Moog Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 30, 2013; comparisons are with the periods ended March 31, 2012. Moog designs and manufactures precision motion and fluid-control products across aerospace and defense and industrial markets, through five segments.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $643.0m | $625.0m | $1,263.8m | $1,225.6m |
| Gross margin | 30.7% | 29.5% | 30.9% | 30.2% |
| Net earnings | $36.5m | $35.4m | $70.6m | $71.8m |
| Diluted EPS | $0.80 | $0.77 | $1.54 | $1.57 |
| Segment operating margin | 9.9% | 10.7% | 10.5% | 11.2% |
Q2 sales rose 3% and net earnings rose 3%; first-half sales rose 3%, while net earnings fell 2%. Acquisitions contributed $29m of Q2 and $51m of first-half sales growth; sales excluding businesses acquired in the prior twelve months declined in both comparisons. Gross margin improved, but higher R&D expense—up 42% in Q2 and 26% year to date—and weaker segment operating performance constrained results. Interest expense declined following the January note redemption.
Segment trends: Aircraft Controls sales increased 10% in Q2, with operating margin improving to 12.2% from 9.6%. Space and Defense Controls sales rose 18%, largely on acquisitions, but margin declined to 7.3% from 11.0%; the company cited acquired businesses’ limited initial contribution, unfavorable mix, and $2m of charges for technical challenges. Industrial Systems sales fell 14% and margin fell to 5.4% from 11.5%, reflecting weak wind and industrial automation demand and restructuring costs. Components sales rose 3% and margin increased to 15.5% from 14.1%. Medical Devices sales were nearly flat and margin eased to 3.7% from 4.2%.
Cash, debt and liquidity
- Six-month operating cash flow was $90.5m, versus $75.4m a year earlier. Investing cash outflow was $127.9m, including $69.8m for acquisitions and $45.3m for capital expenditures; financing provided $39.3m. Cash increased by $1.0m to $149.8m.
- At March 30, 2013, total debt was approximately $820.6m, including short-term borrowings and current installments; cash was $149.8m. Net debt to capitalization was 33%, versus 32% at September 29, 2012. A substantial portion of cash was held outside the U.S. and would be subject to U.S. tax if repatriated.
- The amended $900m U.S. revolving credit facility matures in March 2018 and had $515m outstanding. Reported unused borrowing capacity was $385m, including $372m under the U.S. facility after letters of credit. The $100m receivables securitization program had $94.8m outstanding and matures March 2014. Moog reported compliance with credit covenants.
Outlook, notable items and risks
Management forecast fiscal 2013 sales of $2.59bn, up 5%, with acquisition sales of $119m expected to account for substantially all of the increase. It projected net earnings of $155.7m–$160.3m and diluted EPS of $3.40–$3.50, up 2%–5%. Operating margin was expected to remain relatively unchanged from 2012. Planned restructuring charges were approximately $11m, mainly in Industrial Systems and Aircraft Controls; expected interest expense savings were $7m. Capital expenditures were expected to be about $105m.
Management expected growth in Aircraft Controls, Space and Defense Controls, and Components, offset by a 7% decline in Industrial Systems and approximately flat Medical Devices sales. It said it did not anticipate a significant fiscal 2013 impact from sequestration, while noting that future defense spending reductions could affect sales, profit, and cash flow. Other stated exposures include cyclical markets, government program funding and contract execution, competition and pricing pressure, foreign exchange, pension costs, acquisition integration, and debt covenants.
Unusual developments included the January 2013 redemption at par of $200m of 6¼% senior subordinated notes due 2015, funded with U.S. credit-facility borrowings; the March credit-facility amendment and extension; two 2013 acquisitions; and restructuring actions initiated in Q2. The filing also reported a Q2 tax-rate benefit from a catch-up adjustment for R&D tax credits and first-half acquisition earn-out income where projections were not achieved.
Investor verification priorities
- Check whether fiscal 2013 sales and EPS guidance were achieved, and how much growth was organic versus acquisition-related.
- Track Industrial Systems demand, restructuring costs, and whether segment margins recover as forecast.
- Assess Space and Defense Controls’ acquired-business contribution, product mix, and technical-program charges.
- Review debt levels, revolver and securitization capacity and maturities, covenant compliance, and access to cash held overseas.
- Monitor defense-budget/sequestration effects, pension funding and costs, and the execution and integration of acquisitions.