Business context and reporting period
Moog Inc. designs and manufactures precision motion and fluid-control systems for aerospace, defense, industrial and medical markets. This Form 10-Q covers the fiscal third quarter ended June 29, 2013, and the first nine months of fiscal 2013; comparisons are with the periods ended June 30, 2012. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $670.6 million | $611.2 million | $1,934.5 million | $1,836.8 million |
| Gross margin | 29.6% | 30.0% | 30.4% | 30.1% |
| Net earnings | $34.2 million | $38.9 million | $104.9 million | $110.7 million |
| Diluted EPS | $0.75 | $0.85 | $2.29 | $2.42 |
| Operating cash flow | Not separately reported | Not separately reported | $160.5 million | $143.5 million |
Q3 sales rose 10%, while net earnings and diluted EPS declined 12%. Nine-month sales increased 5%, but net earnings and diluted EPS fell 5%. Sales growth was aided by acquisitions ($32 million in Q3 and $80 million year to date). Gross margin eased in Q3, partly due to Space and Defense Controls technical-challenge charges; year-to-date margin improved slightly, aided by favorable mix in several segments.
Segment trends for the first nine months: Aircraft Controls sales grew 10% and operating profit rose 24%; Components sales grew 13% and operating profit rose 28%. Space and Defense Controls sales increased 10%, but operating profit fell 31%. Industrial Systems sales declined 9% and operating profit fell 49%. Medical Devices sales rose 4%, but operating profit fell to $0.1 million from $4.4 million.
Liquidity, debt and balance sheet
At June 29, 2013, cash was $161.7 million, total assets $3.22 billion, and shareholders’ equity $1.40 billion. Cash and cash equivalents increased $12.9 million from fiscal year-end. Nine-month investing cash outflow was $150.9 million, including $69.2 million for acquisitions and $63.0 million for capital expenditures; financing cash inflow was $4.4 million.
Reported debt totaled approximately $784.8 million, including short-term borrowings, current debt and long-term debt; cash-adjusted debt was approximately $623.1 million. The company reported net debt to capitalization of 31%, versus 32% at September 29, 2012. Its $900 million revolving credit facility had $508.6 million outstanding, with $378 million available after standby letters of credit. Total unused borrowing capacity, including other facilities, was $391 million. The company said it was in compliance with credit covenants.
Moog redeemed $200 million of 6¼% senior subordinated notes at par in January 2013, funding the redemption with U.S. credit-facility borrowings. The amended revolving facility matures March 28, 2018. The receivables securitization program, with $68.9 million outstanding, matures March 3, 2014, subject to possible extension.
Outlook, commentary and risks
- Fiscal 2013 outlook: Sales of approximately $2.58 billion, up 5%; operating margin of 10.6%, versus 11.1% in 2012; net earnings of $148.7 million; and diluted EPS of $3.25, down 2%. Management expected restructuring expense of approximately $11 million and approximately $7 million of lower interest expense from the note redemption.
- Fiscal 2014 outlook: Sales of approximately $2.67 billion, up 3%; operating margin of 12.4%; net earnings of $180.0–$189.3 million; and diluted EPS of $3.90–$4.10, an expected increase of 20%–26%.
- Management cited continued weakness in Industrial Systems’ wind and industrial-automation markets. It expected 2013 sales growth in Aircraft Controls, Components and Space and Defense Controls, with acquisitions contributing about 75% of total growth.
- Q3 other expense primarily included a $7 million loss on the Ethox Medical Buffalo divestiture and a $2 million Industrial Systems investment write-down. The nine-month results also included income from an acquisition earn-out provision that was not achieved. Restructuring charges were $7.0 million for nine months; payments were expected principally by year-end.
- Moog was reviewing strategic alternatives for the remaining Medical Devices segment, including a possible sale, with an adviser engagement expected to last six to twelve months. The company did not expect a significant fiscal 2013 impact from sequestration, but warned that defense spending cuts could affect sales, profit and cash flow, particularly military aftermarket sales.
- Other key risks disclosed include cyclical markets, government contract funding or termination, fixed-price contract cost overruns, customer and supplier concentration, foreign-exchange exposure, pension costs, debt covenants, acquisition integration and legal or regulatory matters. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and the 2013–2014 earnings outlook are achievable, given acquisition contributions and continuing Industrial Systems weakness.
- The financial and operational effects of the Space and Defense Controls technical challenge and the Ethox Medical divestiture and strategic review.
- Available borrowing capacity, covenant headroom, and renewal or extension of the securitization program before its March 2014 maturity.
- Actual restructuring costs and savings, capital expenditures, pension contributions, and the possible effects of defense-budget reductions.