Moog Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 3, 2020 (53 weeks); comparative fiscal year ended September 28, 2019 (52 weeks). The filing also reports fourth-quarter results. Moog designs and manufactures precision motion and fluid controls for aerospace and defense and industrial markets through Aircraft Controls, Space and Defense Controls, and Industrial Systems.
Financial results and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2.885 billion | $2.905 billion |
| Gross margin | 25.8% | 28.1% |
| Net earnings attributable to Moog | $9.2 million | $174.5 million |
| Diluted earnings per share | $0.28 | $4.96 |
| Net cash from operating activities | $279.2 million | $181.4 million |
| Capital expenditures | $88.3 million | $118.4 million |
| Cash and cash equivalents at year-end | $84.6 million | $89.7 million |
| Total indebtedness | $930.3 million | $833.2 million |
| Working capital / current ratio | $902.9 million / 2.3 | $901.3 million / 2.2 |
| Net debt to capitalization | 40% | 36% |
| Total backlog | $2.555 billion | $2.233 billion |
Operating cash flow increased, principally reflecting stronger collections and customer advances; inventory and payment timing partly offset these sources. Cash used in investing was $146.2 million, including the $54.3 million GAT acquisition and $88.3 million of capital spending. Cash used in financing was $142.8 million, including approximately $215.8 million of share repurchases, dividends, and net debt payments. Moog declared dividends of $0.75 per share for FY2020.
By segment, Aircraft Controls sales fell 7% to $1.206 billion and operating profit fell 72% to $34.7 million; Space and Defense Controls sales rose 13% to $770.1 million and operating profit rose 14% to $101.7 million; Industrial Systems sales declined 1% to $908.7 million and operating profit declined 27% to $80.0 million.
Fourth quarter: Sales were $706.9 million versus $765.2 million in the prior-year quarter. Moog reported a $78.0 million net loss attributable to Moog, versus $44.6 million net earnings, with diluted loss per share of $2.40 versus earnings per share of $1.27.
Material changes versus the prior period
- Full-year sales declined 1%, as pandemic-driven declines in commercial aircraft and industrial automation were partly offset by military aircraft, space and defense, medical products, and the GAT acquisition.
- Commercial aircraft sales decreased materially: Aircraft Controls commercial sales fell 29%, while military aircraft sales rose 16%. Industrial Systems medical sales increased, but automation and simulation and test sales weakened.
- Net earnings fell sharply, primarily because FY2020 included a $121.3 million non-cash pension settlement charge, $37.8 million of long-lived asset impairment, $22.7 million of inventory write-downs, and $10.7 million of restructuring expense. The filing reports a 2020 effective tax rate of negative 69.9%, reflecting tax benefits and the unusually low pretax income base.
- Total backlog increased 14%; twelve-month backlog rose 10% to $1.658 billion. Backlog is confirmed orders, not guaranteed revenue.
- Debt increased and net debt to capitalization rose to 40%, primarily associated with share repurchases. Moog issued $500 million of 4.25% notes due 2027 and redeemed $300 million of 5.25% notes due 2022.
Outlook, risks, and unusual items
Management suspended detailed FY2021 guidance because of COVID-19 uncertainty. It expected the pandemic to affect the full fiscal year, with defense, space, and medical markets relatively resilient, but commercial aerospace and industrial markets under pressure. Management did not expect a recovery in industrial markets from second-half FY2020 levels and anticipated possible modest commercial aftermarket growth in the second half of FY2021. It said existing financial arrangements and mitigation actions should meet near-term operating needs, while prioritizing cash preservation and cost management.
Key risks include uncertain commercial aircraft production and aftermarket demand, dependence on government funding and contracts, customer and program concentration (Boeing represented 14% of FY2020 sales), fixed-price contract cost overruns, supply-chain and operational disruption, foreign exchange and interest-rate exposure, and the impact of the pandemic. U.S. Government contracts represented 41% of sales. The company also disclosed $72.4 million of contract reserves, including provisions for expected losses and other contract issues. Management reported no pending legal proceeding expected to materially adversely affect the company; environmental matters were not expected to have a material adverse effect based on established reserves and current assessments.
The pension settlement transferred certain retiree benefit obligations to an insurer and triggered the $121.3 million non-cash charge. The FY2020 long-lived asset impairment and inventory write-downs reflected pandemic-related demand and capacity impacts. The company reported no goodwill impairment. The auditor issued an unqualified opinion on the financial statements and internal controls; the GAT acquisition was excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether commercial aerospace production, airline flight hours, and aftermarket demand recover on the timing assumed by management, and the resulting effect on backlog conversion.
- Whether defense and space demand, government appropriations, and medical demand sustain the offsets to weaker commercial and industrial markets.
- How much of FY2020’s earnings decline was driven by disclosed one-time or pandemic-related charges, and whether further impairment, contract-loss, or inventory charges arise.
- Debt maturities, revolving-credit availability, covenant headroom, and the planned reduction in securitization-facility capacity; the filing notes unused borrowing capacity was subject to leverage limits.
- Cost estimates on over-time contracts and the $72.4 million contract reserve balance, given the judgment involved in estimating costs to completion.