Moog Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012; comparisons are with the quarter and six months ended April 2, 2011. Dollar amounts below are in millions unless stated otherwise.
Business context
Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets. It reports five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. Long-term contracts represent 29% of sales, with much of the remaining revenue recognized upon delivery or completion of service.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $625.0 | $574.2 | $1,225.6 | $1,128.7 |
| Gross margin | 29.5% | 29.1% | 30.2% | 29.4% |
| Net earnings | $35.4 | $30.6 | $71.8 | $64.0 |
| Diluted EPS | $0.77 | $0.66 | $1.57 | $1.39 |
| Segment operating margin | 10.7% | 10.4% | 11.2% | 11.0% |
- Sales rose 9% in both the quarter and first half. Quarterly growth came from all segments, led by Aircraft Controls and Industrial Systems; first-half growth came from four of five segments.
- Quarterly earnings increased 16% and first-half earnings 12%. Gross margin improved, helped in the first half by $5 million lower contract-loss reserve charges, primarily in Aircraft Controls.
- Quarterly SG&A was 15.6% of sales versus 15.2%; first-half SG&A was 15.8% versus 15.3%. Management attributed the increase largely to moving into a new U.K. Aircraft Controls facility.
Cash flow, debt and liquidity
- First-half operating cash flow was $75.4, nearly unchanged from $75.9 a year earlier. Receivables and inventory used cash; management cited billing and collection timing.
- Investing cash outflow was $84.5, including $53.7 of capital expenditures and $25.7 for acquisitions. Capital spending was higher than the prior-year $34.9, partly due to the new facility. Management expected fiscal 2012 capital expenditures of approximately $105.
- Cash was $125.8 at March 31, 2012, versus $113.7 at October 1, 2011. Total debt carrying value was approximately $747 million, including $93.7 short-term borrowings and $653.6 long-term debt and current installments. Net debt to capitalization was 33%, versus 34% at fiscal year-end.
- Unused borrowing capacity was $632, including $616 under the $900 U.S. revolving credit facility. Moog reported compliance with its credit covenants and said cash, operating cash flow, and available borrowing capacity should meet operating needs.
Material changes, outlook and risks
- Moog acquired Protokraft and Bradford Engineering for cash consideration of approximately $25.7, plus $4.4 initial fair value of contingent consideration for Protokraft. Purchase-price allocations remained preliminary.
- A new receivables securitization facility, entered into in March 2012 and maturing March 4, 2013, provides up to $100 of capacity; approximately $83.5 was outstanding at quarter-end. It is accounted for as secured borrowing and replaced some borrowing under the U.S. facility.
- Fiscal 2012 company outlook: sales of approximately $2.47 billion, operating margin of 11.3%, net earnings of $152 million, and diluted EPS of $3.31. Management expected sales growth across all segments. Segment expectations included lower-than-2011 margins in Space and Defense Controls, reflecting normalization from favorable prior-year mix.
- Management cited cyclical markets, government funding and contract risks, fixed-price cost overruns, customer pricing pressure, competition, foreign-exchange movements, pension assumptions, acquisition execution, and debt covenants as risks. Space and Defense Controls faced weaker defense/security activity and lower-margin launch-vehicle mix. Management also noted reliance on major customers including Boeing and Lockheed Martin.
- The 2011 infusion-pump software upgrade reserve and related costs affected Medical Devices comparisons; management said it was no longer incurring costs from the voluntary recall. No material off-balance-sheet arrangements or material changes in critical accounting policies were reported. Management stated disclosure controls were effective.
Most important facts for investors to verify
- Whether sales, margins, and EPS track the fiscal 2012 outlook, particularly as Space and Defense Controls margins normalize.
- Receivables collection and inventory trends, and whether operating cash flow remains sufficient alongside the planned $105 million capital program.
- Debt levels, covenant headroom, and renewal or extension terms for the receivables securitization facility.
- Acquisition integration and final purchase-price allocations for Protokraft and Bradford, including contingent consideration.
- Exposure to government program funding, defense/security spending, fixed-price contract losses, major customers, foreign currency, and pension funding.