Moog Inc. (MOG.A)

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Moog (MOG.A)

Q2 2013 Earnings Call

April 26, 2013 10:00 am ET

Executives

Ann Marie Luhr

John R. Scannell - Chief Executive Officer, Director and Member of Executive Committee

Donald R. Fishback - Chief Financial Officer and Vice President

Analysts

Julie Yates - Crédit Suisse AG, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Tyler Hojo - Sidoti & Company, LLC

Robert Stallard - RBC Capital Markets, LLC, Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Presentation

Operator

Good day, and welcome to the Moog Second Quarter Fiscal Year 2013 Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Ann Marie Luhr. Please go ahead.

Ann Marie Luhr

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of April 26, 2013, our most recent Form 8-K filed on April 26, 2013, and in certain of our other public filings with the SEC. We provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations homepage and webcast page at www.moog.com. John?

John R. Scannell

Good morning. Thanks, Ann. Thank you for joining us. This morning we'll report on the second quarter of fiscal '13 and update our guidance for the full year. Sales, earnings and earnings per share are all up this quarter, so the news is generally good. However, fiscal '13 looks like it will continue to be a challenging year and we're taking further action to ensure we meet our operating goals for this year and position ourselves for a stronger 2014. Let me start this morning's call with the major items of interest and then move to the numbers.

The headline story this quarter is higher aircraft sales and margins compensating for lower industrial sales and margins. The Aircraft segment had a strong quarter. The Military business is holding steady and the Commercial business is growing. Margins continue to improve as our sales grow and our operational initiatives bear fruit. We're anticipating continued strength for the remainder of this year. On the other hand, our Industrial business continues to struggle with weak demand in many of our major markets. We are in the middle of a restructuring effort to align our costs with our projected sales levels and are focused on positioning ourselves for double-digit margins in this segment in 2014.

Since our last call, sequestration has gone from at rest to a reality. So far, we have not seen a direct impact on our business that we can clearly attribute to sequestration. We're paying particular attention to our Military aftermarkets which has shorter lead times than our OEM business. This aftermarket business has enjoyed significant growth over the last few years, as we've expanded our scope and supply and thus, cooperative arrangements with many of the U.S. Military depots. We think that sequestration could have a disproportionate effect on fleet maintenance and upgrades, which could affect this portion of our business. We're optimistic that our Military aftermarket should be okay in 2013, given our backlog and short-term visibility. We think any measurable impacts would likely be solved in 2014. We're working hard in these markets to expand our footprint, evidence the growth over the last 2 to 3 years. We're hopeful that these initiatives will mitigate the longer-term effects of slowing Defense spending.

For our production programs in Defense, we believe 2013 will also hold up and are waiting to understand more about the impacts in the following years. We're already taking action to turn our overhead costs in anticipation of tougher times ahead. In our next quarterly conference call, we'll provide initial guidance for 2014 and at that stage, we'll give you an update on how we are factoring sequestration into next year's numbers.

So looking to the second half of 2013, we think our sales will be somewhat lighter than our forecast from 90 days ago. Including the effect of acquisitions, our organic sales in fiscal '14 will be down about 2% from our January forecast. Our industrial markets continue to be soft and we're moderating our Defense look -- outlook slightly. In light of these trends, we're intensifying our restructuring efforts to position ourselves for 2014.

So now to the numbers. Q2 fiscal '13. Sales in the quarter of $643 million were up 3% from last year. Sales growth in Commercial Aircraft balanced the sales decline in our Industrial segment. Acquisitions contributed $29 million of additional sales. So as I said in my opening, it's a story of strong commercial aircrafts compensating for weaker industrial markets, with growth coming from acquisitions. Net earnings of $37 million were up 3% and earnings per share of $0.80 were up 4% from last year.

Taking a look at the P&L. Our gross margin is up nicely. R&D is significantly higher, driven by the continued spend on major aircraft programs. We incurred $2 million of restructuring in the quarter, the equivalent of $0.03 per share, but interest expense is down a similar amount. SG&A as a percentage of sales is in line with last year and taxes came in slightly lower than last year. The result was a net margin of 5.7% and as I mentioned, earnings per share of $0.80.

Our fiscal '13 outlook. We're moderating our sales forecast for the year by $26 million compared to our guidance 90 days ago. The major drivers are lower Industrial sales and a slightly softer Defense outlook. Aircraft sales will be $11 million lower, mostly the result of slower sales in our Navigation Aid business. Space and Defense will be down $13 million, spread across their 3 markets: space, defense and security. We estimate that Industrial will be about $10 million lower on weaker wins and industrial automation sales. Components will be $12 million higher because of the addition of acquisition sales and finally, Medical will be about $5 million lower, reflecting the run rate of the first half.

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