Moog Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended October 3, 2015 (53 weeks), compared with the 52-week year ended September 27, 2014. This is an annual filing; it also reports fourth-quarter results.
Business context
Moog designs and manufactures precision motion and fluid control systems for aerospace and defense, industrial, components, and medical markets. Its five segments are Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. Aerospace and defense represented approximately 64% of sales. U.S. Government contract sales were 31% of total sales; Boeing accounted for 16%.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2,525.5 million | $2,648.4 million |
| Gross margin | 29.2% | 30.1% |
| Operating profit | $245.5 million | $275.7 million |
| Net earnings | $131.9 million | $158.2 million |
| Diluted EPS | $3.35 | $3.52 |
| Cash from operations | $334.5 million | $287.1 million |
| Cash and equivalents at year-end | $309.9 million | $231.3 million |
| Total indebtedness | $1,075.2 million | $874.0 million |
| Twelve-month backlog | $1,273.5 million | $1,340.0 million |
Sales fell 5%; weaker foreign currencies, particularly the euro and British pound, accounted for 80% of the decline. Lower military and aftermarket sales at Aircraft Controls, weaker energy demand at Industrial Systems and Components, and adverse mix reduced margins. Net earnings fell 17%, while EPS fell 5%, supported by a 13% reduction in average shares following repurchases of approximately 5 million shares. Operating cash flow was a company record. Capital expenditures were $80.7 million.
Working capital was $1,022.0 million and the current ratio was 2.7. Net debt to capitalization rose to 43.5% from 32.3%, primarily reflecting share repurchases. The company had $420.2 million of stated unused borrowing capacity, but leverage covenants limited additional borrowing to approximately $359 million. It reported compliance with its credit covenants.
Segment operating profit/margin: Aircraft Controls $100.0 million/9.2%; Space and Defense Controls $33.2 million/8.7%; Industrial Systems $45.0 million/8.6%; Components $58.7 million/13.4%; Medical Devices $8.6 million/8.7%. Industrial Systems sales declined 12%; other segments’ sales were down except Medical Devices, which grew 3%.
Fourth-quarter sales were $623.2 million versus $671.4 million a year earlier; net earnings were $28.2 million versus $40.3 million.
Material changes and unusual items
- Moog issued $300 million of 5.25% senior notes due 2022; proceeds repaid revolving-credit borrowings. Year-end debt also included $675 million on its U.S. revolving facility and $100 million under its receivables securitization program.
- Share repurchases were a major use of financing cash: approximately $344 million in FY2015 cash-flow reporting. Since the board program was amended in January 2014, approximately 8.8 million shares had been purchased for $611 million by year-end.
- FY2015 restructuring expense was $15.4 million; management expected $21 million of related cost savings in 2016. A Space and Defense Controls accounting correction of $8 million was recorded in the second quarter; the filing says it partly offset operating-profit improvement but does not clearly describe the correction’s nature.
- No goodwill impairment was recorded in 2015. The Medical Devices reporting unit had $62 million of goodwill and a fair value 18% above carrying value after the interim assessment; management identified sensitivity to market growth, product launches, reimbursement and strategic decisions.
- A Medical Devices divestiture generated approximately $3 million. The filing reports no pending legal proceeding expected by management to have a material adverse effect and states that environmental reserves were adequate.
Outlook, commentary, and principal risks
For FY2016, management expected sales of approximately $2.6 billion, operating margin of 10.7%, net earnings of $148 million, and diluted EPS of $4.00. The forecast assumed 2% sales growth, largely from Aircraft Controls and the Airbus A350 ramp-up, cost savings, and a 6% reduction in average diluted shares. Components sales were expected to decline, particularly due to energy-market weakness and lower demand from a key medical customer. Planned pension contributions were approximately $75 million in 2016, including about $68 million to the U.S. plan; management also expected capital expenditures of approximately $90 million.
Key risks include defense-budget and government-contract funding or termination, fixed-price contract cost overruns and estimation risk, customer concentration (including Boeing), cyclical commercial aviation and industrial demand, persistently low oil prices, foreign-exchange movements, competition, product liability, cybersecurity and a multi-year information-system transformation, pension assumptions and funding, and possible goodwill or other asset impairment. Management cautioned that forecasts are not guarantees and disclaimed an obligation to update forward-looking statements.
Most important facts for investors to verify
- Whether FY2016 revenue, margin, earnings, and EPS guidance was achieved, especially the A350 ramp and cost-saving assumptions.
- Whether debt, covenant headroom, and share repurchases remain manageable alongside planned pension contributions and capital spending.
- Whether foreign-exchange pressure, oil-and-gas weakness, defense funding, and backlog conversion continue to affect sales and margins.
- Details and implications of the $8 million Space and Defense Controls accounting correction, and ongoing fixed-price contract loss exposure.
- Medical Devices performance and goodwill headroom, given its sensitivity to market growth, product execution, and healthcare conditions.