Moog Inc. — Form 10-Q Summary
Business context and reporting 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 six months ended March 29, 2014; comparable periods ended March 30, 2013. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $649.9m | $643.0m | $1,293.3m | $1,263.8m |
| Gross profit / margin | $196.8m / 30.3% | $197.4m / 30.7% | $396.1m / 30.6% | $390.1m / 30.9% |
| Net earnings | $37.7m | $36.5m | $69.8m | $70.6m |
| Diluted EPS | $0.82 | $0.80 | $1.52 | $1.54 |
| Operating cash flow | Not separately reported | Not separately reported | $116.1m | $90.5m |
- Q2 sales rose 1%; net earnings rose 3%. For the first half, sales increased 2%, while net earnings declined 1% and diluted EPS fell 1%.
- Q2 operating margin was 10.0%, versus 9.9% a year earlier; first-half operating margin was 10.5% in both periods. Gross margin eased in both comparisons.
- First-half operating cash flow improved $25.6m year over year, helped by favorable collection timing, partly offset by payment timing. Investing used $43.9m, primarily for $35.4m of capital expenditures; financing used $34.4m.
- At March 29, cash was $195.6m and total debt was approximately $706.0m, including short-term borrowings, current long-term installments, and long-term senior debt. Net debt was approximately $510.4m. Net debt to capitalization was 24%, compared with 26% at September 28, 2013.
- The $900m U.S. revolving credit facility had $591m outstanding; the company reported $295m of available capacity on that facility and $305m of total unused borrowing capacity. The company was in compliance with its covenants. Cash was primarily held outside the U.S.
Material changes and segment trends
- Aircraft Controls: First-half sales increased 6%, led by commercial aircraft growth, but operating profit fell 8% and margin declined to 10.7% from 12.2%. Lower foreign military sales, mix, and higher Embraer E-Jets development spending pressured results. Twelve-month backlog rose 15%.
- Space and Defense Controls: First-half sales increased 1% and operating profit rose 6%; Q2 sales fell 10% as space production work wound down. Broad Reach Engineering and NASA program activity supported first-half sales. Backlog declined 3%.
- Industrial Systems: First-half sales increased 1%, while operating profit rose 61%, benefiting from restructuring savings, cost containment, and lower costs. Results included a $5m technology investment write-down. Backlog declined 16%.
- Components: First-half sales rose 3%, including Aspen Motion Technologies acquisition contributions, but operating profit declined 13% and margin fell to 14.6% from 17.3%, reflecting ERP start-up costs, mix, and program delays. Backlog declined 3%.
- Medical Devices: First-half sales declined 16%, partly reflecting the 2013 Ethox Medical divestiture and lower pump sales. Operating profit improved from a low base, and margin rose to 8.5% from 4.1%. The segment remains under strategic review; management is considering options by product line.
Outlook, commentary, and risks
- Management’s 2014 outlook was sales of approximately $2.64bn, up 1%; operating margin of 11.5%; net earnings of $169m; and diluted EPS of $3.65. It expected growth in Space and Defense Controls and Components, flat sales in Aircraft Controls and Industrial Systems, and lower Medical Devices sales.
- Expected 2014 capital expenditures were approximately $105m. Management said restructuring actions had generated $11m in savings through the first six months, about half of expected annual benefits.
- In December 2013, Moog redeemed $200m of 7.25% senior subordinated notes at 103.625%, funded with revolving-credit borrowings. The first half included a $6.9m call premium, a $1.1m deferred debt issuance cost write-off, and a $5m Industrial Systems technology investment write-down. Q2 other income included a $2m acquisition-related settlement.
- Medical Devices goodwill had only 1% fair-value headroom in the latest impairment assessment; further declines in sales, market share, industry growth, or increased costs could require another impairment. The segment had previously recorded a $38m goodwill impairment in fiscal 2013.
- Key risks identified include defense spending and government program funding, fixed-price contract overruns and estimation risk, customer and supplier concentration, competition, foreign exchange, pension assumptions, indebtedness and covenants, ERP implementation, product liability, environmental matters, and acquisition or divestiture execution.
- Management reported no pending legal proceedings expected to have a material adverse effect and said environmental reserves were adequate. Standby letters of credit totaled $13.7m. The filing reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the 2014 sales, margin, earnings, and EPS outlook was achieved, and how much depended on restructuring savings and segment mix.
- Whether Medical Devices’ strategic review, sales performance, and narrow goodwill valuation headroom changed the risk of further impairment or disposal.
- Whether Aircraft Controls’ commercial growth can offset weaker military demand and development costs, and whether segment backlog converts to revenue as expected.
- How sustainable operating cash flow is after the favorable receivables-collection timing, and whether cash held overseas is readily available for U.S. debt service.
- Debt levels, revolving-facility availability, covenant compliance, and the February 2015 securitization-program maturity and renewal.
- Effects of the ERP rollout, technology investment write-down, and restructuring program on future costs and margins.