Moog Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 28, 2019; comparable period ended December 29, 2018. Moog designs and manufactures precision motion and fluid controls for aerospace, defense and industrial markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $754.8 | $679.7 | +11% |
| Gross profit / margin | $211.3 / 28.0% | $199.5 / 29.4% | Margin down 1.4 points |
| Earnings before taxes | $66.9 | $56.5 | +18% |
| Net earnings | $50.0 | $42.8 | +17% |
| Diluted EPS | $1.44 | $1.22 | +18% |
| Operating cash flow | $42.1 | $64.2 | Down $22.1 |
Segment sales increased across the company: Aircraft Controls $340.0 million (+12%), Space and Defense Controls $186.2 million (+19%), and Industrial Systems $228.6 million (+4%). Segment operating margins were 11.4%, 13.6%, and 11.7%, respectively. Industrial Systems’ margin declined from 12.6%, reflecting less favorable mix and the absence of the prior-year non-core business sale gain. Consolidated gross margin also declined, despite higher sales.
Cash, debt and liquidity
- Cash and cash equivalents were $124.2 million; including restricted cash, period-end cash was $127.3 million.
- Total debt carrying value was approximately $987.4 million, versus $833.2 million at September 28, 2019. Net debt to capitalization was 39%, up from 36%.
- Moog issued $500 million of 4.25% senior notes due 2027 and used net proceeds of $492.8 million to repay revolving-credit borrowings. The $300 million of 5.25% notes were redeemed on January 13, 2020 using revolver borrowings; the associated $3.9 million call premium was reflected in Q1 other expense.
- Operating cash flow was lower mainly because of receivables and accounts-payable timing. Investing cash outflow was $84.9 million, including the $53.9 million GAT acquisition and $27.3 million of capital expenditures. Financing cash inflow was $76.4 million, including note proceeds, offset in part by debt repayments and $57.8 million of share repurchases.
- The $1.1 billion U.S. revolving facility matures in 2024; Moog reported compliance with its covenants. It also had $130 million outstanding under its receivables securitization program. Management said cash, operating cash flow and available borrowing capacity should be sufficient for operating needs.
Material changes, outlook and commentary
- Sales growth was driven by military programs in Aircraft Controls and Space and Defense Controls, higher commercial aircraft sales, and medical products. Industrial automation faced weaker demand amid slower global capital investment.
- Backlog was $2.43 billion, up 16%; $1.67 billion was expected to convert to sales over the next 12 months. Management attributed growth chiefly to aerospace and defense orders.
- FY2020 outlook: sales of approximately $3.045 billion (+5%); operating profit of $345 million (+7%); net earnings of approximately $190 million; diluted EPS of $5.30–$5.70, with a $5.50 midpoint. The outlook anticipates stronger defense and space activity and higher medical sales, partly offset by slower industrial automation and slightly lower commercial aircraft sales. Industrial Systems operating profit is expected to decline.
- Moog acquired Germany-based GAT for $53.9 million, adding fluid rotating unions and slip rings to Industrial Systems. It expects FY2020 capital expenditures of about $120 million.
- A retrospective pension accounting change increased reported Q1 net earnings by $2.2 million after tax (about $0.06–$0.07 per diluted share) versus results without the change. The 2018 comparison was also adjusted; reported results should be read on that basis.
Risks, contingencies and unusual items
Key exposures include cyclical commercial aerospace and industrial demand, government funding and contract termination risk, fixed-price contract cost overruns, estimation uncertainty on long-term contracts, supplier performance, Boeing-related concentration, foreign currency movements, pension assumptions, debt covenants and the potential phaseout of LIBOR. The filing warns that backlog may not convert fully to revenue. Management reported no pending legal proceeding expected to materially affect results and considers environmental reserves adequate, but customer claims or project cost growth could require additional loss provisions. Standby letters of credit totaled $35.7 million. The quarter also included the $3.9 million senior-note redemption premium; FY2020 guidance is subject to the risks described in the filing.
Investor verification points
- Track whether backlog converts as planned and whether defense, space and commercial aircraft orders support the FY2020 sales and EPS outlook.
- Monitor gross-margin recovery, Industrial Systems mix and automation demand, and execution of GAT integration and cost improvements.
- Verify cash conversion and working-capital trends, capital expenditure plans, share repurchases, and debt levels after the January 2020 note redemption.
- Review contract reserves, fixed-price program estimates and potential customer claims; confirm the impact of the pension accounting change when comparing periods.
- Assess LIBOR transition implications and any changes in funding, covenant headroom or liquidity.