Moog Inc. 10-Q Summary
Business context and period. Moog designs and manufactures precision motion and fluid-control systems for aerospace and defense, industrial, and medical markets. This filing covers the quarter and six months ended April 4, 2015; comparisons are with the periods ended March 29, 2014. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $637.2 million, down 2% | $1,267.8 million, down 2% |
| Gross margin | 27.2%, versus 30.3% | 28.2%, versus 30.6% |
| Net earnings | $32.1 million, down 15% | $67.4 million, down 4% |
| Diluted EPS | $0.80, versus $0.82 | $1.66, versus $1.52 |
| Operating cash flow | $131.5 million for six months, up from $116.1 million |
- Six-month cash from investing was $34.4 million used, including $37.9 million of capital expenditures. Cash used in financing was $46.0 million.
- Cash was $261.7 million at April 4, 2015. Total debt was approximately $1.03 billion, including $100 million under the receivables securitization program. Net debt was approximately $768 million, based on reported cash and debt.
- Unused borrowing capacity was reported at $468 million; the leverage covenant limited additional borrowing to $419 million. Moog said it was in compliance with its credit covenants. Net debt to capitalization rose to 40% from 32% at September 27, 2014.
- Six-month comprehensive loss was $1.5 million, largely reflecting $80.3 million of foreign-currency translation losses, net of tax.
Material changes and management commentary
- Lower sales in Industrial Systems and Space and Defense Controls were partly offset by growth in Components and Medical Devices; Aircraft Controls sales were broadly flat. Currency translation reduced sales by $28 million in the quarter and $41 million in the half year.
- Aircraft Controls’ weaker aftermarket mix, higher-than-expected costs on new commercial programs, and a vendor-part quality issue pressured margins. Industrial Systems faced softer markets and currency effects. Medical Devices improved sales and operating margin.
- Moog recorded an $8.3 million out-of-period correction in Space and Defense Controls, reducing working capital and pretax earnings. Management said it was immaterial to previously reported statements and expected to be immaterial for full-year 2015, but material to the second quarter; it reduced quarterly gross margin by approximately 100 basis points.
- Interest expense rose, including from the higher cost of the $300 million 5.25% senior notes issued in November 2014 and debt used to fund repurchases. Moog repurchased approximately 6.6 million shares for $457 million cumulatively as of April 4, 2015.
Outlook, risks, and contingencies
- For fiscal 2015, management expected sales to decrease 4% to approximately $2.54 billion, operating margin of 10.6%, net earnings down 10% to approximately $142 million, and diluted EPS up 1% to $3.55. EPS expectations reflected the reduction in shares outstanding from repurchases.
- Management expected approximately $90 million in 2015 capital expenditures and said cash, operating cash flow, and available borrowings should meet operating needs. It also expected $16 million of annual savings from 2014 restructuring actions; $5 million of savings had been realized in the first half.
- Key outlook pressures included weaker foreign currencies, soft industrial demand, lower oil prices affecting marine-energy products, defense funding and program changes, and unfavorable sales mix in some segments. Fixed-price contract cost overruns, supplier performance, customer disputes, and estimates on long-term contracts could lead to additional losses.
- Management identified goodwill impairment sensitivity, particularly in Medical Devices and a smaller Aircraft Controls reporting unit. Additional impairment could result if projected cash flows or key assumptions deteriorate.
- Moog reported no pending legal proceeding expected by management to have a material adverse effect, and said environmental reserves were adequate. It was contingently liable for $13.8 million of standby letters of credit.
- Moog sold two small Medical Devices operations for $3.5 million in cash, subject to a working-capital adjustment, and recorded a $1 million loss on the sale.
Important facts for investors to verify
- Whether sales, margins, and earnings trends across the five segments align with full-year guidance, particularly Aircraft Controls and Industrial Systems.
- Whether the $8.3 million accounting correction is fully contained and whether related contract estimates or controls require further adjustment.
- Progress on restructuring savings, capital expenditures, and the remaining share-repurchase authorization, alongside the resulting leverage and interest burden.
- Cash availability and covenant headroom, considering that much of the cash was held outside the United States and repatriation could incur U.S. taxes.
- Exposure to foreign-exchange movements, defense budgets, oil-related demand, long-term contract costs, and potential goodwill impairment.