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 report covers the third quarter and first nine months of fiscal 2019, ended June 29, 2019; comparisons are with the periods ended June 30, 2018 unless noted. Amounts below are U.S. dollars.
Financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $741.0 million, up 7% | $2.139 billion, up 7% |
| Gross margin | 28.6%, unchanged | 28.5%, versus 28.6% |
| Net earnings attributable to Moog | $47.5 million, up 17% | $133.9 million, versus $55.9 million |
| Diluted EPS | $1.35, up 19% | $3.80, versus $1.55 |
| Operating cash flow | Not presented for the quarter | $129.1 million, versus $46.4 million |
Nine-month earnings comparisons are affected by the prior-year restructuring charges and the 2017 Tax Act. The effective tax rate was 23.7% for the 2019 nine-month period versus 56.4% in 2018; excluding the prior-year Act-related one-time effects, Moog reported a 26.8% 2018 rate.
Segments, third quarter: Aircraft Controls sales rose 12% to $336.7 million, while operating margin declined to 10.2% from 11.2%. Space and Defense Controls sales rose 16% to $173.0 million and margin increased to 13.9% from 11.1%. Industrial Systems sales fell 5% to $231.2 million; margin increased to 11.0% from 10.3%.
Balance sheet and liquidity: At June 29, cash was $89.0 million, total debt was approximately $826.4 million, and shareholders’ equity was $1.356 billion. Net debt to capitalization was 35%, down from 38% at September 29, 2018. Moog reported $717 million of unused borrowing capacity, subject to a leverage-covenant limit on total borrowing capacity of $507 million, and compliance with its debt covenants. The current ratio and other liquidity ratios are not stated in the filing.
Nine-month investing cash outflow was $88.6 million, including $91.1 million of capital expenditures; financing cash outflow was $78.8 million. Cash and restricted cash decreased by $38.7 million over the period. Management attributed stronger operating cash flow chiefly to pension contributions being $151 million lower than in the prior-year period, partly offset by increased cash use from inventory and receivables. Full-year 2019 capital expenditures were expected to be approximately $120 million.
Material changes and unusual items
- Sales gains in Aircraft Controls and Space and Defense Controls more than offset lower Industrial Systems sales. Aerospace and defense growth included higher commercial aircraft production and defense-program activity.
- Aircraft Controls’ nine-month results included a $10 million supplier-quality charge in the second quarter. Higher operating costs also pressured that segment’s margin.
- Moog’s 2018 exit from wind pitch controls had reduced Industrial Systems sales but improved margins by removing a low-margin business; the absence of prior-year restructuring costs also lifted year-to-date operating profit. Moog sold a small non-core Industrial Systems business in 2019 for $4.2 million and recorded a $2.6 million gain.
- Moog adopted ASC 606 using the modified retrospective method. The standard increased reported 2019 net earnings by $4.5 million for the quarter and $8.0 million for the nine months; prior-year results were not restated. Revenue recognized over time was 64% of 2019 sales.
- Net contract assets were $297.1 million, up from $253.0 million at September 30, 2018. Contract loss and contract-related reserves were $57.6 million.
Outlook, risks and contingencies
Management’s 2019 outlook was sales of approximately $2.877 billion, net earnings of approximately $178 million and diluted EPS of $4.95–$5.15. It expected higher defense and commercial aircraft sales and improved operating margins, principally from higher volumes and the absence of 2018 wind pitch controls exit charges. Aircraft Controls margin was expected to decline because of higher costs and the supplier-quality charge. The outlook is subject to execution and market risks.
Backlog was approximately $2.15 billion, with about 74% expected to be recognized as sales over the next 12 months. Management cautions that backlog may not convert fully to revenue. Fixed-price contract cost overruns, estimates on over-time contracts, supplier performance, government funding, and customer claims or delays could lead to further loss provisions. Other disclosed exposures include cyclical markets, foreign currency movements, Boeing customer concentration, pension assumptions and debt covenants. Moog reported $34.5 million of standby letters of credit. Management did not expect pending legal or environmental matters to have a material adverse effect, and reported no material off-balance-sheet arrangements.
Moog expected adoption of the new lease standard in fiscal Q1 2020 to add a material right-of-use asset and lease liability; the impact had not yet been fully quantified. The board declared a $0.25-per-share quarterly dividend on July 25, 2019.
Important facts for investors to verify
- Whether Aircraft Controls can manage production costs and resolve the supplier-quality issue without further margin pressure.
- Whether defense, commercial aircraft and industrial demand support the $4.95–$5.15 EPS outlook and expected backlog conversion.
- How working-capital needs, especially receivables and inventory, affect cash generation and liquidity.
- Whether the $57.6 million contract reserve adequately reflects remaining fixed-price project risks and customer claims.
- The effect of debt covenants on available borrowing capacity, alongside debt maturities and interest-rate exposure.