Moog Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, energy, and medical markets. The filing covers the three months ended January 2, 2016; comparisons are with the three months ended January 3, 2015. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $568.5 million | $630.5 million | Down 10% |
| Gross profit / margin | $161.5 million / 28.4% | $183.9 million / 29.2% | Margin down 0.8 percentage points |
| Earnings before tax | $35.7 million | $49.4 million | Down 28% |
| Net earnings attributable to common shareholders | $26.2 million | $35.3 million | Down 26% |
| Diluted earnings per share | $0.71 | $0.86 | Down 17% |
| Operating cash flow | $(0.5) million | $78.5 million | Declined $79.0 million |
| Capital expenditures | $12.3 million | $20.2 million | Down $7.9 million |
Research and development expense rose 11% to $34.8 million, including increased Aircraft Controls program spending. SG&A declined to $83.0 million, or 14.6% of sales versus 15.5%. Interest expense rose 55% to $8.3 million, reflecting the cost of senior notes and higher debt associated with share repurchases. The effective tax rate was 26.6%, compared with 28.7%.
Segments
Sales declined in every segment except Medical Devices. Aircraft Controls sales were $254.8 million, down 4%, and operating profit was $18.1 million, down 26%. Space and Defense Controls sales fell 17% to $82.6 million, while operating profit rose 35% to $11.8 million. Industrial Systems sales fell 6% to $125.2 million, with operating profit up 3% to $13.6 million. Components sales fell 26% to $79.6 million and operating profit fell 72% to $4.7 million. Medical Devices sales rose 13% to $26.2 million, and operating profit rose 40% to $3.3 million.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $323.3 million at January 2, 2016, up from $309.9 million at October 3, 2015. Management said most cash was held outside the U.S. and would generally be subject to U.S. tax if repatriated.
- Total debt was approximately $1.132 billion, compared with approximately $1.075 billion at fiscal year-end. This included $730 million outstanding on the $1.1 billion U.S. revolving facility, $300 million of senior notes, and $100 million under the receivables securitization program.
- Reported unused borrowing capacity was $366 million, but the leverage covenant limited additional borrowing to $268 million. Moog reported compliance with all debt covenants. Net debt to capitalization was 45%, versus 44% at fiscal year-end.
- Operating cash flow was nearly breakeven, principally reflecting working-capital timing. Receivables provided $5.2 million of cash, versus $62.8 million in the prior-year quarter; accounts payable and accrued expenses used cash.
- Total assets were $3.117 billion and total liabilities were $2.105 billion. The current ratio was approximately 2.9, based on reported current assets and liabilities.
Material changes, outlook, and commentary
- Management attributed the sales decline to broad segment weakness, adverse sales mix, and foreign currency. Weaker currencies contributed $16 million to the year-over-year sales decline through translation; management said currency effects accounted for 26% of the overall decline. Lower energy and industrial demand was a major headwind, including the effects of lower oil prices.
- Full-year 2016 guidance: sales expected to decline 2% to $2.47 billion; operating margin expected to increase slightly to 9.8%; net earnings expected to decline 6% to $124 million; diluted EPS forecast at $3.20–$3.50, with a $3.35 midpoint, described as unchanged from 2015. Average diluted shares were expected to decline 6% to 37 million, reflecting repurchases.
- Management expected Aircraft Controls sales growth, primarily from Airbus A350 production, to be offset by weakness in Components and Industrial Systems. Components guidance anticipated a 17% sales decline; Industrial Systems, a 5% decline. Expected 2016 capital expenditures were approximately $80 million.
- Moog acquired 70% of Linear Mold and Engineering for stated consideration of approximately $25.8 million, including $11.0 million cash, $10.5 million assumed debt, a $1.3 million note, and $3.0 million contingent consideration. The remaining 30% is redeemable beginning three years after acquisition. The acquisition was assigned to Aircraft Controls.
- Restructuring expense was $0.3 million in the quarter; the restructuring accrual was $10.2 million. Management cited savings from prior restructuring and cost containment actions.
- Foreign currency translation drove a $23.2 million quarterly loss in other comprehensive income. Medical Devices goodwill had a $38.2 million accumulated impairment loss; its prior impairment assessment showed fair value 18% above carrying value, leaving sensitivity to weaker assumptions and business performance.
Risks, contingencies, and unusual items
Risks highlighted include cyclical end markets, lower defense budgets and government program funding, fixed-price contract cost overruns, long-term contract estimate changes, backlog conversion, supplier performance, foreign exchange, debt and covenant constraints, pension funding, and potential goodwill impairment. Management noted that unresolved customer claims or disputes, project delays, cost growth, or changes in contract estimates could require additional loss provisions with potentially material effects. It reported no pending legal proceeding expected to have a material adverse effect and said environmental reserves were adequate. Standby letters of credit totaled $16.0 million. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the $2.47 billion revenue and $3.20–$3.50 diluted EPS guidance remains achievable, particularly given continued weakness in energy, industrial, and Components markets.
- Whether operating cash flow recovers from the quarter’s near-zero result and whether working-capital outflows reflect timing rather than a persistent trend.
- Debt covenant headroom: the filing reports $366 million of unused capacity but only $268 million of borrowing capacity under the leverage covenant.
- Medical Devices goodwill assumptions and the potential for impairment, alongside exposure to additional contract-loss provisions or customer disputes.
- Execution and financial contribution of the Linear Mold and Engineering acquisition, including contingent consideration and the redeemable noncontrolling interest.