Moog Inc. — Q3 2017 Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 1, 2017; comparisons are with periods ended July 2, 2016. Dollar amounts below are U.S. dollars.
Business context and results
Moog designs and manufactures precision motion and fluid controls for aerospace, defense, and industrial markets. It reports four segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, and Components.
| Metric | Three months ended July 1, 2017 | Prior-year quarter | Nine months ended July 1, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $626.2 million | $613.3 million | $1,848.3 million | $1,792.9 million |
| Gross profit / margin | $182.4 million / 29.1% | $183.7 million / 29.9% | $540.0 million / 29.2% | $524.3 million / 29.2% |
| Earnings before income taxes | $48.3 million | $51.6 million | $133.0 million | $127.8 million |
| Net earnings attributable to Moog | $40.1 million | $36.3 million | $102.7 million | $93.6 million |
| Diluted EPS | $1.11 | $1.00 | $2.83 | $2.55 |
Quarterly sales rose 2% and nine-month sales rose 3%. Moog’s attributable net earnings increased 10% in both periods, while diluted EPS increased 11%. The quarterly gross margin declined 0.8 percentage points, primarily due to less favorable Aircraft Controls sales mix; the nine-month gross margin was unchanged. Lower effective tax rates—17.0% versus 30.9% for the quarter and 23.4% versus 27.5% for nine months—supported earnings comparisons.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $169.3 million, versus $160.8 million a year earlier. Investing cash use was $82.9 million, including $40.5 million for the Rotary Transfer Systems acquisition and $45.3 million of capital expenditures. Financing cash use was $67.9 million.
- Cash and cash equivalents were $344.5 million at July 1, 2017, up from $325.1 million at October 1, 2016. Management said cash was primarily held outside the U.S.
- Reported short-term borrowings were $120.1 million; current installments of long-term debt were $0.3 million and long-term debt was $836.1 million. The U.S. revolver balance was $540 million and the receivables securitization balance was $120 million. Net debt to capitalization was 36%, down from 41% at fiscal year-end.
- Management reported compliance with debt covenants. It cited $548 million of unused borrowing capacity, while the leverage covenant limited total borrowing capacity to $530 million at quarter-end. The $1.1 billion U.S. revolver matures in 2021; the $120 million securitization facility terminates in April 2018.
Segment and other material changes
For the quarter, Aircraft Controls sales increased 4% but operating profit fell 12%; Space and Defense Controls sales rose 2% while operating profit fell 11%; Industrial Systems sales fell 6%; and Components sales increased 7%. For the first nine months, sales increased in Aircraft Controls, Space and Defense Controls, and Components, but declined in Industrial Systems. Aircraft Controls benefited from Airbus A350 production growth; Industrial Systems weakness reflected lower industrial and energy sales. Components growth included the Rotary Transfer Systems acquisition.
Nine-month other expense included $13.5 million of losses related to divesting non-core Space and Defense Controls businesses. The company acquired Rotary Transfer Systems on April 2, 2017, for $42.6 million net of acquired cash, including assumed pension obligations. It completed the sale of the held-for-sale portion of the non-core businesses on July 19, 2017, after quarter-end. Restructuring expense was nil for the first nine months of 2017 versus $8.3 million in the comparable 2016 period.
Outlook, commentary, and risks
Management’s 2017 outlook was for sales to increase 2% from fiscal 2016 to $2.5 billion, operating margin of 10.1%, net earnings of $136 million, and diluted EPS of $3.65–$3.85 (midpoint $3.75). Expected growth was led by Airbus A350 and defense programs and higher medical pump sales; Industrial Systems sales were expected to decline. Management expected margin expansion from the absence of prior-year restructuring and goodwill impairment charges and from restructuring benefits, partly offset by divestiture losses.
Key risks include cyclical aerospace, defense, and industrial demand; uncertain defense budgets and government contract funding; fixed-price and long-term contract cost-estimate risk; customer and program concentration; foreign-currency movements; pension assumptions and funding; debt and covenant constraints; and acquisition, divestiture, and goodwill impairment risks. Management stated that pending legal and environmental matters were not expected to have a material adverse effect, but noted customer disputes or project cost growth could require additional loss provisions. Standby letters of credit totaled $24.7 million.
Important facts for investors to verify
- Whether the projected 2017 sales, margin, net earnings, and EPS targets were achieved, and the assumptions underlying the forecast.
- Whether the $13.5 million divestiture-related loss was substantially complete and whether subsequent sale proceeds or working-capital adjustments differed from estimates.
- How the Airbus A350 ramp, F-35 and other defense programs, and weaker Industrial Systems markets affected subsequent sales, margins, and backlog.
- Debt and liquidity headroom under the leverage covenant, and the renewal or refinancing of the securitization facility due in April 2018.
- Potential additional contract loss provisions, pension funding needs, and the effects of foreign exchange and customer or government spending changes.