Moog Inc. — Form 10-Q Summary
Business context and reporting period
Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets. This filing covers the first quarter of fiscal 2012, the three months ended December 31, 2011, compared with the three months ended January 1, 2011. Financial amounts below are in U.S. dollars; millions are used unless noted.
Key financial metrics
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $600.6 million | $554.4 million | +8% |
| Gross profit / gross margin | $185.1 million / 30.8% | $164.6 million / 29.7% | Margin +1.1 percentage points |
| Operating profit / margin, all segments | $70.0 million / 11.7% | $63.7 million / 11.5% | Profit +10% |
| Earnings before income taxes | $52.9 million | $45.8 million | +16% |
| Net earnings | $36.4 million | $33.4 million | +9% |
| Diluted EPS | $0.80 | $0.73 | +10% |
| Effective tax rate | 31.3% | 27.0% | Higher |
| Cash from operating activities | $35.0 million | $58.3 million | Down $23.3 million |
| Cash from investing activities | $(45.5) million | $(21.2) million | Greater outflow |
| Cash from financing activities | $10.2 million | $(44.3) million | Net inflow |
At December 31, 2011, cash and cash equivalents were $111.7 million; current assets were $1.416 billion and current liabilities were $546.7 million. Long-term debt carrying value was $727.4 million, excluding current installments; the balance sheet also reported $8.4 million of notes payable and $1.2 million of current long-term debt installments. Net debt to capitalization was 34%, unchanged from October 1, 2011. The $900 million U.S. revolving credit facility had $344 million outstanding and $542 million of available capacity after letters of credit; total unused borrowing capacity was $558 million. Moog reported compliance with its credit covenants.
Material changes versus the prior comparable period
- Sales rose in four of five segments. Aircraft Controls increased 18%, Industrial Systems 10%, Medical Devices 7%, and Components 2%; Space and Defense Controls declined 8%.
- Aircraft Controls’ sales and operating profit benefited from higher military and commercial aircraft demand. Its operating margin increased to 10.7% from 10.3%.
- Space and Defense Controls’ operating margin fell to 14.4% from 16.5%, reflecting lower DVE program sales and the absence of a favorable prior-year program adjustment.
- Medical Devices returned to segment operating profit of $1.6 million from a $1.5 million loss. The prior-year quarter included a $1 million reserve related to a voluntary infusion-pump software upgrade.
- Gross margin improved, with management citing $4 million less in contract-loss-reserve charges, primarily in Aircraft Controls. R&D expense increased 24%, partly because work on the 747-8 certification program was being completed.
- Operating cash flow decreased, principally due to billing and collection timing, including a late-quarter military aircraft invoice, and higher profit-sharing payments. Investing outflows increased with the Bradford Engineering acquisition and higher capital spending.
Outlook, commentary, risks and unusual items
- Management forecast fiscal 2012 sales of approximately $2.48 billion, up about 6%; operating margin of 11.3% versus 10.6% in fiscal 2011; net earnings of $152 million; and diluted EPS of $3.31, up 12%.
- Segment outlooks included sales growth of 9% in Aircraft Controls, 8% in Space and Defense Controls, 3% in Industrial Systems, 5% in Components, and 2% in Medical Devices. Management expected Space and Defense Controls’ margin to decline to a more normal level; other segment margin outlooks generally anticipated improvement.
- Capital expenditures were expected to be approximately $105 million for fiscal 2012. Management said operating cash flow, cash on hand, and available borrowing capacity should meet operating needs.
- Moog acquired Bradford Engineering in the quarter for approximately $13 million in cash, adding satellite control, propulsion, and thermal-control products. Purchase-price allocation was preliminary.
- The effective tax rate increased, in part because a foreign tax credit was no longer available following a tax-law change; the prior-year comparison included a catch-up adjustment for R&D tax credits.
- Risks highlighted include economic and market cyclicality, government funding and contract termination, fixed-price contract cost overruns, customer concentration, competition, foreign currency and regulatory exposure, pension assumptions, acquisition execution, product reliability, and debt covenants. Approximately 29% of sales were under long-term contracts, many recognized using percentage of completion.
- In December 2011, the board authorized repurchases of up to 1 million shares. No shares were purchased under that publicly announced program during the quarter. A February 2012 amendment to the supplemental retirement plan modified benefits for active participants, including named executive officers.
Important facts for investors to verify
- Whether the expected billing and collection timing improvement translates into stronger operating cash flow in subsequent quarters.
- Delivery, cost, and margin performance on major aircraft and defense programs, including F-35, DVE, and 747-8-related work.
- Progress toward the $2.48 billion sales, 11.3% operating-margin, and $3.31 diluted-EPS outlook, including the expected segment mix.
- Capital spending against the approximately $105 million outlook, facility expansion plans, and available credit capacity and covenant headroom.
- Integration and final purchase accounting for Bradford Engineering, and any acquisition-related contingent liabilities or adjustments.
- Developments in pension obligations, contract-loss reserves, product reliability matters, and the amended supplemental retirement-plan benefits.