating profit fell to $7.1 million, principally due to losses on the European space-business sale. Excluding those losses, reported margin would have been 17.3%. Backlog rose 17%.
- Industrial Systems: Sales fell 10% to $112.4 million and operating profit fell to $10.7 million, reflecting weaker activity across automation, test and simulation, and energy. Backlog declined 19%.
- Components: Sales rose 10% to $115.9 million and operating profit rose to $11.5 million, supported by medical products and improved mix. Backlog was down 2%.
Consolidated gross margin improved on favorable mix, especially in Space and Defense Controls and Components, and on restructuring benefits. The company recorded $8.9 million of expense related to selling European space businesses. It expects the remaining held-for-sale business sale to close during 2017. Moog also acquired the remaining 30% interest in Linear Mold and Engineering for $1.7 million cash on January 25, 2017, after quarter-end.
Outlook, commentary, and risks
Management forecast fiscal 2017 sales of approximately $2.4 billion, up 1% from fiscal 2016; operating margin of 10.0%, compared with 9.9%; and net earnings attributable to Moog of approximately $127 million, flat with 2016. Expected diluted EPS was $3.30–$3.70, with a $3.50 midpoint. The outlook assumed growth in Aircraft Controls and Components, offset by an expected 9% decline in Industrial Systems sales; the European space-business sale losses and unfavorable mix were expected to weigh on margins.
Management cited uncertain defense spending beyond 2017, cyclical industrial demand, reduced oil-exploration activity, foreign-exchange movements, customer pricing pressure, and competition as risks. Other material exposures include fixed-price and long-term contract cost estimates, potential contract losses and backlog conversion, government funding and contract requirements, pension assumptions and funding, indebtedness and covenant restrictions, and possible further impairment or divestiture effects. The filing states that current legal and environmental matters are not expected to have a material adverse effect, while noting that customer disputes or future project cost growth could result in additional loss provisions.
Key facts for investors to verify
- Whether the expected 2017 sales growth, 10.0% operating margin, and $3.30–$3.70 diluted EPS guidance remain achievable.
- Progress and final economics of the European space-business divestiture, including the recorded loss and held-for-sale balances.
- Whether Industrial Systems demand and backlog stabilize, and whether Airbus A350, F-35, and medical-product growth offsets weakness elsewhere.
- Cash availability and borrowing headroom, given overseas cash balances, debt levels, and the leverage covenant.
- Potential additional contract-loss provisions, pension funding needs, foreign-exchange effects, and other risks described in the filing.