Moog Inc. — Form 10-Q Summary
Business context and period: Moog designs and manufactures precision motion and fluid-control systems for aerospace, defense, and industrial markets. This report covers the first quarter of fiscal 2018, the three months ended December 30, 2017, compared with the three months ended December 31, 2016. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Net sales | $627.5 million | $589.7 million | Up 6% |
| Gross profit / margin | $184.1 million / 29.3% | $172.5 million / 29.3% | Margin unchanged |
| Operating profit, segments | $66.3 million | $52.4 million | Up 27%; segment measure excludes interest, equity compensation, and corporate costs |
| Earnings before taxes | $47.8 million | $36.5 million | Up 31% |
| Income tax expense / effective rate | $46.5 million / 97.3% | $6.4 million / 17.6% | FY2018 rate sharply increased by tax-law enactment charges |
| Net earnings attributable to Moog | $1.3 million | $30.6 million | Down 96% |
| Diluted EPS | $0.04 | $0.84 | Down $0.80 |
| Operating cash flow | $44.2 million | $50.6 million | Down $6.4 million |
| Capital expenditures | $21.1 million | $14.8 million | Investing cash outflow was $21.6 million |
Cash and equivalents were $395.0 million at December 30, 2017, versus $368.1 million at September 30, 2017. Total current assets were $1.685 billion and current liabilities $613.5 million. Long-term debt, net of issuance costs and current installments, was $962.0 million; gross senior debt was $965.3 million. Moog reported net debt to capitalization of 32%, unused borrowing capacity of $529 million, and compliance with credit-facility covenants. Cash was primarily held outside the United States.
Operating cash flow was reduced by inventory growth and the timing of payments, partly offset by collections and customer advances. Management expects fiscal 2018 capital expenditures of approximately $95 million.
Material changes and segment results
- Aircraft Controls: Sales rose 4% to $278.5 million; operating profit increased 33% to $30.8 million and margin rose to 11.0%. Commercial aircraft growth, including A350 production and aftermarket activity, was partly offset by lower military sales. Twelve-month backlog was $590 million, down 3% year over year.
- Space and Defense Controls: Sales rose 9% to $133.4 million; operating profit increased to $16.3 million from $9.1 million. The comparison benefited from the prior-year losses on European space-business divestitures. Backlog increased 13% to $411 million.
- Industrial Systems: Sales rose 9% to $215.6 million, including contributions from Rotary Transfer Systems and favorable currency. Operating profit declined 5% to $19.2 million and margin fell to 8.9% amid higher operating expenses and investment. Backlog rose 25% to $272 million.
Fiscal 2018 reporting was reorganized into three segments, with the former Components segment allocated between Space and Defense Controls and Industrial Systems; comparative segment data was restated. A new 51%-owned Singapore aircraft-services joint venture was formed, but is accounted for under the equity method because voting control is shared. Moog also acquired Rotary Transfer Systems in fiscal 2017.
Outlook, commentary, and risks
Management forecast fiscal 2018 sales of approximately $2.617 billion, up 5%, and segment operating profit of $288 million, up 15%. Growth was expected across all segments, led by industrial automation and the F-35 program. Management expected higher operating margins, including from the non-recurrence of prior-year divestiture losses.
Management forecast an unusually high 42% effective tax rate due to the Tax Cuts and Jobs Act, net earnings attributable to common shareholders of $124 million, and diluted EPS of $3.23–$3.63 (midpoint $3.43). Excluding the Act’s effects, its forecast was a 31% tax rate, $148 million of net earnings, and EPS of $3.90–$4.30 (midpoint $4.10). These are management estimates, not guarantees.
The quarter included provisional tax charges of $31.0 million for transition tax on foreign earnings and $15.25 million for withholding taxes, partly offset by a $12.225 million deferred-tax remeasurement benefit. The company had not completed its accounting for the Act, and the amounts could change. The filing also describes a $13.1 million loss on fiscal 2017 divestitures, a factor affecting prior-year comparisons.
Key risks include dependence on government programs and funding, fixed-price contract cost overruns and estimation changes, possible failure to convert backlog to revenue, customer or supplier performance, cyclical aerospace and industrial demand, foreign-exchange movements, pension funding, and potential additional tax liabilities. Management reported no pending legal proceeding expected to have a material adverse effect and considered environmental reserves adequate, while noting customer disputes could lead to additional contract-loss provisions. Standby letters of credit totaled $48.8 million.
Important facts for investors to verify
- Final tax accounting and cash-tax consequences of the Tax Cuts and Jobs Act, including the provisional foreign-earnings charges and management’s 2018 tax and EPS assumptions.
- Whether sales and segment-margin growth meet guidance, particularly the expected F-35, A350, industrial automation, satellite, and launch-vehicle contributions.
- Conversion of backlog into sales and cash, and the effects of inventory growth and payment timing on operating cash flow.
- Exposure to long-term and fixed-price contracts, contract-loss reserves, customer disputes, and government-program funding or delays.
- Debt, borrowing availability, overseas cash repatriation plans, and the expected $95 million fiscal 2018 capital-spending program.