Moog Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 2, 2016, compared with the periods ended July 4, 2015. Moog designs and manufactures precision motion and fluid controls for aerospace, defense, industrial, and medical markets.
Key financial results
Amounts are in millions except per-share data.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $613.3 | $634.5 | $1,792.9 | $1,902.3 |
| Gross margin | 29.9% | 30.0% | 29.2% | 28.8% |
| Net earnings attributable to common shareholders | $36.3 | $36.3 | $93.6 | $103.7 |
| Diluted EPS | $1.00 | $0.94 | $2.55 | $2.59 |
| Operating cash flow | Not presented separately | Not presented separately | $160.8 | $206.8 |
- Q3 sales fell 3%; nine-month sales fell 6%. Q3 common-shareholder earnings were essentially flat, while nine-month earnings declined 10%. Lower average diluted shares, reflecting repurchases, lifted quarterly EPS despite flat earnings; nine-month EPS declined 2%.
- Nine-month operating cash flow declined $46 million, or 22%. Management cited less favorable timing of payments and collections, $19 million of additional pension contributions, partly offset by increased customer advances.
- At July 2, cash was $394.4 million and total debt was approximately $1.11 billion, including $688.1 million drawn on the U.S. revolver and $120 million under receivables securitization. Net debt to capitalization was 41%, down from 44% at fiscal year-end. Current assets were $1.67 billion versus current liabilities of $585.1 million.
Changes, segments, and management outlook
- Year-to-date gross margin improved from 28.8% to 29.2%, aided by the absence of a prior-year $7 million accounting correction, $7 million in savings from 2015 restructuring, and improved Aircraft Controls mix. Lower energy and industrial sales mix in Components and Industrial Systems partly offset these gains.
- Components was the principal weakness: nine-month sales declined 21% and operating profit 50%, amid weaker marine energy, industrial, medical, and aerospace/defense demand. Space and Defense Controls sales fell 9%, while operating profit rose substantially, partly because the prior year included restructuring charges and an accounting correction. Aircraft Controls sales were nearly flat; Industrial Systems sales declined 2%; Medical Devices sales rose 3%.
- Management forecast fiscal 2016 sales of $2.42 billion, down 4%, operating margin of 9.7%, and common-shareholder net earnings of $122 million, down 7%. Diluted EPS guidance was $3.25–$3.45, midpoint $3.35, expected to be flat with 2015. Outlook reflects expected declines in Components, Industrial Systems, and Space and Defense Controls, partly offset by Aircraft Controls growth as Airbus A350 production ramps.
- Management expected Components sales to fall 17% and margin to decline, principally from weak energy and industrial markets. Oil exploration-related sales were expected to be about $40 million in 2016, versus about $100 million in 2014. Commercial aircraft growth and restructuring/cost controls were important offsets to broader pressure.
Liquidity, risks, and unusual items
- The U.S. revolving credit facility was amended to extend maturity to June 2021; capacity is $1.1 billion. Reported unused borrowing capacity was $404 million, but the leverage covenant limited additional borrowing to $369 million. Moog reported compliance with its covenants. The receivables facility matures in April 2018 and had a $96 million minimum borrowing requirement.
- Cash is primarily held outside the United States and is not available for U.S. debt repayment without potential repatriation taxes. The company stated that cash, operating cash flow, and borrowing arrangements should meet operating needs.
- Restructuring expense was $8.3 million for the nine months, including $4.6 million of noncash charges, mainly intangible-asset write-offs. The company also acquired 70% of Linear Mold and Engineering for approximately $22.8 million, including cash, an unsecured note, and assumed debt; the remaining 30% is redeemable beginning three years after acquisition.
- Other risks include currency movements, cyclical end markets, government funding and contract exposure, fixed-price contract cost overruns, backlog conversion, pension assumptions and funding, and impairment risk. Management noted Medical Devices goodwill fair value exceeded carrying value by 18% in the 2015 assessment; adverse assumptions could reduce that cushion. Customer disputes could result in further contract loss provisions. Management did not expect pending legal or environmental matters to have a material adverse effect and said adequate environmental reserves were established.
Important facts for investors to verify
- Whether the 2016 sales, margin, earnings, and EPS outlook was achieved, especially given Components and energy-market weakness.
- Whether operating cash flow, pension contributions, and working-capital trends improved, and how much foreign-held cash is practically available to U.S. operations.
- Debt, covenant headroom, interest costs, and the capacity to fund repurchases and investment without reducing financial flexibility.
- Aircraft Controls and Space and Defense Controls backlog conversion and contract estimates, including any additional loss provisions.
- Medical Devices goodwill assumptions and the performance of the Linear Mold and Engineering acquisition.