Moog Inc. — FY2010 Form 10-K Summary
Business context and reporting period. Moog designs and manufactures precision motion and fluid-control systems for aerospace and defense, industrial, and medical markets. It reports five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. Fiscal 2010 ended October 2, 2010 and included 52 weeks; fiscal 2009 included 53 weeks, which management said affects comparability but did not quantify. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $2,114.3 million | $1,848.9 million |
| Gross margin | 29.0% | 29.1% |
| Net earnings | $108.1 million | $85.0 million |
| Diluted EPS | $2.36 | $1.98 |
| Operating cash flow | $195.3 million | $117.9 million |
| Capital expenditures | $65.9 million | $81.8 million |
| Cash and cash equivalents at year-end | $112.4 million | $81.5 million |
| Working capital | $812.8 million | $764.1 million |
| Current ratio | 2.70 | 2.71 |
| Total long-term debt, including current installments | $762.7 million | $816.1 million |
| Net debt to capitalization | 36.8% | 41.4% |
Fourth-quarter 2010 sales were $571.8 million and net earnings were $32.3 million; diluted EPS was $0.71. Fourth-quarter 2009 comparables were $504.3 million, $15.2 million, and $0.35, respectively.
Annual sales increased 14%, primarily reflecting approximately $200 million in incremental sales from recent acquisitions. Net earnings rose 27%; diluted EPS grew 19%, partly reflecting more shares outstanding following the October 2009 stock offering. Gross margin was essentially flat: favorable mix in legacy products was offset by acquired wind-energy and high-lift-actuation products with lower margins. Segment operating profit was $216.4 million, or 10.2% of sales, versus $171.4 million, or 9.3%, in 2009.
Operating cash flow increased by $77 million, attributed mainly to higher earnings and non-cash expenses and a smaller increase in working-capital needs. Investing cash use was $98.1 million, including $65.9 million of capital spending and $29.8 million for acquisitions. Financing cash use was $65.9 million, principally reflecting debt repayments. The $750 million U.S. revolving facility had $371.2 million outstanding; total unused borrowing capacity was $387.1 million. Moog reported compliance with all credit covenants.
Material changes and segment performance
- Aircraft Controls: Sales rose 14% to $756.6 million; operating margin improved to 10.1% from 7.9%. Acquired high-lift actuation business and stronger military sales contributed to growth.
- Space and Defense Controls: Sales increased 19% to $325.5 million, while operating margin declined to 11.0% from 14.6%, mainly due to a greater share of lower-margin cost-plus development work.
- Industrial Systems: Sales increased 20% to $545.7 million and margin improved to 8.8% from 6.8%, supported by acquisitions and a late-year recovery in legacy markets.
- Components: Sales rose 4% to $360.0 million and margin improved to 16.7% from 16.1%; backlog fell to $153 million from $183 million.
- Medical Devices: Sales grew 14% to $126.6 million, but the segment remained loss-making; operating loss narrowed to $4.0 million from $7.4 million. Startup costs at a new Costa Rica facility, product development, and sales-force investment weighed on results.
Moog completed four acquisitions in 2010 for a total purchase price of approximately $35 million. The twelve-month backlog increased to $1.18 billion from $1.10 billion. The company incurred $5.1 million of restructuring expense in 2010, down from $15.1 million in 2009; remaining severance payments were expected to be completed by the end of 2011.
Outlook, risks, and contingencies
Management’s 2011 outlook called for sales of $2.2 billion, up 6%; operating margin of 10.7%, versus 10.2% in 2010; net earnings of $124 million; and diluted EPS of $2.70, a projected 14% increase. Sales were expected to rise in all segments except Components. Planned 2011 capital expenditures were approximately $90 million, and anticipated pension contributions were approximately $39 million.
- Key exposures include cyclical commercial aerospace and industrial demand, changes in government program funding or contract termination, and customer concentration. U.S. Government contract sales were 35% of 2010 sales; Boeing represented 10% of sales.
- Long-term contract accounting depends on estimates of costs and completion. Thirty percent of sales used percentage-of-completion accounting; fixed-price work represented 82% of that revenue. Contract loss reserves were $40.8 million at year-end.
- Pension obligations and funding are sensitive to discount rates, asset returns, and mortality assumptions. Management estimated that the lower discount rate and updated mortality assumption would increase 2011 pension expense by $6 million and $2 million, respectively.
- At year-end, goodwill was $704.8 million and other intangible assets were $205.9 million. No goodwill impairment was recorded; management reported each reporting unit’s fair value exceeded carrying value by more than 10% in its annual test.
- Other risks include foreign exchange, interest rates, product liability and recalls, environmental compliance and remediation, supplier and subcontractor performance, acquisition integration, and regulatory requirements for government contracting and exports. Management said pending legal proceedings and environmental matters were not expected to have a material adverse effect.
Management stated that cash, operating cash flow, and available borrowing capacity should be sufficient for operating needs. The U.S. credit facility matures in March 2013 and is secured by substantially all U.S. assets. No material off-balance-sheet arrangements were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; controls at four 2010 acquisitions were excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether 2011 sales, margin, earnings, and EPS guidance was achieved, especially the expected recovery in Industrial Systems and Medical Devices.
- How much of 2010 sales growth and future growth depends on acquisitions, and whether acquired businesses deliver expected margins and cash flows.
- Progress, cost estimates, and remaining exposure on fixed-price development programs and the $40.8 million contract-loss reserve.
- Debt refinancing and covenant headroom ahead of the March 2013 U.S. facility maturity, including sensitivity to variable interest rates.
- Future pension funding and expense against the $39 million planned 2011 contributions and actuarial assumptions.
- Fourth-quarter and annual comparisons in light of the 52-week 2010 versus 53-week 2009 fiscal year and the effect of acquisitions.