Moog Inc. — FY2018 Form 10-K
Business context and reporting period. Moog designs and manufactures precision motion and fluid controls for aerospace, defense and industrial markets. This 10-K covers the 52-week fiscal year ended September 29, 2018; figures below are annual unless noted. Its three segments are Aircraft Controls, Space and Defense Controls, and Industrial Systems.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2.709 billion | $2.498 billion |
| Gross margin | 28.5% | 29.3% |
| Segment operating profit | $257.9 million | $250.2 million |
| Net earnings attributable to Moog | $96.5 million | $141.3 million |
| Diluted EPS | $2.68 | $3.90 |
| Cash from operating activities | $102.4 million | $217.8 million |
| Capital expenditures | $94.5 million | $75.8 million |
| Cash and cash equivalents at year-end | $125.6 million | $368.1 million |
| Total indebtedness | $862.8 million | $957.0 million |
| Working capital / current ratio | $795.8 million / 2.2 | $997.0 million / 2.6 |
Sales rose 8%, while segment operating profit increased 3%. Net earnings fell 32% and diluted EPS fell 31%. The reported effective tax rate was 47.4%, versus 22.7%; excluding special Tax Act effects and restructuring charges, Moog reported an estimated FY2018 effective rate of 25.1%. Net debt to capitalization was 37.6%, up from 32.7%. Operating cash flow less capital expenditures was approximately $7.9 million, calculated from reported figures.
Segment sales and operating profit were: Aircraft Controls, $1.194 billion and $128.7 million; Space and Defense Controls, $580.9 million and $66.9 million; Industrial Systems, $935.1 million and $62.3 million. Corresponding operating margins were 10.8%, 11.5% and 6.7%. The filing reports fourth-quarter sales of $700.9 million and net earnings attributable to Moog of $40.6 million.
Material changes and notable items
- Growth spanned all three segments. Acquisitions added approximately $39 million in sales, and stronger foreign currencies added $27 million. The twelve-month backlog rose 22% to $1.481 billion.
- Industrial Systems operating profit declined from $87.6 million to $62.3 million, principally reflecting the wind pitch-control exit. The company recorded approximately $39 million of related restructuring expense, including inventory and asset impairments, severance and other exit costs. Without the charge, management said the segment’s operating margin would have been 10.6%.
- Cash from operations declined by about $115 million. Moog cited accelerated pension contributions, which included $85 million of additional funding, and higher inventory use. Capital spending increased; investing outflows also included $48.4 million for acquisitions.
- The Tax Cuts and Jobs Act drove provisional tax charges, including a $30.8 million transition tax and $10.4 million provision on certain undistributed earnings, partly offset by a $10.9 million deferred-tax remeasurement benefit. Moog repatriated about $235 million of foreign earnings during the year.
- Moog acquired VUES Brno for approximately $64 million net of acquired cash and Electro-Optical Imaging for approximately $5.4 million; it also divested a non-core business and recognized a $1.8 million loss. A $0.50-per-share dividend was declared for FY2018.
Liquidity, debt and outlook
Year-end debt included $430 million drawn on the $1.1 billion U.S. revolving facility, $300 million of 5.25% senior notes due 2022, and $130 million under the receivables securitization program. The company reported compliance with credit covenants. Although stated unused borrowing capacity was about $638 million, the leverage covenant limited additional borrowing capacity to approximately $440 million. Management said cash, operating cash flow and available borrowing arrangements were expected to be sufficient for operating needs.
For FY2019, management forecast sales of approximately $2.877 billion, segment operating profit of $336 million and an 11.7% operating margin. It expected net earnings attributable to common shareholders of $185 million and diluted EPS of $5.05–$5.45, with a $5.25 midpoint. Management attributed the expected improvement partly to the absence of FY2018 wind-exit charges and the unusually high reported tax rate. Forecasts included growth in defense and commercial-aircraft programs; Industrial Systems growth was expected to offset wind pitch-control sales losses. Moog expected about $95 million of FY2019 capital expenditures and approximately $850 million in U.S. defense sales.
Risks, contingencies and management commentary
- Government sales were 33% of revenue; government contracts may be underfunded, modified or terminated. Commercial aerospace and industrial demand are cyclical and sensitive to economic conditions and program schedules.
- Boeing accounted for 14% of sales. Fixed-price contracts represented 88% of percentage-of-completion sales, making cost estimates and potential overruns important risks. Contract and contract-related loss reserves were $42.3 million.
- Backlog is not guaranteed revenue: customers, including the U.S. Government, may defer, modify or cancel orders. Revenue from long-term contracts depends on estimates of costs to complete; changes can materially affect earnings.
- Other disclosed risks include supplier and subcontractor performance, competition, foreign exchange and export regulation, cybersecurity and a multi-year systems transformation, product liability, environmental remediation, pension assumptions, acquisition integration, and debt covenants.
- Moog stated that pending legal proceedings were not expected by management to have a material adverse effect; it also said environmental reserves were adequate. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting, with the acquired Moog Brno entities excluded from the control assessment.
Important facts for investors to verify
- Whether FY2019 EPS and margin improvement materialized, and how much depended on nonrecurrence of wind-exit charges and tax normalization.
- Whether the $1.481 billion twelve-month backlog converted to sales as expected, particularly across defense and commercial-aircraft programs.
- Whether cash generation recovered after pension funding and inventory demands, and whether liquidity remained within covenant limits.
- The final tax consequences of the Tax Act estimates and repatriations, and the effect of the planned adoption of the new revenue-recognition standard; Moog estimated an approximately $16 million opening-equity increase.
- Exposure to Boeing, U.S. Government funding, fixed-price contract estimates, and the wind pitch-control exit’s remaining costs and lost sales.