Moog Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended December 29, 2018; comparative quarter ended December 30, 2017. Moog designs and manufactures precision motion and fluid-control systems across Aircraft Controls, Space and Defense Controls, and Industrial Systems.
Financial performance
- Revenue: $679.7 million, up 8% year over year. Management attributed growth across all segments primarily to organic growth.
- Profit: Gross profit was $199.5 million; gross margin was 29.4%, unchanged. Net earnings were $44.1 million versus $1.3 million, and diluted EPS was $1.25 versus $0.04. The prior-year comparison was heavily affected by Tax Act charges; its effective tax rate was 97.3%, compared with 24.3% this quarter.
- Operating segments: Aircraft Controls sales rose 9% to $304.0 million, with operating margin of 10.9% versus 11.1%. Space and Defense Controls sales rose 17% to $156.1 million, with margin of 11.8% versus 12.3%. Industrial Systems sales rose 2% to $219.6 million; margin increased to 12.6% from 9.2%, reflecting the absence of the exited wind-pitch-control business and a sale gain.
- Cash flow: Operating cash flow was $64.2 million versus $44.2 million. Capital expenditures were $24.4 million; investing cash outflow was $21.6 million. Financing cash outflow was $59.1 million, including net credit-facility repayments, dividends, and share purchases. Cash ended at $110.8 million.
- Liquidity and debt: Total debt was approximately $818.8 million, including short-term borrowings; net debt to capitalization was 36%, down from 38% at fiscal year-end. The company reported $718 million of unused borrowing capacity, but leverage covenants limited additional borrowing to $499 million. It was in compliance with its debt covenants.
- Other metrics: Backlog was approximately $2.1 billion, with about 67% expected to be recognized as sales over the next twelve months. The company declared and paid a $0.25 per-share quarterly dividend.
Changes versus the prior comparable period
- Sales increased in each segment. Military aircraft growth, including F-35 production, and defense, missile, and industrial automation demand were notable drivers.
- Consolidated gross margin was flat. Segment operating profit improved overall, particularly in Industrial Systems, while Aircraft Controls and Space and Defense Controls margins declined modestly.
- Operating cash flow improved, partly because pension contributions were lower and customer advances increased.
- Foreign-currency translation shifted to a $9.4 million loss in other comprehensive income from a $10.4 million gain a year earlier.
Outlook, commentary, and risks
- Fiscal 2019 guidance: Revenue of approximately $2.877 billion and diluted EPS of $5.05–$5.45. Management cited defense growth, commercial-aircraft program ramp-ups, and improved margins, including the absence of 2018 wind-pitch-control exit charges. It expected Industrial Systems growth to offset lost sales from that exit.
- Capital spending: Management expected approximately $95 million of fiscal 2019 capital expenditures, including investment supporting higher F-35 production and engine-propulsion testing.
- Accounting and unusual items: Moog adopted ASC 606 using the modified-retrospective method. It increased opening retained earnings by $14.9 million; the standard added $2.3 million to current-quarter sales and $0.04 million to net earnings. The quarter also included a $2.6 million gain from selling a non-core Industrial Systems business.
- Contract and market risks: The filing highlights estimation uncertainty on over-time and fixed-price contracts, potential cost overruns and additional loss provisions, and the possibility that backlog may not convert to revenue. Other risks include government funding and contract termination, cyclical end markets, supplier performance, foreign exchange, pension assumptions, debt covenants, and litigation. Contract and contract-related loss reserves were $42.7 million; standby letters of credit totaled $43.6 million.
- Management said it had adequate reserves for pending environmental matters and did not expect those matters or current legal proceedings to materially affect results. It cautioned that customer claims or project cost growth could nevertheless produce material losses.
Important facts for investors to verify
- Whether fiscal 2019 EPS and sales guidance remains achievable, especially given dependence on defense programs and commercial-aircraft production schedules.
- How much of the $2.1 billion backlog converts to revenue, and whether contract cost estimates or loss reserves require adjustment.
- Available liquidity under the leverage covenant, debt refinancing and interest-rate exposure, and the effect of cash held primarily outside the United States.
- The sustainability of Industrial Systems margin gains after the wind-pitch-control exit and the one-time sale gain.
- Comparability of reported results given the ASC 606 adoption and the unusually high prior-year tax expense.