Moog Inc. — Q1 Fiscal 2014 Form 10-Q
Reporting period: Three months ended December 28, 2013, compared with the three months ended December 29, 2012. Balance-sheet amounts are compared with September 28, 2013. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Moog designs and manufactures precision motion and fluid-control systems for aerospace and defense and industrial markets. It reports five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices.
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Net sales | $643.4 | $620.8 |
| Gross profit / margin | $199.3 / 31.0% | $192.7 / 31.0% |
| Operating profit by segment / margin | $71.7 / 11.1% | $68.8 / 11.1% |
| Earnings before income taxes | $46.9 | $49.1 |
| Net earnings | $32.1 | $34.1 |
| Diluted EPS | $0.70 | $0.75 |
| Operating cash flow | $68.2 | $28.2 |
| Capital expenditures | $20.0 | $21.9 |
Net margin was approximately 5.0%, versus 5.5% a year earlier. The effective tax rate was 31.5%, compared with 30.5%.
Financial position and liquidity
- Cash was $179.6, versus $157.1 at fiscal year-end; management said cash was primarily held outside the U.S. and generally reinvested locally.
- Total assets were $3,226.8 and shareholders’ equity was $1,577.7. Total liabilities were $1,649.1.
- Debt was approximately $698.9, including $104.2 of short-term borrowings, $8.6 of current long-term debt, and $586.1 of long-term senior debt. Net debt to capitalization was 25%, down from 26% at September 28, 2013.
- The $200 million of 7¼% subordinated notes due 2018 were redeemed in December at 103.625%, funded with U.S. revolving-credit borrowings. The redemption generated an $8.0 million income-statement charge, including a $6.9 million call premium and $1.1 million write-off of debt issuance costs. The $200 million of 6¼% notes due 2015 had been redeemed at par in January 2013.
- The $900 million U.S. revolver had $586 million outstanding and $300 million unused after letters of credit; total unused borrowing capacity across facilities was $315 million. Moog reported compliance with credit covenants.
- The receivables securitization facility had $99 million outstanding and was scheduled to mature March 3, 2014, subject to possible renewal. Management said cash, operating cash flow, and available borrowings should be sufficient for operating needs.
Changes and segment performance
- Sales rose 4%, with $18 million of growth attributed to acquisitions. Aircraft Controls, Space and Defense Controls, and Components grew; Industrial Systems and Medical Devices declined. Gross margin was unchanged.
- Net earnings fell 6% and diluted EPS fell 7%. The $8.0 million note-redemption charge and a roughly $4 million Industrial Systems technology-investment write-down weighed on results. Interest expense declined to $5.1 million from $8.6 million.
- Aircraft Controls sales increased 5% to $265.4 million, led by commercial aircraft growth; operating margin eased to 12.0% from 12.3%. Commercial sales to Boeing and Airbus increased, while military sales declined.
- Space and Defense Controls sales increased 15% to $99.5 million, partly from Broad Reach Engineering; operating margin declined to 7.9% from 9.5%, with higher costs on a recent space acquisition.
- Industrial Systems sales declined 3% to $144.1 million, while reported operating margin increased to 8.5% from 6.1%. Excluding the $4 million technology write-down, management cited $16 million of segment operating profit and an 11.3% margin; restructuring benefits and lower prior-year professional fees contributed to improvement.
- Components sales rose 3% to $102.7 million, including Aspen acquisition sales, but operating margin fell to 15.8% from 19.0%, partly reflecting prior-year strong marine sales and a $2 million earn-out reversal.
- Medical Devices sales declined 9% to $31.8 million, primarily due to the 2013 Ethox Medical Buffalo divestiture. Operating margin rose to 11.4% from 4.6%, aided by the divestiture and cost actions. The company was assessing strategic options for the segment, including a possible sale.
Cash flow, outlook, and risks
- Operating cash flow increased by $40.0 million year over year, primarily due to stronger receivables collections. Investing cash outflow was $28.6 million and financing cash outflow was $18.7 million. Cash increased $22.5 million during the quarter.
- Management forecast FY2014 sales of approximately $2.63 billion, about 1% growth; operating margin of 11.6%; net earnings of $169 million; and diluted EPS of $3.65. It expected capital expenditures of approximately $105 million.
- Outlook by segment: Aircraft Controls sales flat at $1.06 billion; Space and Defense Controls up 6% to $420 million; Industrial Systems down 3% to $575 million; Components up 5% to $438 million; and Medical Devices slightly down to $137 million. Management expected margin improvement in most segments, with Components margin moderating.
- Management cited defense-spending uncertainty and sequestration, cyclical markets, customer pricing pressure, competition, foreign-currency movements, pension costs, and potential government contract funding or termination as risks. It said the impact of sequestration and the 2014 budget legislation could not then be reliably estimated; military aftermarket sales were considered particularly exposed.
- Medical Devices goodwill was not impaired in the quarter, but its estimated fair value exceeded carrying value by only 1%. Management warned that weaker cash flows or adverse assumption changes could lead to further impairment. The segment also had a prior-year $38 million goodwill impairment.
- Other notable obligations and exposures include anticipated 2014 pension contributions of $51.6 million and contract-loss reserves of $38.9 million. The filing reported no material off-balance-sheet arrangements and no material changes to critical accounting policies.
Important facts for investors to verify
- Whether the receivables securitization facility maturing March 3, 2014 was renewed or replaced, and on what terms.
- Whether the full-year sales, margin, earnings, EPS, and capital-spending outlook was achieved, particularly amid defense-budget and industrial-market uncertainty.
- Whether Medical Devices’ narrow 1% goodwill valuation cushion, strategic review, and any potential sale or impairment changed materially.
- Whether the $4 million technology-investment write-down was isolated and whether reported Industrial Systems margin gains persisted.
- Whether refinancing, pension funding, and foreign-held cash affected leverage, liquidity, or access to funds in the U.S.