Moog Inc. — FY2016 Form 10-K
Business context and reporting period. Moog designs and manufactures precision motion and fluid-control systems for aerospace, defense and industrial markets. Its four segments are Aircraft Controls, Space and Defense Controls, Industrial Systems and Components. The fiscal year ended October 1, 2016 and comprised 52 weeks; FY2015 comprised 53 weeks, a comparability consideration. FY2016 Q4 sales were $619.1 million, net earnings attributable to common shareholders were $33.1 million, and diluted EPS was $0.92.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $2,411.9 million | $2,525.5 million |
| Gross margin | 29.5% | 29.2% |
| Operating profit | $238.2 million | $245.5 million |
| Net earnings attributable to common shareholders | $126.7 million | $131.9 million |
| Diluted EPS | $3.47 | $3.35 |
| Cash from operating activities | $215.9 million | $334.5 million |
| Capital expenditures | $67.2 million | $80.7 million |
- Sales fell 4%, operating profit fell 3%, and common-shareholder earnings fell 4%; diluted EPS rose 4%, helped by a 7% reduction in average diluted shares following share repurchases.
- Gross margin improved 0.3 percentage points, supported by prior restructuring savings and the absence of a prior-year accounting adjustment; adverse product mix partly offset the improvement. SG&A declined to 14.1% of sales from 14.7%, while R&D increased 11% to $147.3 million.
- Operating cash flow declined 35%, mainly reflecting unfavorable timing of payments and collections and higher pension contributions. Cash was $325.1 million; working capital was $1.031 billion and the current ratio was 2.7.
- Total indebtedness was $1.012 billion, down from $1.075 billion; net debt to capitalization was 41.0%, versus 43.5%. The company reported $418 million of borrowing capacity under its leverage covenant and compliance with its debt covenants.
- Total assets were $3.042 billion and shareholders’ equity was $988.4 million. Twelve-month backlog was $1.225 billion, down 4% year over year.
Material changes and segment results
- Aircraft Controls: sales decreased 2% to $1.064 billion; operating profit was $98.5 million and margin was 9.3%. Commercial aircraft growth, including Airbus A350 activity, was offset by lower military sales and aftermarket activity.
- Space and Defense Controls: sales decreased 4% to $366.1 million, while operating profit rose 25% to $41.4 million and margin improved to 11.3%. Lower space-program sales were partly offset by defense activity and the additive-manufacturing acquisition.
- Industrial Systems: sales decreased 1% to $515.0 million; operating profit increased 8% to $48.5 million. Cost savings helped, while industrial automation weakness and unfavorable mix remained pressures.
- Components: sales decreased 13% to $467.1 million and operating profit fell 26% to $49.8 million, reflecting reduced marine-energy demand, lower aerospace and defense aftermarket sales, and weaker sleep-apnea product sales.
- Foreign-currency translation reduced FY2016 sales by $26 million; weaker currencies accounted for almost one-quarter of the sales decline. The company repurchased approximately 850,000 shares for $39.1 million.
Outlook, risks and unusual items
- FY2017 outlook: management expected sales to increase 1% to approximately $2.4 billion, operating margin to reach 10.3% from 9.9%, and common-shareholder earnings to remain around $127 million. Diluted EPS guidance was $3.30–$3.70, midpoint $3.50.
- Expected segment sales changes were +4% Aircraft Controls, flat Space and Defense Controls, −5% Industrial Systems and +2% Components. Management cited the A350 ramp and medical pumps as growth drivers, offset by weakness in Industrial Systems and unfavorable mix in some businesses.
- FY2016 included $15.4 million of restructuring expense and a $4.8 million goodwill impairment related to the Linear additive-manufacturing business. Moog acquired 70% of Linear in FY2016. A product-line exit also generated approximately $4.9 million of long-lived-asset impairment within restructuring expense.
- Government funding and contract termination, fixed-price contract cost overruns and estimation judgments, customer concentration (Boeing represented 14% of sales), cyclical aerospace and industrial demand, foreign exchange, supplier performance, cybersecurity and pension assumptions are identified risks. U.S. Government contracts represented 30% of sales.
- Defined-benefit pension obligations and market assumptions may affect earnings and funding needs. Moog anticipated approximately $70 million of pension contributions in FY2017. Environmental matters and other legal proceedings were disclosed; management did not expect pending matters to have a material adverse effect and stated reserves were adequate for identified environmental matters.
- Cash dividends were not paid in FY2015 or FY2016, and management reported no current plan to pay them. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Investor facts to verify
- Whether backlog converts to revenue as expected, particularly given government options, commercial-aircraft production schedules and the 4% backlog decline.
- Whether the FY2017 sales, margin and EPS outlook is achieved, including the A350 ramp, medical-pump growth and expected Industrial Systems decline.
- Whether operating cash flow recovers after the FY2016 working-capital timing effects, and whether planned pension contributions and capital spending affect liquidity.
- Debt covenant headroom and borrowing availability, given $1.012 billion of debt and the $418 million covenant-limited capacity.
- Performance and impairment assumptions for Linear, and the financial impact of the post-year-end Bradford Engineering sale.
- Exposure to contract loss reserves, pension obligations, foreign-exchange movements and customer concentration, including Boeing’s 14% share of sales.