Moog Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 28, 2014; comparisons are with the periods ended June 29, 2013. Dollar amounts below are in millions unless otherwise noted.
Business context
Moog designs and manufactures precision motion and fluid-control systems for aerospace and defense, industrial, and medical markets. It reports five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Net sales | $683.7 | $670.6 | $1,977.0 | $1,934.5 |
| Gross margin | 29.6% | 29.6% | 30.3% | 30.4% |
| Net earnings | $48.1 | $34.2 | $117.9 | $104.9 |
| Diluted EPS | $1.08 | $0.75 | $2.59 | $2.29 |
| Operating margin | 11.0% | 9.3% | 10.7% | 10.1% |
- Q3 sales increased 2%; management attributed growth to Aircraft Controls and, to a lesser extent, Space and Defense Controls and Industrial Systems. Foreign-currency translation contributed $8 million. Nine-month sales also rose 2%; acquisitions contributed $14 million.
- Operating cash flow was $210.0 million for the first nine months, up from $160.5 million. Investing cash use was $66.2 million; financing cash use was $85.3 million. Cash increased to $216.2 million from $157.1 million at fiscal year-end.
- At June 28, 2014, total current assets were $1,678.4 million and current liabilities were $707.0 million. Debt comprised $103.9 million of short-term borrowings, $5.2 million of current long-term debt, and $670.0 million of long-term senior debt. Net debt to capitalization was 27%, versus 26% at September 28, 2013.
- The amended U.S. revolving facility provides $1.1 billion of capacity and matures in May 2019. Reported unused borrowing capacity was $430 million, including $416 million under the revolver after letters of credit. Moog reported compliance with all facility covenants.
Material changes and segment results
- Aircraft Controls sales grew 8% in Q3, led by commercial aircraft growth, while military sales declined. Q3 operating margin fell to 10.3% from 11.4%, including higher early-production contract-loss reserves.
- Space and Defense Controls sales increased 2% in Q3 and operating margin improved to 8.5% from 6.7%, aided by the absence of a prior-year technical charge and restructuring benefits.
- Industrial Systems sales were broadly flat in Q3, while operating margin rose to 11.4% from 6.3%, reflecting restructuring benefits and the absence of prior-year charges.
- Components sales declined 2% in Q3 and operating margin fell to 15.3% from 16.3%, affected by ERP start-up costs and sales mix.
- Medical Devices sales declined 24% in Q3, partly following the Buffalo Ethox Medical divestiture and lower pump and set sales. The segment returned to an 8.2% operating margin from a prior-year loss, mainly because the prior-year period included the divestiture loss.
- Moog redeemed its $200 million 7¼% senior subordinated notes in December 2013 using revolver borrowings. The redemption generated a $6.9 million call premium and a $1.1 million write-off of debt issuance costs. It repurchased approximately 2.13 million shares for $143 million under its share repurchase program through June 28, 2014.
Guidance, commentary and risks
- Fiscal 2014 outlook: Sales of approximately $2.65 billion, operating margin of 11.2%, net earnings of $165 million, and diluted EPS of $3.65. Management expected growth in Aircraft Controls, Space and Defense Controls, and Components; flat Industrial Systems sales; and lower Medical Devices sales.
- Fiscal 2015 outlook: Sales of approximately $2.69 billion, operating margin of 11.7%, net earnings of $181 million, and diluted EPS of $4.25. Management expected industrial-market recovery, with flat Aircraft Controls sales.
- Management cited restructuring savings of $9 million through the first nine months, approximately 75% of expected annual benefits. ERP implementation start-up costs increased SG&A by $11 million year to date.
- Medical Devices remained under strategic review, including options for the segment or individual product lines. Its goodwill fair value exceeded carrying value by only 1% at the latest disclosed quantitative assessment; management warned that weaker sales, industry growth, costs, or strategic decisions could lead to further impairment.
- Key risks include defense budget and contract funding, fixed-price contract cost overruns, dependence on major customers and suppliers, cyclical markets, foreign exchange, pension assumptions, indebtedness and covenants, ERP implementation, and environmental or product-liability matters. Moog said pending legal and environmental matters were not expected to have a material adverse effect; it had $14.1 million of standby letters of credit outstanding.
Important facts for investors to verify
- Whether fiscal 2014 and 2015 sales, margin, earnings, and EPS targets were achieved, particularly given the risks to Medical Devices and industrial-market recovery.
- Progress and costs of the ERP implementation, restructuring savings, and commercial-aircraft program profitability.
- Medical Devices strategic-review outcomes and whether the narrow goodwill valuation cushion changes.
- Debt, borrowing availability, covenant headroom, and the renewal or extension of the securitization program, which was scheduled to mature in February 2015.
- Share-repurchase pace and its effect on leverage, liquidity, and per-share results.