Moog Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2023, ended April 1, 2023. Comparisons are with the three and six months ended April 2, 2022, except balance-sheet comparisons, which are with October 1, 2022. Moog designs and manufactures precision motion and fluid-control systems across aerospace, defense and industrial markets.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $836.8 | $770.8 | $1,596.9 | $1,494.9 |
| Gross profit | $221.3 | $213.0 | $425.0 | $405.9 |
| Gross margin | 26.4% | 27.6% | 26.6% | 27.2% |
| Earnings before taxes | $56.3 | $38.7 | $116.6 | $100.1 |
| Net earnings | $43.0 | $29.1 | $89.0 | $75.4 |
| Diluted EPS | $1.34 | $0.91 | $2.79 | $2.34 |
| Operating cash flow | — | $(33.0) | $180.2 |
- Quarterly sales rose 9% and first-half sales rose 7%. Excluding foreign-exchange effects and sales lost from divestitures, management reported growth of 11% and 10%, respectively.
- Quarterly net earnings increased 48%; first-half net earnings increased 18%. Gross margin declined in both periods, reflecting unfavorable Aircraft Controls mix, Space and Defense Controls contract charges, and Industrial Systems operational charges; higher volume partly offset these items.
- Q2 segment operating profit was $31.9 million for Aircraft Controls, $27.5 million for Space and Defense Controls, and $24.4 million for Industrial Systems. Segment margins were 9.2%, 11.2%, and 10.0%, respectively.
- First-half operating cash flow was negative despite higher earnings, principally because receivables and inventory absorbed cash and customer advances contributed less. Management cited supply-chain constraints and strategic purchases of materials ahead of requirements.
- Capital expenditures were $89.7 million in the first half. Cash, cash equivalents and restricted cash totaled $109.7 million at April 1, 2023; cash and cash equivalents alone were $107.0 million.
- Long-term debt, including current installments and before deferred issuance costs, was $964.6 million, up from $842.2 million at fiscal year-end. The company had $663 million of unused capacity across financing arrangements and reported compliance with debt covenants. The U.S. revolver’s weighted-average borrowing rate was 6.08%.
- Current assets were $1.93 billion and current liabilities $842.9 million. Contract advances were $317.3 million. Unbilled receivables were $685.4 million.
Material changes and notable items
- Aircraft Controls sales grew 11% in Q2, led by commercial aircraft recovery, while military sales declined. Space and Defense Controls sales rose 10%, supported by space programs and the RIwP turret production ramp. Industrial Systems sales rose 3%; underlying growth excluding currency and divestiture effects was 8%.
- Interest expense increased 81% in Q2 and 73% in the first half, primarily due to higher interest rates and, to a lesser extent, higher debt.
- First-half 2023 included a $10.0 million gain on building sales; first-half 2022 included a $16.1 million gain on the sale of the NAVAIDS business. Q2 2023 included $1.2 million of asset impairment and $2.0 million of restructuring expense. The 2022 comparable quarter included $15.2 million of impairment and $7.8 million of restructuring.
- The $1.2 million impairment in 2023 included $1.0 million for Aircraft Controls equipment following the U.S. Air Force’s planned retirement of the KC-10 tanker and $0.2 million for a Space and Defense Controls receivable associated with an expected contract cancellation.
- Twelve-month backlog was $2.3 billion, unchanged from the prior-year quarter. Remaining performance obligations totaled $5.2 billion; approximately 44% was expected to be recognized as sales over the following 12 months.
Outlook, commentary and risks
- FY2023 company outlook: sales of approximately $3.19 billion and segment operating profit of approximately $354 million. Management expects reported net earnings of $186 million and diluted EPS of $5.81; it separately forecasts adjusted diluted EPS of $5.50–$5.90, with a $5.70 midpoint. Adjusted operating margin is expected to rise to 11.0%, versus 10.2% in FY2022.
- Management expects FY2023 sales growth of 7% excluding divestitures and weaker foreign currencies through the first half. It expects operating-margin improvement from volume and fewer restructuring and impairment charges, partly offset by higher interest expense.
- Management forecast FY2023 operating cash flow of $165 million and capital expenditures of $165 million. It stated that available funding should meet requirements for the next 12 months and beyond.
- Key exposures include supply-chain constraints and cost inflation, fixed-price contract cost overruns and estimates, government funding and contract changes, cyclical commercial aerospace and industrial demand, foreign-currency movements, higher interest rates, and customer or supplier performance. Management noted that additional contract losses could materially affect results if costs, delays, or other estimates worsen.
- Contract reserves were $45.6 million. The company also disclosed $22.0 million of contingent liability related to standby letters of credit. Management said pending legal and environmental matters were not expected to have a material adverse effect; no material change in risk factors was reported.
Important facts for investors to verify
- Whether cash conversion improves as inventory and receivables grow and supply constraints ease; first-half operating cash flow was $(33.0) million.
- Whether FY2023 sales, margin, cash-flow and adjusted EPS outlooks are achieved, and how management defines adjusted results.
- Whether development-program cost growth, especially in Space and Defense Controls, or other fixed-price contract estimates lead to further charges or loss reserves.
- Debt levels, variable-rate borrowing costs, covenant headroom, and the effect of higher interest expense on earnings and liquidity.
- Whether commercial aerospace recovery, industrial demand, government funding and the $2.3 billion twelve-month backlog translate into expected deliveries and revenue.