Moog Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets. It reports five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. This filing covers the 52-week fiscal year ended October 1, 2011; unaudited fourth-quarter results are also provided. Comparative fiscal 2010 also comprised 52 weeks.
Financial and operating performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $2.331 billion | $2.114 billion |
| Gross margin | 29.2% | 29.0% |
| Operating profit / margin | $246.4 million / 10.6% | $216.4 million / 10.2% |
| Net earnings | $136.0 million | $108.1 million |
| Diluted earnings per share | $2.95 | $2.36 |
| Cash from operations | $196.2 million | $195.3 million |
| Capital expenditures | $83.7 million | $65.9 million |
Fourth-quarter sales were $619.1 million and net earnings were $38.2 million, or $0.83 per diluted share, compared with $571.8 million, $32.3 million, and $0.71, respectively, in fourth-quarter FY2010.
At October 1, 2011, cash was $113.7 million, working capital $834.1 million, and the current ratio 2.53. Total debt was $716.2 million; net debt to capitalization was 33.9%, down from 36.8% in FY2010. The amended U.S. revolving credit facility provides $900 million of capacity, with $555 million unused after letters of credit. The company reported compliance with its debt covenants.
Twelve-month backlog increased to $1.325 billion from $1.181 billion. Net sales outside the U.S. were 45% of total sales; U.S. Government contract sales were 32%. FY2011 segment sales rose in Aircraft Controls, Space and Defense Controls, Industrial Systems, and Medical Devices, while Components declined. Medical Devices returned to approximately break-even operating profit.
Material changes versus FY2010
- Sales increased 10% and net earnings 26%; diluted EPS rose 25%. Higher sales across most segments, lower interest expense, and a lower effective tax rate contributed to earnings growth.
- Operating margin improved to 10.6% from 10.2%; gross margin was broadly stable. Higher volume and favorable mix were partly offset by additions to contract loss reserves, particularly in Aircraft Controls.
- Operating cash flow was nearly unchanged. Increased inventory needs and pension contributions offset stronger earnings, customer advances, and collections.
- Debt declined and net debt to capitalization improved. The company repurchased the remaining 766,400 shares authorized under its existing program for approximately $29 million.
- Components operating profit fell 17%, reflecting lower sales, mix, newer-product costs, and a $2 million technology investment write-down. Medical Devices improved from a loss to near break-even.
Outlook, commentary, and risks
Management forecast FY2012 sales of $2.52 billion, up 8%; operating margin of 11.1%, versus 10.6% in FY2011; net earnings of $152 million; and diluted EPS of $3.31, up 12%. It expected capital expenditures of approximately $105 million. Segment outlook included higher sales in each segment, while Space and Defense Controls was expected to have a lower margin as FY2011 included favorable program adjustments.
Management cited continued investment in engineering, systems integration, aftermarket growth, acquisitions, and cost improvement. It expected growth from aircraft production and aftermarket, improving industrial demand, and new medical products, while noting uncertain economic conditions and potential defense spending moderation.
- Contract estimates and fixed-price exposure: 29% of sales used percentage-of-completion accounting; 81% of those sales were on fixed-price contracts. Contract loss reserves were $45.2 million, and changes in estimated costs could materially affect earnings.
- Program and product matters: Aircraft Controls recorded $20 million of higher contract loss reserves, including costs on early Boeing 787 production units and the G280. Medical Devices incurred warranty costs related to a voluntary infusion-pump software correction; management’s outlook assumed those costs would not recur.
- Government, customer, and market exposure: Government contracts may be reduced, unfunded, or terminated. Boeing represented 10% of FY2011 sales; the filing identifies Boeing and Lockheed Martin concentration as risks. Commercial aviation and industrial demand are cyclical.
- Pension and debt: Pension obligations rely on actuarial assumptions; the lower discount rate was expected to add $4 million to FY2012 pension expense for the largest U.S. plan. Forty percent of debt was variable-rate, creating interest-rate exposure.
- Other risks and contingencies: Foreign exchange, export controls, competition, acquisitions, product liability, environmental remediation, and catastrophic facility disruption could affect results. Management did not expect pending legal or environmental matters to have a material adverse effect. No material off-balance-sheet arrangements were reported.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Internal-control assessments excluded certain acquired businesses.
Important facts for investors to verify
- Whether FY2012 sales, operating-margin, earnings, and EPS targets were achieved, and the assumptions underlying the forecast.
- Updates to Aircraft Controls contract reserves and cost estimates on the 787, G280, and other fixed-price programs.
- Medical Devices’ recall-related warranty exposure, product performance, and progress toward the projected margin improvement.
- Backlog conversion, customer advances, receivables and inventory growth, and cash conversion relative to reported earnings.
- Debt, covenant headroom, variable-rate exposure, pension funding needs, and planned capital spending.
- How acquisitions and customer or government-program concentration affect growth, margins, and risk.