MOOG Inc. — Q1 Fiscal 2021 Form 10-Q
Business context and period: The quarter ended January 2, 2021. Moog designs and manufactures precision motion and fluid-control systems for aerospace, defense, and industrial markets. Results are compared with the three months ended December 28, 2019, the prior-year comparable quarter. COVID-19 affected commercial aerospace and industrial demand; most operations remained open.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $684.0 million | $754.8 million | Down 9% |
| Gross profit / margin | $189.6 million / 27.7% | $211.3 million / 28.0% | Margin down 0.3 percentage points |
| Earnings before taxes | $50.4 million | $66.9 million | Down 25% |
| Net earnings | $37.8 million | $50.0 million | Down 24% |
| Diluted EPS | $1.17 | $1.44 | Down 19% |
| Operating cash flow | $94.1 million | $42.1 million | Up $52.0 million |
SG&A was $99.6 million, or 14.6% of sales versus 13.0% a year earlier; lower sales and limited near-term cost flexibility increased the ratio. Interest expense fell to $8.4 million from $10.2 million. The effective tax rate was 24.9%, compared with 25.2%. Declared dividends were $0.25 per share.
Segments and material changes
- Aircraft Controls: Sales fell 16% to $286.8 million; operating profit fell 28% to $27.9 million and margin declined to 9.7% from 11.4%. Commercial aircraft sales dropped sharply, partly offset by higher military aircraft sales.
- Space and Defense Controls: Sales rose 1% to $188.2 million; operating profit declined 9% to $23.0 million, with margin at 12.2% versus 13.6%. Space growth was offset by defense declines and an unfavorable mix.
- Industrial Systems: Sales fell 9% to $209.0 million; operating profit declined 26% to $19.9 million and margin fell to 9.5% from 11.7%, reflecting lower automation and simulation/test demand and factory inefficiencies.
- Twelve-month backlog was $1.898 billion, up 14% year over year, driven by defense and space orders; commercial aerospace orders were lower.
- Moog acquired Genesys Aerosystems for $77.7 million net of acquired cash, included in Aircraft Controls. It also sold a non-core Aircraft Controls business and recorded a $0.4 million loss.
Cash, debt, and liquidity
Cash and restricted cash totaled $98.3 million at quarter-end. Current assets were $1.665 billion and current liabilities $813.9 million. Operating cash flow benefited from working-capital movements, including customer receipts and contract advances. Investing cash outflow was $96.4 million, including the Genesys acquisition and $20.3 million of capital expenditures. Financing provided $13.0 million, including $34 million net proceeds from revolving credit facilities, offset in part by $11.7 million of treasury-share purchases and $8.0 million of dividends.
Debt carrying value was approximately $967.2 million, including $69.1 million classified as current; gross senior debt was $975.2 million. The U.S. revolving facility had $399.8 million outstanding, and $500 million of 4.25% senior notes are due in 2027. The company reported $703 million of unused borrowing capacity, was in compliance with debt covenants, and had a 40% net-debt-to-capitalization ratio. The securitization facility, with up to $80 million capacity, matures October 2021.
Outlook, risks, and unusual items
Moog suspended detailed fiscal 2021 guidance because the duration and effects of COVID-19 remained uncertain. Management expected the pandemic to affect the full fiscal year, saw defense and space markets remaining relatively strong, and did not expect a near-term recovery in industrial markets from second-half FY2020 levels. Commercial aerospace remained under pressure; management anticipated possible modest commercial aftermarket growth in the second half of 2021. Management said existing financing and mitigating actions were expected to meet short-term operating needs.
Key risks include prolonged weakness in air travel and industrial investment, government funding and program changes, supply-chain and production disruption, fixed-price contract overruns, and uncertainty in cost estimates for long-term contracts. Contract reserves were $70.8 million. Management cautioned that further delays, cost growth, or estimate changes on customer projects could require additional loss provisions. COVID-19-related changes in sales, earnings, or cash flows could also affect asset valuations and potentially lead to impairment. No pending legal or environmental matter was expected by management to have a material adverse effect, but customer disputes could have a material impact. Standby letters of credit totaled $39.8 million.
A notable prior-year comparison item was a $4 million call premium on redemption of $300 million of 5.25% senior notes; the notes were redeemed in January 2020. The quarter’s results are interim and are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether commercial aerospace sales and aftermarket demand recover as anticipated, and how OEM production schedules evolve.
- Whether backlog converts into revenue on schedule; backlog is not a guarantee of future sales.
- Whether working-capital cash-flow benefits are sustainable and whether the company maintains adequate liquidity as debt maturities and facility renewals approach.
- Whether contract estimates, $70.8 million of contract reserves, or COVID-19 effects lead to additional losses or asset impairments.
- The final purchase-price allocation and subsequent operating contribution of Genesys, and the effect of the newly authorized share-repurchase program.