Moog Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended July 3, 2010, and the nine months then ended. Comparisons are with the three and nine months ended June 27, 2009. Unaudited; amounts are in U.S. dollars.
Business context and financial performance
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.
| Metric | Three months 2010 | Three months 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $536.8 million | $445.2 million | $1,542.4 million | $1,344.6 million |
| Gross margin | 29.1% | 28.2% | 29.1% | 29.7% |
| Operating profit (segment measure) | $55.5 million | $31.2 million | $154.9 million | $132.8 million |
| Net earnings | $29.2 million | $15.9 million | $75.8 million | $69.9 million |
| Diluted earnings per share | $0.64 | $0.37 | $1.66 | $1.63 |
Third-quarter sales rose 21% and net earnings rose 84%; diluted EPS increased 73%. For the nine months, sales grew 15%, net earnings 8%, and diluted EPS 2%. The 2010 sales increase reflected recovery from the recession and acquisitions; management attributed $35 million of third-quarter and $171 million of year-to-date incremental sales to recent acquisitions. Third-quarter gross margin improved with volume, while year-to-date margin declined due in part to acquired lower-margin wind-energy and high-lift actuation products.
Segments and material changes
- Aircraft Controls: Nine-month sales rose 14% to $555.0 million and operating margin increased to 9.8% from 8.4%, with acquisition contributions and lower R&D expense. Backlog increased to $523.6 million from $407.2 million.
- Space and Defense Controls: Nine-month sales grew 15% to $236.0 million, but operating margin fell to 10.4% from 14.9%, reflecting a greater share of lower-margin cost-plus development work.
- Industrial Systems: Nine-month sales rose 22% to $385.8 million and margin improved to 8.2% from 7.3%. Acquired wind-energy businesses contributed significantly; sales in some legacy markets remained weak.
- Components: Nine-month sales increased 5% to $270.4 million, while margin declined to 16.6% from 17.4% amid product-mix changes. Backlog fell to $160.0 million from $197.7 million.
- Medical Devices: Nine-month sales increased 19% to $95.2 million; the operating loss narrowed to $0.5 million from $6.7 million. Costa Rica facility start-up costs continued to weigh on results.
Cash flow, debt, and liquidity
- Nine-month cash from operations was $135.0 million, up from $83.9 million. Capital spending was $44.7 million, implying operating cash flow less capital expenditures of approximately $90.2 million.
- Investing activities used $75.5 million, including $28.6 million for acquisitions. Financing activities used $45.3 million, primarily reflecting debt repayments.
- Cash and equivalents were $91.1 million at July 3, 2010, versus $81.5 million at fiscal year-end. Total current assets were $1,240.5 million and current liabilities $454.9 million.
- Long-term debt, excluding current installments, included $398.6 million of senior debt and $378.6 million of senior subordinated notes. The U.S. revolving credit facility had $388 million outstanding; unused borrowing capacity was $380 million in total, including $352 million under that facility after letters of credit.
- Net debt to capitalization declined to 38% from 41% at October 3, 2009. Moog reported compliance with all credit-facility covenants and said cash, operating cash flow, and available borrowing capacity should meet operating needs.
Outlook, commentary, and risks
Management forecast 2010 sales of approximately $2.1 billion, operating margin of 10.3%, net earnings of $107 million, and diluted EPS of $2.35. For 2011, it forecast sales of approximately $2.2 billion, operating margin of 10.9%, net earnings of $124 million, and diluted EPS of $2.70. These are management expectations, not guarantees.
Management cited economic recovery, acquisition contributions, program demand, product mix, and continuing cost improvements as important drivers. It expected restructuring payments to be completed by year-end 2010 and did not anticipate additional restructuring charges for the remainder of the year. Expected 2010 pension contributions totaled approximately $34 million.
- Key risks include commercial and industrial cyclicality, dependence on government funding and major customers, contract cost overruns and program delays, competitive pricing, and acquisition integration and performance.
- Other cited risks include indebtedness and covenant compliance, pension funding needs, foreign-currency movements, potential goodwill or intangible-asset impairment, and product quality, safety, and liability issues, particularly in medical devices.
- The Aircraft Controls reporting unit’s estimated fair value exceeded carrying value by only 6% at the latest annual goodwill test; management identified demand changes, program delays, and unfavorable contract terms as potential adverse factors.
- Moog reported no material off-balance-sheet arrangements and no material changes to previously disclosed contractual obligations. It also said there were no material current-year changes to market-risk disclosures.
Unusual comparison factors include unusually low third-quarter 2009 taxes, which benefited from a cumulative earnings adjustment and tax items; the 2009 year-to-date comparison also included a foreign tax credit related to repatriated cash and an R&D tax-credit benefit. Consequently, earnings growth comparisons are affected by prior-year tax benefits.
Important facts for investors to verify
- Whether forecast sales, margins, net earnings, and EPS are achieved, and how much growth depends on acquired businesses.
- Aircraft Controls goodwill headroom and the impact of program funding, delays, or adverse contract economics.
- Space and Defense Controls’ lower-margin development mix and Components’ declining backlog.
- Medical Devices’ ability to improve profitability after facility start-up costs, and the status of pension contributions and restructuring payments.
- Credit-facility availability, debt reduction, covenant compliance, and sensitivity to interest rates and foreign exchange.