Moog Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended December 29, 2012. Comparisons are with the three months ended December 31, 2011, unless otherwise noted. Moog designs and manufactures precision motion and fluid control systems for aerospace, defense, industrial and medical markets.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $620.8 million | $600.6 million | +3% |
| Gross profit / margin | $192.7 million / 31.0% | $185.1 million / 30.8% | Margin +0.2 percentage points |
| Operating profit, segments | $68.8 million / 11.1% | $70.0 million / 11.7% | Profit down $1.2 million |
| Earnings before taxes | $49.1 million | $52.9 million | Down 7% |
| Net earnings | $34.1 million | $36.4 million | Down 6% |
| Diluted EPS | $0.75 | $0.80 | Down 6% |
| Operating cash flow | $28.2 million | $35.0 million | Down $6.8 million |
Research and development expense rose 11% to $32.3 million; SG&A was 16.9% of sales versus 15.9%. Interest expense was $8.6 million. The effective tax rate was 30.5%, versus 31.3%.
Liquidity, debt and cash flow
- Cash was $152.1 million at quarter-end, compared with $148.8 million at September 29, 2012. Cash increased $3.3 million during the quarter.
- Cash used in investing was $23.3 million, mainly capital expenditures of $21.9 million; cash used in financing was $3.5 million.
- Debt at quarter-end included $77.5 million of short-term borrowings and approximately $681.6 million of long-term debt, including current installments. Net debt to capitalization was 31%, down from 32% at fiscal year-end.
- Unused borrowing capacity was $597 million, including $583 million under the $900 million U.S. revolver. Moog reported compliance with its credit covenants.
- Cash was substantially held outside the United States and generally unavailable for U.S. needs without repatriation and potential U.S. tax. The $69.4 million receivables securitization balance was under a program scheduled to mature March 4, 2013, extendable by agreement.
Changes and segment performance
Sales growth came from Aircraft Controls and Components, while Industrial Systems and Space and Defense Controls declined; Medical Devices was essentially flat. Segment results were uneven:
- Aircraft Controls: Sales rose 9% to $252.3 million; operating margin improved to 12.3% from 10.7%, with stronger commercial and military aircraft sales.
- Space and Defense Controls: Sales fell 2% to $86.5 million and margin declined to 9.5% from 14.4%, reflecting legacy program declines, mix and acquired-business costs.
- Industrial Systems: Sales fell 6% to $148.0 million and margin declined to 6.1% from 10.0%, particularly due to weakness in wind and industrial automation.
- Components: Sales rose 13% to $99.3 million and margin increased to 19.0% from 17.0%, supported by marine/energy sales and an earn-out provision adjustment.
- Medical Devices: Sales were $34.8 million and margin remained 4.6%.
Operating cash flow declined partly because of lower earnings and higher pension contributions. The filing reports a substantial pension liability: long-term pension and retirement obligations were $425.2 million. Pension expense for U.S. plans increased, including higher amortization of actuarial losses.
Outlook, commentary and notable events
- Management forecast FY2013 sales of $2.62 billion, up 6%; operating margin of about 11.2%; net earnings of $160.3–$164.9 million; and diluted EPS of $3.50–$3.60, up 5%–8%. The outlook excluded possible sequestration effects.
- Management expected growth in Aircraft Controls, Space and Defense Controls, Components and Medical Devices, offset by a projected 5% Industrial Systems sales decline. Industrial Systems outlook included $4 million of restructuring expense. Space and Defense Controls margin was expected to fall because of mix and acquisitions.
- On January 15, 2013, Moog redeemed $200 million principal of its 6.25% senior subordinated notes at par, using its U.S. revolver. Management expected this to reduce FY2013 interest expense by $5 million.
- On December 31, 2012, after the quarter-end, Moog acquired Broad Reach Engineering for $48 million, including cash, a note and contingent consideration. The filing’s FY2013 outlook anticipated acquisition-driven Space and Defense Controls growth.
- Management cited possible U.S. defense sequestration cuts, cyclical and uncertain markets, pricing and competition, government contract funding and termination risks, fixed-price contract cost overruns, foreign currency exposure, pension assumptions, acquisitions and debt covenants. Moog forecast approximately $800 million of domestic defense sales for 2013, but stated sequestration’s occurrence and implementation were uncertain.
- Expected FY2013 capital expenditures were approximately $105 million. The company reported no material off-balance-sheet arrangements and no material change in critical accounting policies.
Important facts for investors to verify
- Whether the securitization program was renewed or replaced before its March 4, 2013 maturity, and the effect of the $200 million note redemption on revolver usage and interest expense.
- Actual FY2013 sales, margins and EPS versus guidance, especially performance in Industrial Systems and Space and Defense Controls.
- Any impact of sequestration or other government spending changes on defense programs and the company’s forecast domestic defense sales.
- Integration, results and contingent consideration for acquisitions, including Broad Reach Engineering, and the extent to which acquisitions support forecast growth.
- Cash availability and potential tax cost of repatriating foreign-held cash, along with pension funding needs and covenant headroom.