Moog Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2017. Moog designs and manufactures precision motion and fluid-control systems for aerospace and defense and industrial markets. The filing reports four segments for FY2017; effective October 1, 2017, the company combined Components into its other segments, moving to three reporting segments.
Financial performance and position
| Metric | FY2017 | Prior comparable period |
|---|---|---|
| Net sales | $2.498 billion | $2.412 billion; up 4% |
| Operating profit | $250.2 million | $238.2 million; up 5% |
| Gross margin | 29.3% | 29.5% |
| Net earnings attributable to Moog | $141.3 million | $126.7 million; up 11% |
| Diluted EPS | $3.90 | $3.47; up 12% |
| Operating cash flow | $217.8 million | $215.9 million |
| Cash and cash equivalents | $368.1 million | $325.1 million |
| Total indebtedness | $957.0 million | $1.006 billion |
| Working capital / current ratio | $997.0 million / 2.6 | $938.3 million / 2.6 |
| Net debt to capitalization | 32.7% | 40.8% |
FY2017 net margin was 5.7%, versus 5.3% in FY2016. Investing activities used $109.6 million, including $75.8 million of capital expenditures and $40.5 million for an acquisition; financing activities used $75.7 million. Cash flow was broadly flat year over year as increased earnings were offset in part by working-capital timing. The reported cash balance was primarily held outside the U.S.
In the fourth quarter, net sales were $649.3 million versus $619.1 million a year earlier; net earnings attributable to Moog were $38.6 million versus $33.1 million, and diluted EPS was $1.07 versus $0.92.
Material changes and unusual items
- Sales rose in Aircraft Controls, Space and Defense Controls, and Components, but fell 7% in Industrial Systems. Foreign currency translation reduced FY2017 sales by $19 million.
- Aircraft Controls sales increased 6%, led by commercial aircraft programs, including the A350 ramp-up. Space and Defense Controls sales increased 8%, while operating profit fell 9%. Components sales increased 7%; Industrial Systems sales fell 7%.
- Gross margin edged down, partly due to unfavorable Aircraft Controls mix, including lower foreign military and military aftermarket sales. The company also cited restructuring savings.
- Other expense included $13.2 million of losses from divesting non-core Space and Defense businesses. Space and Defense Controls also recorded a $4 million satellite-program engineering charge. No goodwill impairment was recorded in FY2017; the company reported a $4.8 million goodwill impairment in FY2016.
- FY2017 effective tax rate fell to 22.7% from 28.5%, benefiting from divestitures, U.S. tax incentives, and other tax items. Management expects a higher rate in FY2018.
- Moog acquired Rotary Transfer Systems for approximately $42.6 million net of acquired cash and acquired the remaining interest in Linear Mold and Engineering. Twelve-month backlog was $1.212 billion, down 1% year over year.
Outlook, risks, and contingencies
Management forecast FY2018 sales of $2.617 billion, up 5%, and operating profit of $288 million, up 15%, using the new segment presentation. It expected net earnings attributable to common shareholders of $148 million, up 5%, and diluted EPS of $3.90–$4.30, with a $4.10 midpoint. The forecast assumes a 31% effective tax rate. Expected growth drivers included F-35 and A350 production ramps, growth in industrial markets, and launch-vehicle and satellite programs; management also cited declines in legacy commercial aircraft programs and some defense controls sales.
Principal risks include dependence on government funding and contracts, cyclical commercial aerospace and industrial demand, fixed-price contract cost overruns and estimation uncertainty, customer concentration (Boeing represented 13% of FY2017 sales), foreign exchange exposure, supplier and subcontractor performance, pension assumptions, cybersecurity and a multiyear systems transformation, and debt covenants and variable interest rates. U.S. Government contracts represented 31% of sales; 42% of sales were to customers outside the U.S. Contract and contract-related loss reserves were $43.2 million.
Management said no pending legal proceeding was expected to have a material adverse effect and that environmental reserves were adequate. The company reported no material off-balance-sheet arrangements and was in compliance with its credit-facility covenants. The independent auditor issued an unqualified opinion on the financial statements and internal controls; the acquired Rotary Transfer Systems business was excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether the FY2018 sales, margin, tax-rate, and EPS assumptions were achieved, especially given the forecast 31% tax rate.
- Whether backlog conversion and program schedules support the growth outlook, including F-35 and A350 ramps and the decline in legacy programs.
- Whether working-capital demands, contract loss reserves, and fixed-price contract estimates affect future operating cash flow or earnings.
- Debt availability, variable-rate exposure, and planned pension contributions; management anticipated approximately $72 million of FY2018 pension contributions.
- The impact and integration of the Rotary Transfer Systems acquisition, non-core divestitures, and the new three-segment reporting structure.