Moog Inc. — Form 10-Q summary
Business context and period. Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets. This report covers the fiscal second quarter and first six months ended April 2, 2016, compared with the periods ended April 4, 2015. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $611.1 | $637.2 | $1,179.6 | $1,267.8 |
| Gross profit | $179.2 | $173.6 | $340.6 | $357.5 |
| Gross margin | 29.3% | 27.2% | 28.9% | 28.2% |
| Earnings before income taxes | $40.6 | $41.4 | $76.3 | $90.8 |
| Net earnings attributable to common shareholders | $31.1 | $32.1 | $57.3 | $67.4 |
| Diluted EPS | $0.85 | $0.80 | $1.55 | $1.66 |
| Operating cash flow | Not provided quarterly | $78.4 | $131.5 |
Quarterly sales fell 4% and first-half sales fell 7%. Common-shareholder earnings declined 3% for the quarter and 15% for the half. Quarterly gross margin improved, but first-half earnings and cash generation weakened. Lower average shares outstanding, reflecting repurchases, supported quarterly diluted EPS despite lower net earnings. The effective tax rate was 23.9% for Q2 and 25.2% for the first half.
Balance sheet and liquidity at April 2, 2016
- Cash and cash equivalents were $348.3, primarily held outside the United States. Total debt was approximately $1,105.1, implying net debt of approximately $756.8.
- Debt included $702.9 outstanding on the $1,100 revolving facility, $300.0 of senior notes, and $100.0 under the receivables securitization program. The revolver matures in May 2019; the 5.25% senior notes mature in December 2022.
- Unused borrowing capacity was reported at $391, but the leverage covenant limited borrowing capacity to $324. The company reported compliance with all covenants. Net debt to capitalization was 42%, versus 44% at October 3, 2015.
- Six-month operating cash flow was $78.4, down 40%. Investing used $37.6, including $27.7 of capital expenditures and $11.0 of acquisition payments. Financing used $5.2. Cash increased by $38.5 during the period.
Material changes and segment performance
- Components: Sales fell 18% in Q2 and 22% in the first half; first-half operating profit fell 60%. Weak energy, medical, industrial, and aerospace/defense sales contributed.
- Space and Defense Controls: First-half sales declined 11%, mainly as satellite and launch-vehicle programs wound down. Operating profit improved, helped by the nonrecurrence of a $8 million prior-year accounting correction and an inventory obsolescence charge.
- Aircraft Controls: First-half sales declined 2% and operating profit declined 21%. Airbus A350 growth was offset by lower V-22, other military, Boeing, and business-jet activity, alongside higher R&D and restructuring costs.
- Industrial Systems: First-half sales declined 3%; currency weakness and subdued energy and automation markets were partly offset by flight-simulation growth. Operating profit increased modestly.
- Medical Devices: First-half sales rose 4% and operating profit rose 91%, supported by IV and enteral pump volumes, favorable mix, and lower material costs. Comparisons also benefited from the absence of a prior-year loss on the sale of small operations.
Foreign-currency translation reduced first-half sales by $24 million; management attributed 27% of the first-half sales decline to weaker currencies. The company acquired 70% of Linear Mold and Engineering for a stated purchase price of approximately $23 million, including cash, an unsecured note, and assumed debt; the remaining 30% is a redeemable noncontrolling interest. Moog also repurchased approximately 0.5 million shares for $22 million during the first half.
Outlook, commentary, and risks
- Management forecast 2016 sales of $2.47 billion, down 2% from fiscal 2015; operating margin of 9.6%; common-shareholder earnings of $123 million, down 7%; and diluted EPS of $3.20–$3.50, with a $3.35 midpoint, unchanged from 2015. It expected diluted average shares to decline 6% to 37 million.
- Management expected weakness in Components and Industrial Systems from energy and industrial market conditions, partly offset by Aircraft Controls growth as the A350 ramps up. It expected cost-containment and restructuring savings, but noted unfavorable sales mix and elevated program R&D.
- Q2 restructuring expense was $8.1 million, primarily associated with exiting an Aircraft Controls product line and workforce reductions in other businesses. Management expected $11 million of savings over the following four quarters from the Q2 actions. First-half 2016 restructuring expense was $8.3 million.
- Management cited exposure to economic cycles, defense funding, fixed-price and long-term contract estimates, cost overruns, backlog conversion, supplier performance, currency movements, debt covenants, pension assumptions, and potential goodwill impairment. Medical Devices goodwill fair value exceeded carrying value by 18% in the latest disclosed test; adverse changes in assumptions could reduce that cushion.
- The filing reported no pending legal proceeding management believed would materially harm the company and no expected material adverse impact from currently known environmental matters. It cautioned that unresolved customer contract issues, delays, or cost growth could require additional loss provisions. Standby letters of credit totaled $18.5 million.
Important facts for investors to verify
- Whether Components and energy-related weakness persists, and whether the stated 2016 sales and EPS outlook remains achievable.
- Whether restructuring savings and A350-related growth offset higher R&D spending and adverse segment mix.
- How operating cash flow develops after the first-half decline, including working-capital timing and pension contributions.
- Debt and covenant headroom: the reported $324 million covenant-limited borrowing capacity is below stated unused facility capacity.
- Progress and final purchase accounting for Linear Mold and Engineering, including the terms and potential value of the redeemable 30% interest.
- Whether Medical Devices goodwill assumptions, long-term contract estimates, or customer disputes require impairment charges or additional contract-loss reserves.