Moog Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 1, 2017; comparisons are with the periods ended April 2, 2016. Moog designs and manufactures precision motion and fluid controls for aerospace, defense, and industrial markets.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $632.4 million, up 3% | $1,222.1 million, up 4% |
| Gross margin | 29.3%, unchanged | 29.3%, versus 28.9% |
| Earnings before taxes | $48.2 million, versus $40.6 million | $84.7 million, versus $76.3 million |
| Net earnings attributable to Moog | $32.0 million, up 3%; diluted EPS $0.88, versus $0.85 | $62.6 million, up 9%; diluted EPS $1.73, versus $1.55 |
| Operating cash flow | Not separately provided for the quarter | $121.7 million, versus $78.4 million |
First-half operating cash flow benefited from favorable working-capital movements, including accounts payable and inventory. Capital expenditures were $30.2 million. Cash, cash equivalents, and restricted cash totaled $342.5 million at April 1, including $37.4 million held in escrow for an acquisition; unrestricted cash was $305.1 million.
Debt balances included $540.4 million drawn on the U.S. revolver, $300 million of senior notes, and $120 million under the receivables securitization program. Net debt to capitalization was 37%, down from 41% at October 1, 2016. The company reported compliance with debt covenants; borrowing capacity was constrained by the leverage covenant.
Material changes and segment performance
- Aircraft Controls sales rose 6% in both the quarter and first half; operating profit increased substantially, helped by the Airbus A350 ramp, lower R&D, and the absence of prior-year restructuring charges.
- Space and Defense Controls sales increased 14% for the quarter and 13% for the half, while operating profit declined because of non-core business sale losses, a satellite program engineering charge, and higher R&D.
- Industrial Systems sales fell 10% in both periods, reflecting lower activity across its markets; first-half operating profit also declined.
- Components sales increased 3% for the quarter and 6% for the half, supported by medical products; first-half operating profit improved.
- Foreign currency translation reduced sales by $7 million in the quarter and $15 million in the first half. First-half foreign currency translation also contributed a $28.8 million other comprehensive loss.
Outlook, commentary, and risks
Management forecast fiscal 2017 sales of approximately $2.5 billion, up 2% from fiscal 2016; operating margin of 10.0%, versus 9.9%; net earnings approximately flat at $127 million; and diluted EPS of $3.35–$3.65, with a $3.50 midpoint. The outlook anticipated growth in Aircraft Controls, Space and Defense Controls, and Components, partly offset by a 9% decline in Industrial Systems. Management cited A350 production, defense programs, and medical product demand as supports, with industrial-market weakness, unfavorable mix, currency, and divestiture losses as offsets.
Moog recorded $13.4 million of first-half losses associated with selling non-core Space and Defense Controls businesses; management expected the held-for-sale business sale to be completed during 2017. On April 2, 2017, one day after quarter-end, Moog acquired Rotary Transfer Systems for approximately $42.6 million net of acquired cash, including deferred payments and assumed pension obligations.
Risks highlighted include cyclical markets and uncertain future defense budgets, fixed-price and long-term contract cost estimates, possible additional contract losses, foreign-exchange exposure, pension funding, indebtedness and covenant limits, and execution of acquisitions and divestitures. Management said pending legal and environmental matters were not expected to have a material adverse effect, but noted customer claims or disputes could materially affect results. The company also reported $22.5 million of standby letters of credit.
Important facts for investors to verify
- Whether the fiscal 2017 sales, margin, earnings, and EPS outlook is achieved, particularly given Industrial Systems weakness and sales-mix pressures.
- The nature and remaining financial impact of non-core business disposals, including the $13.4 million loss and related tax treatment.
- The sustainability of first-half operating cash flow, which benefited from favorable working-capital timing.
- Progress on the Rotary Transfer Systems acquisition and the use of the $37.4 million held in escrow.
- Developments in long-term contract estimates, satellite-program engineering issues, and customer or government claims that could require additional loss provisions.