Moog Inc. — Q3 Fiscal 2020 Form 10-Q
Reporting period: Third quarter and first nine months ended June 27, 2020. Moog designs and manufactures precision motion and fluid controls for aerospace, defense and industrial markets. Its segments are Aircraft Controls, Space and Defense Controls, and Industrial Systems. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $657.5 | $741.0 | $2,177.7 | $2,139.5 |
| Gross margin | 23.0% | 28.6% | 26.2% | 28.5% |
| Net earnings (loss) | $(12.6) | $46.2 | $87.2 | $130.0 |
| Diluted EPS | $(0.39) | $1.31 | $2.59 | $3.69 |
- Quarterly change: Sales fell 11%; Moog recorded a net loss versus prior-year profit. Gross profit included a $19.3 million COVID-related inventory write-down. The quarter also included $31.9 million of long-lived asset impairment and $4.8 million of restructuring expense.
- Nine-month change: Sales increased 2%, but net earnings declined 33%. The period included the same $19.3 million inventory charge and $31.9 million impairment charge, as well as restructuring expense. The prior-year comparison is adjusted for a pension accounting change.
- Segment sales / operating profit: Aircraft Controls: Q3 $249 million / $(42) million, versus $337 million / $34 million; nine months $931 million / $31 million, versus $961 million / $95 million. Space and Defense Controls: Q3 $184 million / $22 million, versus $173 million / $24 million; nine months $563 million / $72 million, versus $494 million / $63 million. Industrial Systems: Q3 $224 million / $18 million, versus $231 million / $25 million; nine months $684 million / $69 million, approximately unchanged sales and lower profit than the prior year.
- Aircraft Controls’ Q3 results were hit by the commercial aviation downturn and COVID-related charges; management reported a 4.4% adjusted operating margin excluding those charges. Space sales benefited from launch vehicle and satellite activity. Medical demand and the GAT acquisition partly offset weakness across Industrial Systems markets.
- Cash flow, nine months: Operating cash flow was $187.8 million, compared with $129.1 million; investing cash outflow was $128.1 million, including $54.3 million for GAT and $70.4 million of capital spending; financing cash outflow was $45.7 million. Cash, cash equivalents and restricted cash rose to $105.6 million from $92.5 million at fiscal year-end.
- Liquidity and debt at June 27: Current assets were $1,659.9 million and current liabilities $717.3 million. Long-term debt, including current installments, was approximately $988.2 million; cash and cash equivalents were $102.3 million. The U.S. revolving facility had $404 million drawn against $1.1 billion of capacity, and the receivables securitization program had $82 million drawn against up to $130 million. Moog reported compliance with credit covenants; the leverage covenant limited unused borrowing capacity to $620 million.
- Net debt to capitalization was 41%, up from 36% at September 28, 2019, primarily due to share repurchases. Moog issued $500 million of 4.25% senior notes due 2027 and redeemed $300 million of 5.25% notes, recording a $4 million call premium in the nine-month period.
- Backlog was approximately $2.522 billion, up 18% year over year; about 66% was expected to be recognized as sales over the following 12 months.
Outlook, management commentary and risks
- Moog suspended its fiscal 2020 outlook because the duration and scale of COVID-19 effects could not be reasonably estimated. Management expected Q4 sales to resemble Q3, with strength in defense, space and medical; further weakness in industrial markets; and little to no improvement in commercial aircraft.
- Management prioritized employee safety, customer delivery, liquidity, cash preservation and cost control. It resized operations in markets with significant sustained demand reductions and reduced or prioritized capital spending. It said available financial arrangements and mitigation actions should meet near-term operating needs.
- Commercial aircraft demand was under severe pressure from reduced air travel, airline cash-preservation measures, lower flight hours and delayed aircraft purchases. Industrial automation, simulation and test, and energy markets faced weak demand and constrained investment. Defense and space funding had not been materially affected to date, while demand for certain medical products increased.
- COVID-19 drove asset impairments, inventory reserves and restructuring. Moog cautioned that further changes in sales, earnings and cash flows could lead to additional impairment. Other key risks include fixed-price contract overruns and estimate changes, government funding and contract exposure, supply-chain disruption, backlog conversion, debt and covenant constraints, and uncertainty around the LIBOR transition.
- Moog temporarily suspended dividend payments and share buybacks as part of its liquidity actions. It had paid $0.25 per share in each of Q1 and Q2; subsequently, on July 24, the board declared a $0.25 quarterly dividend payable September 4, 2020.
Important facts for investors to verify
- Whether commercial aircraft demand and Moog’s sales, margins and production levels stabilize or deteriorate further, especially in Aircraft Controls.
- Whether reported backlog converts to revenue as expected and whether fixed-price contract estimates, reserves or losses change materially.
- Whether the $51.1 million of Q3 inventory and long-lived asset charges are followed by further COVID-related write-downs or restructuring costs.
- Liquidity, borrowing capacity and covenant headroom, including the effect of cash use, debt maturities and any resumption of repurchases or dividends.
- Whether defense, space and medical demand continues to offset weakness in commercial aerospace and industrial markets.