MOOG INC. annual report, FY2019

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Moog Inc. — FY2019 Form 10-K

Business context and reporting period. Moog designs and manufactures precision motion and fluid controls for aerospace and defense and industrial markets. This 10-K covers the 52 weeks ended September 28, 2019; fiscal 2019 Q4 ended on that date. The company reports Aircraft Controls, Space and Defense Controls, and Industrial Systems.

Financial performance and position

  • Revenue and earnings: FY2019 net sales were $2.905 billion, up 7% from $2.709 billion. Net earnings attributable to Moog were $179.7 million versus $96.5 million; diluted EPS was $5.11 versus $2.68.
  • Margins: Gross margin was 28.1%, down from 28.6%. Operating profit was $321.1 million, up 22%; net return on sales was 6.2% versus 3.6%.
  • Segment results: Aircraft Controls sales rose 9% to $1.303 billion, while operating profit fell 5% to $122.7 million (9.4% margin). Space and Defense Controls sales rose 18% to $683.5 million and operating profit rose 32% to $89.0 million (13.0% margin). Industrial Systems sales fell 2% to $918.2 million, while operating profit increased to $109.5 million (11.9% margin), largely reflecting the absence of prior-year wind-business exit charges.
  • Cash flow and investment: Operating cash flow was $181.4 million, up from $102.4 million. Capital expenditures were $118.4 million, versus $94.5 million. Cash, cash equivalents and restricted cash totaled $92.5 million at year-end.
  • Debt and liquidity: Total indebtedness was $833.2 million, down from $862.8 million; net debt to capitalization was 36%, versus 37.6%. Working capital was $901.3 million and the current ratio was 2.2. Unused short- and long-term borrowing capacity was $708.8 million; Moog reported covenant compliance.
  • Backlog: Total backlog was $2.233 billion. Twelve-month backlog was $1.502 billion, up 1% year over year.
  • Fiscal Q4: Sales were $765.2 million versus $700.9 million in Q4 2018; net earnings attributable to Moog were $45.9 million versus $40.6 million, and diluted EPS was $1.31 versus $1.14.

Material changes versus the prior year

  • Sales growth came from Aircraft Controls and Space and Defense Controls; Industrial Systems sales declined. Weaker foreign currencies reduced sales by $23 million.
  • Aircraft Controls’ margin was pressured by higher operating costs and a $10 million supplier-quality charge. Space and Defense Controls benefited from higher defense volumes.
  • Industrial Systems’ FY2019 operating profit benefited from no repeat of FY2018’s $39 million of wind pitch controls restructuring charges, including a $12 million inventory write-down.
  • The effective tax rate fell to 23.1% from 47.4%; FY2018 was unusually elevated by Tax Cuts and Jobs Act impacts and limited tax benefits related to restructuring. FY2019 net earnings also included a $3 million gain on a non-core business sale and a $4 million capitalized-software impairment charge.
  • Moog adopted ASC 606 using the modified retrospective method. The standard increased FY2019 reported sales by $27.6 million and net earnings by $9.5 million compared with the former accounting basis; prior periods were not restated.

Outlook, risks and other disclosures

  • FY2020 outlook: Management forecast sales of $3.010 billion, operating profit of $345 million, net earnings of $195 million and diluted EPS of $5.35–$5.75. Expected growth is led by defense and space; commercial aircraft sales are expected to be lower, and Industrial Systems sales slightly lower amid slowing global capital investment. Management anticipated higher overall operating margin, including Aircraft Controls improvement and stable Space and Defense Controls margin.
  • Key risks: Results depend on cyclical commercial aerospace and industrial demand, government appropriations and contract awards, and execution on fixed-price programs. An estimated 64% of FY2019 sales was recognized over time using cost-to-cost estimates; changes to estimated contract costs can materially affect earnings. Contract reserves were $60.9 million.
  • Other notable exposures include Boeing, which represented 13% of FY2019 sales; U.S. Government contract sales, 35%; foreign sales, 39%; and trade tariffs, foreign currency, Brexit, supplier performance, cybersecurity, product quality, pension assumptions and environmental matters. Management said pending legal proceedings and current environmental matters were not expected to have a material adverse effect.
  • After year-end, Moog extended its $1.1 billion U.S. revolving credit facility to October 2024 and extended its receivables securitization program to October 2021. Management expected FY2020 capital expenditures of approximately $120 million.
  • The auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective internal control over financial reporting.

Important facts for investors to verify

  • How much of FY2020 growth and margin improvement depends on defense, space and F-35 program volumes, and whether commercial aircraft weakness exceeds management’s assumptions.
  • Whether cost estimates, contract reserves and recall provisions remain adequate for fixed-price and other over-time contracts.
  • How working-capital use—especially higher receivables and inventories—affects cash conversion, given FY2019 operating cash flow and elevated capital spending.
  • Debt maturity, variable-rate exposure and covenant headroom; also the availability and terms of borrowing facilities.
  • The comparability of reported earnings across years, considering ASC 606 adoption, FY2018 restructuring charges and unusual tax effects.