Moog Inc. — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 1, 2011; comparisons are with the three months ended January 2, 2010. Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $554.4 million | $495.2 million | Up 12% |
| Gross profit / margin | $164.6 million / 29.7% | $144.4 million / 29.2% | Margin up 0.5 percentage points |
| Earnings before taxes | $45.8 million | $29.5 million | Up 55% |
| Net earnings | $33.4 million | $21.6 million | Up 55% |
| Diluted EPS | $0.73 | $0.47 | Up 55% |
| Operating cash flow | $58.3 million | $56.1 million | Up $2.2 million |
Segment operating profit totaled $63.7 million, or 11.5% of sales, versus $48.6 million and 9.8% a year earlier. The filing defines segment operating profit to exclude interest, equity-based compensation, and corporate expenses. The effective tax rate was 27.0%, compared with 26.8%.
Investing cash outflow was $21.2 million, primarily reflecting $18.1 million of capital spending and a $3.1 million acquisition. Financing cash outflow was $44.3 million, including $45.9 million of net revolving-credit repayments. Cash declined $7.7 million during the quarter to $104.7 million.
At January 1, 2011, total assets were $2.701 billion and shareholders’ equity was $1.154 billion. Long-term debt, including current installments, had a carrying value of $714.8 million; the filing reports its fair value as $725.8 million. Separately, notes payable were $5.0 million. The U.S. credit facility had $325 million outstanding; total unused borrowing capacity was $428 million, including $414 million under that facility. Net debt to capitalization was 35%, down from 36% at October 2, 2010. Moog stated it was in compliance with credit-facility covenants and believed available cash, operating cash flow, and borrowing capacity would meet operating needs.
Material changes and segment results
- Sales increased in all five segments, led by Space and Defense Controls and Aircraft Controls. Management cited stronger demand and improving industrial activity, partly offset by weaker wind-energy sales and foreign-currency translation, which reduced reported sales by $5 million.
- Space and Defense Controls sales rose 38% to $95.7 million and operating margin increased to 16.5% from 10.8%, benefiting from the Driver’s Vision Enhancer program, tactical missiles, and security and surveillance.
- Aircraft Controls sales rose 12% to $196.0 million; margin was 10.3% versus 10.1%. Higher commercial aircraft and military aftermarket sales were partly offset by contract-loss reserves.
- Industrial Systems sales rose 5% to $143.7 million and margin improved to 10.0% from 8.2%. Broad-based recovery was offset by a $14 million decline in wind energy.
- Components sales increased 2% to $86.4 million and margin improved to 17.1% from 14.3%, while backlog fell 8% to $162.4 million.
- Medical Devices sales rose 11% to $32.6 million, but the segment posted a $1.5 million operating loss versus $0.1 million of profit. A $1 million reserve for a voluntary infusion-pump software upgrade and investment in a larger direct sales force weighed on results; shipments of one pump were held pending resolution of a software issue.
Gross margin improved with product mix, partly offset by contract-loss reserves that were $8 million higher than the prior-year quarter, primarily in Aircraft Controls. Interest expense declined 14% to $9.2 million, mainly due to lower average interest rates. Restructuring expense was $0.1 million versus $1.8 million; management did not anticipate significant additional restructuring charges for the remainder of FY2011.
Outlook, risks, and other notable items
Management forecast FY2011 sales of approximately $2.25 billion, up 6%; operating margin of 10.9%, compared with 10.2% in FY2010; net earnings of $127 million; and diluted EPS of $2.75, up 17%. It expected sales growth in all segments except Components. Segment outlooks included sales growth in Aircraft Controls, Space and Defense Controls, Industrial Systems, and Medical Devices, but declines in Components. These are forward-looking estimates, not guarantees.
Moog completed one Aircraft Controls acquisition for $3 million in cash, complementing its military aftermarket business. It expected approximately $38.5 million of pension-plan contributions during FY2011, including amounts already contributed. The most recent annual goodwill impairment test, as of the beginning of Q4 FY2010, found no impairment; each reporting unit’s fair value exceeded carrying value by more than 10%.
Principal disclosed risks include dependence on government funding and major customers, aerospace and industrial cycles, contract cost overruns and loss reserves, competition and pricing pressure, indebtedness and covenant compliance, pension funding needs, foreign exchange and international risks, acquisition execution, and medical-device quality, safety, and product-liability exposure. Moog reported no material off-balance-sheet arrangements and no material changes in market-risk disclosures. Management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether FY2011 sales, margin, earnings, and EPS guidance remained achievable as program demand and market conditions evolved.
- Whether higher contract-loss reserves, especially in Aircraft Controls, indicated further exposure on fixed-price or development contracts.
- Progress resolving the infusion-pump software issue, the related upgrade, and the Medical Devices segment’s return to profitability.
- Cash conversion and working-capital trends, including inventory growth and reliance on customer advances, alongside capital spending and debt repayment.
- Credit-facility headroom and covenant compliance, as well as pension contributions and the assumptions underlying goodwill valuations.