Moog Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023 (52 weeks), compared primarily with fiscal 2022. Moog designs and manufactures precision motion and fluid-control products and systems for aerospace, defense and industrial markets. Its segments are Aircraft Controls, Space and Defense Controls, and Industrial Systems.
Financial performance and position
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $3.319 billion | $3.036 billion | Up 9% |
| Gross margin | 26.9% | 27.0% | Down 0.1 percentage point |
| Net earnings | $171 million | $155 million | Up 10% |
| Diluted EPS | $5.34 | $4.83 | Up 11% |
| Cash from operations | $136 million | $247 million | Down $111 million |
| Capital expenditures | $173 million | $139 million | Up $34 million |
- Segment operating profit was $343 million, versus $283 million in FY2022. Aircraft Controls sales rose 11% and operating profit rose 17%; Space and Defense Controls sales rose 9% and operating profit rose 10%; Industrial Systems sales rose 8% and operating profit rose 41%.
- Operating cash flow fell largely because of working-capital use: inventory used $130 million of cash, receivables used $57 million, and unbilled receivables used $88 million. Management also cited supply-chain and labor constraints that delayed product shipments. Cash from operations less capital expenditures was approximately negative $37 million.
- At year-end, cash and cash equivalents were $69 million, long-term debt was $863 million, and total debt principal was $868 million. Unused short- and long-term borrowing capacity was approximately $712 million. The company reported compliance with its financing covenants and believes available funding sources are sufficient for the foreseeable future.
- Total assets were $3.81 billion and total liabilities were $2.17 billion. Net inventories were $724 million; unbilled receivables were $707 million, compared with contract advances and progress billings of $378 million.
- Interest expense increased to $64 million from $37 million, reflecting higher borrowing rates and debt levels. The effective tax rate was 20.8%, versus 23.6%.
Material changes and notable items
- Revenue increased across all three segments. Commercial aircraft recovery was a major Aircraft Controls driver; defense and space programs supported Space and Defense Controls; industrial automation, simulation and test, and energy markets contributed to Industrial Systems growth.
- Gross margin was nearly flat: pricing benefits were offset by incremental contract charges, mainly in Space and Defense Controls and Aircraft Controls. Excluding specified segment adjustments, management reported improved adjusted margins in Aircraft Controls and Industrial Systems, but a decline in Space and Defense Controls associated with space-vehicle development cost growth.
- FY2023 included $13 million of non-cash pension settlement expense after a lump-sum buyout that settled $41 million of projected benefit obligations. The company also recorded $8 million of restructuring expense, $15 million of asset impairment, and a $10 million gain from building sales.
- Total backlog was $5.1 billion, down 2% from the prior year; twelve-month backlog was $2.4 billion, up 4%. Management expects to recognize approximately 47% of remaining performance obligations as sales over the next twelve months.
Outlook, risks and contingencies
- For FY2024, management forecasts sales of approximately $3.45 billion, segment operating profit of approximately $415 million, net earnings of approximately $220 million, and diluted EPS of $6.60–$7.00 (midpoint $6.80). It expects aerospace and defense recovery and pricing and simplification benefits to support results, partly offset by lower Industrial Systems orders, higher interest expense and a higher tax rate.
- Management expects FY2024 sales growth in Aircraft Controls and Space and Defense Controls, but a decline in Industrial Systems. Commercial aircraft aftermarket sales and margin are expected to fall as prior-year special sales do not repeat.
- Facility security clearance: In September 2023, the Defense Counterintelligence and Security Agency invalidated Moog’s existing clearance because CEO Pat Roche is not a U.S. citizen. Until an approved mitigation plan is in place, Moog cannot enter new contracts requiring facility security clearance. The timing, approval and associated costs are uncertain and could affect sales, profit and cash flow.
- Other material risks include supply-chain constraints and inflation, fixed-price contract cost overruns and estimation uncertainty, dependence on government programs and major customers, cybersecurity and systems-transformation risks, foreign-exchange exposure, and possible changes in defense spending or commercial aircraft production. Boeing represented 11% of FY2023 sales; U.S. Government contracts represented 39%.
- Management reported no pending legal proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements. Purchase commitments were approximately $1.28 billion, including $102 million for property, plant and equipment. Environmental matters are reserved, and management does not expect them to be materially adverse.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Estimated costs to complete over-time contracts were identified as the critical audit matter; 64% of revenue was recognized over time using cost-to-cost estimates.
Important facts for investors to verify
- Progress and DCSA approval of the security-clearance mitigation plan, including any restrictions, costs or lost contract opportunities.
- Whether supply-chain and labor constraints ease and inventory and unbilled receivables convert to cash; operating cash flow declined substantially despite higher earnings.
- Assumptions behind FY2024 guidance, especially industrial demand, aircraft production and aftermarket trends, contract cost estimates, interest expense and tax rate.
- Performance and remaining risk on fixed-price development contracts, including the $45 million contract-reserve balance and any further cost growth or loss provisions.
- Backlog conversion and exposure to government funding, Boeing and other large customers; backlog orders may be modified, delayed, terminated or not fully realized.