Moog Inc. 2012 Form 10-K Summary
Business context and reporting period
Moog designs and manufactures precision motion and fluid controls for aerospace and defense and industrial markets. It reports five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. This Form 10-K covers the 52-week fiscal year ended September 29, 2012; the filing also reports fourth-quarter results.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $2,469.5 million | $2,330.7 million |
| Gross margin | 30.2% | 29.2% |
| Operating profit / margin | $273.4 million / 11.1% | $246.4 million / 10.6% |
| Net earnings | $152.5 million | $136.0 million |
| Diluted EPS | $3.33 | $2.95 |
| Operating cash flow | $214.3 million | $196.2 million |
| Capital expenditures | $107.0 million | $83.7 million |
| Cash and cash equivalents | $148.8 million | $113.7 million |
| Working capital / current ratio | $885.0 million / 2.33 | $834.1 million / 2.53 |
Fiscal 2012 sales rose 6%, net earnings 12%, and diluted EPS 13%. Management attributed growth mainly to Aircraft Controls and Components; improved product mix lifted gross margin. Research and development expense rose 9% to $116.4 million, while interest expense declined to $34.3 million. Fourth-quarter sales were $632.7 million versus $619.1 million a year earlier; net earnings were $41.8 million versus $38.2 million, and diluted EPS was $0.91 versus $0.83.
Operating cash flow less capital expenditures was approximately $107.3 million. Investing activities used $215.6 million, including $104.1 million for acquisitions and $107.0 million for capital spending. Total debt was approximately $764.6 million, including $90.8 million of short-term borrowings; net debt was approximately $615.8 million. Net debt to capitalization was 32.1%, down from 33.9%. The company reported $607.9 million in unused borrowing capacity and compliance with credit-facility covenants. Cash was substantially held outside the U.S. and was not available for domestic needs without repatriation and potential additional U.S. taxes.
Segment trends and material changes
- Aircraft Controls: Sales rose 13% to $963.4 million; operating profit increased 25% to $104.6 million. Commercial and military sales both grew.
- Space and Defense Controls: Sales were nearly flat at $358.8 million, while operating profit fell 13% to $42.9 million, reflecting less favorable mix and lower contributions from certain programs.
- Industrial Systems: Sales were nearly flat at $633.7 million and operating margin remained 10.0%. Growth in simulation, testing, and non-renewable energy was offset by weakness in wind energy and industrial automation.
- Components: Sales rose 6% to $374.1 million and operating profit rose 14% to $57.3 million, including acquired-business contributions.
- Medical Devices: Sales declined 2% to $139.6 million, but operating profit improved to $5.4 million from near breakeven, reflecting better efficiencies and cost containment.
Moog completed four acquisitions in 2012 for a combined purchase price of approximately $110 million, adding businesses in Components and Space and Defense Controls. Twelve-month backlog decreased to $1.279 billion from $1.325 billion. The company made no cash dividend payments in 2011 or 2012 and said it had no foreseeable plans to do so.
Outlook, risks, and unusual items
For fiscal 2013, management forecast sales of $2.62 billion to $2.67 billion, operating margin of 11.4% to 11.6%, net earnings of $161 million to $170 million, and diluted EPS of $3.50 to $3.70. The forecast excluded any effects of U.S. defense sequestration. Management expected Aircraft Controls, Components, and Medical Devices margins to expand, with slight compression in Space and Defense Controls; Industrial Systems faced a wide sales and margin range amid economic uncertainty.
- U.S. Government contracts represented 30% of 2012 sales; foreign government sales were 9%. The filing warned that sequestration could materially reduce sales, operating profit, and cash flow.
- Boeing accounted for 11% of sales. Moog identified loss of Boeing or a significant reduction in Boeing business as a risk.
- Long-term contracts accounted for 32% of sales and rely on cost estimates. Contract loss reserves were $48.4 million at year-end; cost overruns or estimate changes could affect earnings.
- Goodwill was $762.9 million. No impairment was recorded, but the Medical Devices reporting unit’s estimated fair value was sensitive to discount-rate assumptions.
- Defined-benefit pension obligations and retirement liabilities increased; the balance-sheet pension and retirement obligation was $427.6 million. Management expected $39 million of pension contributions in 2013 and estimated a lower discount rate would add $10 million to 2013 pension expense.
- Foreign-currency movements, cyclical markets, customer and supplier concentration, product liability, environmental matters, and debt covenants were identified risks. Management said pending legal matters were not expected to have a material adverse effect and that environmental reserves were adequate.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor excluded the four 2012 acquisitions from the internal-control assessment; those acquisitions contributed $23.2 million of sales and a $0.4 million net loss for the period included in the consolidated results.
Important facts for investors to verify
- Whether sequestration or other defense-budget changes affected contract funding, orders, or the 2013 outlook.
- Whether backlog converts to revenue and whether fixed-price contract estimates or loss reserves change materially.
- Whether the four acquisitions meet expected growth and profitability assumptions, and how integration and purchase-accounting effects develop.
- Whether pension assumptions, funding needs, and the projected $39 million 2013 contribution affect earnings and cash flow as described.
- Whether Industrial Systems demand, especially wind energy and China exposure, supports management’s forecast range.
- Whether available liquidity remains adequate given the March 2013 maturity of the receivables securitization facility and the company’s foreign-held cash.