Moog Inc. — Form 10-Q Summary
Business context and reporting period
Moog designs and manufactures precision motion and fluid controls for aerospace, defense and industrial markets. This filing covers the fiscal second quarter and first six months ended March 28, 2020; comparisons are with the periods ended March 30, 2019. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $765.3 million | $718.8 million | $1,520.1 million | $1,398.5 million |
| Gross margin | 27.2% | 27.5% | 27.6% | 28.4% |
| Net earnings | $49.7 million | $41.1 million | $99.8 million | $83.8 million |
| Diluted EPS | $1.48 | $1.17 | $2.91 | $2.38 |
| Operating cash flow | — | — | $80.7 million | $108.8 million |
- Q2 sales rose 6% and net earnings rose 21%; first-half sales rose 9% and earnings rose 19%. Diluted EPS increased 26% and 22%, respectively.
- First-half cash used in investing was $111.4 million, including $54.3 million for the GAT acquisition and $53.5 million of capital expenditures. Financing provided $58.2 million, including proceeds from a $500 million senior-note issuance and share repurchases.
- At March 28, cash and restricted cash totaled $119.3 million. Debt carrying value was $1.103 billion before deferred issuance costs; long-term debt on the balance sheet was $1.094 billion. Net debt to capitalization was 44%, versus 36% at September 28, 2019. Moog reported compliance with debt covenants and $536 million of unused borrowing capacity subject to its leverage covenant.
- Backlog was $2.603 billion, up 17% year over year; $1.793 billion was expected to convert to sales over the following 12 months.
Material changes versus the prior comparable period
- Aircraft Controls first-half sales grew 9% and operating profit rose 22%, supported primarily by military programs. Space and Defense Controls sales grew 18% and operating profit rose 28%, led by space and defense demand.
- Industrial Systems first-half sales increased 1%, but operating profit fell 11%; the quarter’s operating profit declined 18%. Management cited weaker legacy industrial sales, unfavorable mix, GAT acquisition impacts and the absence of a prior-year divestiture gain.
- Consolidated first-half gross margin fell 0.8 percentage points. Management cited unfavorable Industrial Systems mix, Aircraft Controls operating costs and development-program charges. The prior-year comparison included a $10 million Aircraft Controls supplier-quality charge.
- Debt structure changed after issuance of $500 million of 4.25% notes due 2027 and redemption of $300 million of 5.25% notes due 2022; the redemption included a $3.9 million call premium.
Outlook, commentary, risks and unusual items
- Moog suspended its fiscal 2020 outlook because of COVID-19 uncertainty. Management estimated that second-half sales could be 10%–20% below first-half sales and described a possible “marginal loss on the reduced sales” in a range of 30%–40%; the filing does not clarify that phrase further.
- Management said operations had largely remained open and COVID-19 had not materially affected the reported financial statements through March 28. It warned that commercial aircraft faced the greatest pressure from reduced air travel, while defense and space were expected to face more modest pressures; medical-product demand had increased. Supply-chain, productivity, demand and asset-impairment risks remain.
- To preserve liquidity, Moog said it would temporarily suspend dividends and share repurchases, minimize capital spending and discretionary costs, freeze hiring and salaries, and manage inventory and cash flow. The company had paid $0.25 per share in each of the first two fiscal quarters before announcing the suspension.
- A retrospective change in pension-asset accounting increased reported net earnings by $2.2 million in Q2 and $4.4 million in the first half versus results without the change; prior-year comparisons were adjusted. COVID-19-related impacts on future earnings and cash flows could not be reasonably estimated.
- Other risks include fixed-price contract cost overruns, estimation uncertainty on long-term contracts, government funding and customer concentration, supplier performance, foreign exchange, debt covenants and LIBOR transition. Contract reserves were $65.4 million. Management said pending legal and environmental matters were not expected to have a material adverse effect, but customer disputes could lead to additional contract losses.
Important facts for investors to verify
- Whether COVID-19 sales, operating results and cash conversion track management’s estimated second-half ranges, and whether the suspended outlook is restored.
- Whether liquidity and covenant capacity remain adequate as debt leverage rises and dividends and buybacks are suspended.
- Whether backlog converts as expected, especially given commercial-aircraft weakness, and whether contract estimates or reserves require further changes.
- Whether Industrial Systems margins recover and whether medical demand and defense/space growth offset declines in commercial aerospace and industrial markets.
- How much reported earnings growth reflects operating performance versus the pension accounting change, tax benefits and prior-period unusual items.