MOOG INC. quarterly report, Q2 FY2024

Moog Inc. — Form 10-Q Summary

Reporting period: Second quarter and first six months of fiscal 2024, ended March 30, 2024. Comparisons are with the quarter and six months ended April 1, 2023, unless noted. Moog reports four segments: Space and Defense, Military Aircraft, Commercial Aircraft, and Industrial. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m” and “billion” as “bn.”

Financial results and key metrics

Metric	Q2 FY2024	Q2 FY2023	Six months FY2024	Six months FY2023
Net sales	$930.3m	$836.8m	$1,787.2m	$1,596.9m
Gross margin	28.7%	26.4%	28.0%	26.6%
Net earnings	$60.0m	$43.0m	$107.8m	$89.0m
Diluted EPS	$1.86	$1.34	$3.34	$2.79
Operating cash flow	Not presented for the quarter	$16.4m	$(33.0)m

Q2 sales rose 11% and net earnings and diluted EPS each rose 39%. First-half sales increased 12%, net earnings 21%, and diluted EPS 20%.
Q2 segment sales and operating profit: Space and Defense $266.8m and $42.2m; Military Aircraft $202.5m and $16.8m; Commercial Aircraft $207.6m and $24.8m; Industrial $253.4m and $28.2m.
Q2 operating margins were 15.8% for Space and Defense, 8.3% for Military Aircraft, 12.0% for Commercial Aircraft, and 11.1% for Industrial. Industrial first-half operating profit declined 6% year over year, partly reflecting the prior-year $10m building-sale gain.
Cash and cash equivalents were $59.1m at March 30, 2024, versus $69.0m at September 30, 2023. Current assets were $2.16bn and current liabilities $1.00bn. Receivables, unbilled receivables, and inventory were $419.4m, $794.2m, and $810.5m, respectively.
Debt carrying value was $948.6m, comprising $952.0m gross debt less deferred issuance costs. Gross debt included $450m drawn on the U.S. revolver, $500m of 4.25% senior notes, and $2m under the SECT facility. Cash was held outside the U.S. The company reported $679m of unused financing capacity, including $646m available under the U.S. revolver, and stated it was in compliance with covenants.
Six-month investing cash outflow was $84.0m, including $77.5m of capital expenditures and $5.9m for the DCL acquisition. Financing cash inflow was $57.9m, including $84.5m of net revolving-credit borrowings; dividends paid were $17.6m.

Material changes and operating drivers

Sales increased in all segments in Q2. Commercial Aircraft grew 26%, supported by widebody OEM and aftermarket demand; Military Aircraft grew 11%, including FLRAA activity; and Space and Defense grew 9%, led by defense programs. Industrial grew 4%, with simulation and test and energy gains partly offset by lower industrial automation sales.
Management attributed improved gross margin to a $14m Employee Retention Credit benefit, better performance on space vehicle development programs, and Military Aircraft simplification initiatives. Higher pricing and volume also supported segment profitability.
Interest expense increased 20% in Q2 and 23% for the first half, reflecting higher debt balances and borrowing rates. The reported weighted-average rate on most U.S. revolver borrowings was 6.85%.
Q2 twelve-month backlog was $2.5bn, up from $2.3bn a year earlier. Remaining performance obligations were $5.2bn; Moog expects to recognize approximately 48% as sales over the next 12 months.
Effective October 1, 2023, the former Aircraft Controls segment was split into Military Aircraft and Commercial Aircraft; prior-period segment presentation was recast.

Outlook, risks, contingencies, and unusual items

FY2024 outlook calls for sales of $3.55bn, operating profit of $422m, net earnings of $222m, and diluted EPS of $6.87. Adjusted diluted EPS guidance is $7.05–$7.45, with a $7.25 midpoint, excluding first-half impairment and restructuring charges.
Management expects aerospace and defense growth, but lower Industrial sales due to slower orders, particularly in industrial automation. It expects margin improvement from pricing, simplification, and the Employee Retention Credit, partly offset by higher interest expense and taxes. Commercial Aircraft margin is expected to decline on sales mix and the absence of prior-year favorable retrofit activity.
Q2 included $6.75m of asset impairment and $6.75m of restructuring expense. The impairment included charges associated with the U.S. Army’s cancellation of the FARA program, equipment no longer in use, and an investment devaluation. The FARA cancellation also resulted in a $0.2m inventory write-down. Management said 2024 restructuring actions could incur up to $2m of additional costs through 2025.
Contract reserves were $63.3m. Moog cautions that changes in contract costs, delivery schedules, government budget pressures, or estimates on long-term contracts could require additional loss provisions. Other cited risks include competition, cyclical markets, supply-chain constraints and inflation, supplier performance, and changes in government funding and aircraft production rates.
The company said pending legal and environmental matters are not expected to have a material adverse effect and that it has no material off-balance-sheet arrangements. It had $15.2m of contingent exposure under standby letters of credit.
The board declared a $0.28-per-share quarterly dividend on April 25, 2024, payable May 28, 2024. Approximately 2.2m shares remained available under the repurchase authorization.

Important facts for investors to verify

Whether the $14m Employee Retention Credit benefit is nonrecurring and how it affects underlying margins and FY2024 guidance.
Whether Commercial Aircraft growth and the $2.5bn twelve-month backlog convert to revenue as expected, and how OEM build rates and aftermarket demand evolve.
Industrial order trends, especially industrial automation, and the impact on sales and margins.
Working-capital conversion: unbilled receivables and inventory grew, while six-month operating cash flow was only $16.4m; assess the effect of the receivables purchase program on reported cash flows.
Debt, variable interest costs, contract-loss exposures and reserves, and any further costs related to FARA or restructuring actions.