UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-5129
MOOG INC.
(Exact name of registrant as specified in its charter)
New York State 16-0757636
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
East Aurora, New York 14052-0018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716)652-2000
No Change
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
Class Outstanding at August 8, 1994
Class A Common Stock, $1.00 par value 6,041,934 Shares
Class B Common Stock, $1.00 par value 1,677,031 Shares
MOOG INC.
INDEX
Page
No.
PART I. FINANCIAL INFORMATION 3-20
Consolidated Condensed Balance Sheets
June 30, 1994 and September 30, 1993 4
Consolidated Condensed Statements of Operations
Three Months Ended June 30, 1994 and 1993 5
Consolidated Condensed Statements of Operations
Nine Months Ended June 30, 1994 and 1993 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended June 30, 1994 and 1993 7
Notes to Consolidated Condensed Financial
Statements 8-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-20
PART II. OTHER INFORMATION 21
SIGNATURES 22
PART I: FINANCIAL INFORMATION
MOOG INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
Unaudited Audited
As of As of
June 30 September 30
ASSETS 1994 1993
CURRENT ASSETS
Cash and cash equivalents $ 9,759 $ 18,589
Receivables, net 123,212 123,009
Inventories (note 4 and 6) 65,572 66,862
Deferred income taxes 11,371 6,412
Prepaid expenses and other current assets 1,721 1,842
TOTAL CURRENT ASSETS 211,635 216,714
PROPERTY, PLANT AND EQUIPMENT, net 91,716 95,855
INVESTMENT IN ACQUIRED PRODUCT LINES (note 2) 78,000 -
OTHER ASSETS 8,212 5,561
TOTAL ASSETS $389,563 $318,130
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 15,522 $ 19,851
Current installments of long-term debt
and convertible subordinated debentures 9,348 18,793
Accounts payable 15,100 13,912
Accrued salaries, wages and commissions 15,878 16,736
Contract loss reserves 4,677 5,396
Other accrued liabilities 13,942 9,531
Accrued income taxes 348 195
Customer advances 5,166 8,767
TOTAL CURRENT LIABILITIES 79,981 93,181
LONG-TERM DEBT, excluding current
installments (note 3) 162,239 78,153
LONG-TERM PENSION OBLIGATION 24,086 25,110
OTHER LONG-TERM LIABILITIES 450 5,144
DEFERRED INCOME TAXES 7,417 1,857
CONVERTIBLE SUBORDINATED DEBENTURES,
excluding current installments 19,400 20,800
MINORITY INTEREST IN SUBSIDIARY COMPANY 1,518 1,324
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY (note 9)
Preferred stock 100 100
Common stock 9,134 9,134
Other shareholders' equity 85,238 83,327
TOTAL SHAREHOLDERS' EQUITY 94,472 92,561
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $389,563 $318,130
See accompanying notes to Consolidated Condensed Financial Statements.
MOOG INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Unaudited
Three Months Ended
June 30
1994 1993
NET SALES $ 73,215 $ 72,151
OTHER INCOME 773 1,251
73,988 73,402
COSTS AND EXPENSES
Cost of sales 49,881 51,328
Research and development expenses 5,449 3,553
Selling, general and administrative
expenses 13,828 13,037
Interest expense 2,654 2,724
Foreign currency exchange (gain) loss (118) 88
Other expenses 143 136
71,837 70,866
EARNINGS BEFORE INCOME TAXES 2,151 2,536
INCOME TAXES 939 1,014
NET EARNINGS $ 1,212 $ 1,522
EARNINGS PER COMMON SHARE $.16 $.20
AVERAGE COMMON SHARES OUTSTANDING 7,713,465 7,713,465
See accompanying notes to Consolidated Condensed Financial Statements.
MOOG INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Unaudited
Nine Months Ended
June 30
1994 1993
NET SALES $217,160 $215,109
OTHER INCOME 1,706 2,336
218,866 217,445
COSTS AND EXPENSES
Cost of sales 150,543 150,243
Research and development expenses 15,415 12,052
Selling, general and administrative
expenses 40,221 39,747
Interest expense 7,377 8,446
Foreign currency exchange (gain) loss (339) 420
Other expenses 644 347
Inventory obsolescence charge (note 4) 2,574 -
Restructuring expense (note 4) 2,107 -
218,542 211,255
EARNINGS BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 324 6,190
INCOME TAXES 155 2,155
EARNINGS BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 169 4,035
EXTRAORDINARY ITEM, LOSS FROM EARLY
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES OF $119 (note 7) - (357)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (note 5) 505 -
NET EARNINGS $ 674 $ 3,678
EARNINGS PER COMMON SHARE:
- BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $.03 $.53
- EXTRAORDINARY ITEM - (.05)
- CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .06 -
- NET EARNINGS $.09 $.48
AVERAGE COMMON SHARES OUTSTANDING 7,713,465 7,713,465
See accompanying notes to Consolidated Condensed Financial Statements.
MOOG INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Unaudited
Nine Months Ended
June 30
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 674 $ 3,678
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 10,655 11,514
Provisions for losses 4,676 3,699
Deferred income taxes (16) (87)
Other 487 (103)
Changes in assets and liabilities
providing (using) cash:
Receivables 542 8,528
Inventories (909) (4,563)
Other assets (3,027) (2,269)
Accounts payable and accrued expenses 3,076 (11,269)
Other liabilities (9,829) 157
Accrued income taxes 199 330
NET CASH PROVIDED BY
OPERATING ACTIVITIES 6,528 9,615
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of hydraulic and mechanical
actuation product lines of
AlliedSignal Inc. (78,000) -
Purchase of property, plant and equipment (5,101) (8,042)
Proceeds from sale of assets 430 8,950
Other 54 128
NET CASH (USED) PROVIDED
BY INVESTING ACTIVITIES (82,617) 1,036
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in notes payable (4,744) 166
Proceeds from revolving lines of credit 68,000 16,521
Payments on revolving lines of credit (149) (16,400)
Proceeds from issuance of long-term debt 68,778 606
Payments on long-term debt and capital
lease obligations (62,914) (12,747)
Purchase of convertible subordinated
debentures (1,282) (177)
Preferred stock dividends paid (7) (7)
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 67,682 (12,038)
Effect of exchange rate changes on cash (423) (47)
DECREASE IN CASH (8,830) (1,434)
Cash at beginning of period 18,589 8,106
Cash at end of period $ 9,759 $ 6,672
See accompanying notes to Consolidated Condensed Financial Statements.
MOOG INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands except share data)
Unaudited
1. In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
necessary to present fairly the financial position of Moog Inc. as
of June 30, 1994 and September 30, 1993, and the results of its
operations and cash flows for the three and nine months ended June
30, 1994 and 1993. The results of operations for the nine month
period ended June 30, 1994 are not necessarily indicative of the
results expected for the full year. In addition, certain
reclassifications have been made to the prior period financial
statements to conform with the current year presentation.
2. On June 17, 1994, the Company concluded the acquisition of the
hydraulic and mechanical actuation product lines (the Product Lines)
of AlliedSignal Inc. located in Torrance, California. The Product
Lines include mechanical drive systems for leading edge flaps and
hydraulic servoactuators for primary and secondary flight controls
used on a variety of commercial and military aircraft. The purchase
price including payment for specified transition services to be
provided by AlliedSignal over a period of approximately one year was
$78,000. The acquisition was financed by borrowings under a
revolving credit and term loan agreement with a banking group.
The acquisition has been accounted for under the purchase method.
Accordingly, the operating results of the Product Lines have been
included in the Consolidated Condensed Statements of Operations
since the date of acquisition. Certain information required to
establish the opening balance sheet for the Product Lines has not
yet been provided by AlliedSignal and, additionally, asset
appraisals have not been finalized. Accordingly, the purchase price
including prepayment for transition services was $78,000 and has
been shown as a separate line item on the June 30, 1994 Consolidated
Condensed Balance Sheet.
As the Company does not presently have all the information necessary
to report on the required proforma results of operations, this
information is not included in this filing. This information will
be provided as soon as practicable.
3. In conjunction with the acquisition, the Company refinanced its
Domestic credit facilities. On June 15, 1994, the Company closed on
a $152,000 Revolving Credit and Term Loan Agreement with a banking
group. The agreement provides for an $85,000 revolving credit
facility and a $67,000 term loan facility. Interest on both the
revolving and term facilities is LIBOR plus 2.125%. Subsequent to
closing, the Company entered into interest rate swap arrangements
for $60,000, effectively converting this amount to fixed rate debt
at 8.2% for the next two years.
4. During the quarter ended March 31, 1994, the Company recorded a pre-
tax charge for future restructuring costs of $2,107. This charge
includes $1,683 of severance benefit costs related to workforce
reductions primarily in the Company's operations in England, Germany
and Denmark, and $424 of additional costs primarily related to the
disposition of a facility which is in the process of being
subleased.
In addition to the restructuring charge, the Company recorded a
$2,574 pre-tax charge for the write-off of Domestic obsolete
inventory in the second quarter of 1994. This inventory
obsolescence charge reflects a recent decline in repair activities
and spare parts requirements on many government programs in addition
to accelerating the cash tax benefit by physically disposing of this
excess inventory in this fiscal year. Approximately $5,000 of
inventory covered by the reserve for obsolescence will be scrapped
prior to year-end resulting in cash tax benefits of approximately
$1,900. The consolidated reserve remaining after scrapping the
excess inventory will be approximately $3,500 and is considered
adequate to properly value the remaining inventory.
5. In the quarter ended December 31, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." As a result of recording previously
unrecognized deferred tax assets in the United States and Japan in
accordance with SFAS 109, net earnings were increased by $505. The
effect of adopting SFAS 109 has been reported as a Cumulative Effect
of Change in Accounting Principle.
Also in the first quarter of 1994, the Company adopted Statement of
Financial Accounting Standards No. 106 (SFAS 106), "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions." The
effect of adopting SFAS 106 is to increase post-retirement benefit
expenses by approximately $400 for the twelve months ending
September 30, 1994, or approximately $300 in the first nine months.
6. Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method of valuation. Inventories are
comprised of the following:
June 30 September 30
1994 1993
Raw materials and purchased parts $13,352 $14,641
Work in process 44,134 47,176
Finished goods 8,086 5,045
$65,572 $66,862
7. In late December 1992, the Company extinguished $10,186 of its 12
7/8% long-term debt prior to the scheduled maturity in order to take
advantage of the significant decline in interest rates. The cost of
the extinguishment was reported as an extraordinary loss of $357,
net of an income tax benefit of $119.
8. In addition to the cash flow information provided in the
Consolidated Condensed Statements of Cash Flows, the following
supplemental cash flow data is provided:
Nine Months Ended
June 30
1994 1993
Cash paid during the period for:
Interest $7,190 $6,841
Income tax 2,703 1,582
Non cash investing and financing
activities:
Leases capitalized 242 38
9. The changes in shareholders' equity for the nine months ended June
30, 1994 are summarized as follows:
Number of Shares
Class A Class B
Preferred Common Common
Amount Shares Stock Stock
PREFERRED STOCK
Beginning and end of period $ 100 100,000
COMMON STOCK
Beginning and end of period 9,134 6,598,989 2,535,134
ADDITIONAL PAID-IN CAPITAL
Beginning and end of period 47,780
RETAINED EARNINGS
Beginning of period 54,259
Net earnings 674
Preferred stock dividends (7)
End of period 54,926
TREASURY STOCK
Beginning and end of period (18,002) (562,555) (858,103)
EQUITY ADJUSTMENTS
Beginning of period 564
Foreign currency translation 1,190
End of period 1,754
LOAN TO SAVINGS AND STOCK
OWNERSHIP PLAN (SSOP)
Beginning of period (1,274)
Payments received on loan
to SSOP 54
End of period (1,220)
TOTAL SHAREHOLDERS' EQUITY $94,472 100,000 6,036,434 1,677,031
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING HIGHLIGHTS
(dollars in thousands)
DOMESTIC CONTROLS manufactures and markets precision control components
primarily for North America.
Three Months Ended Nine Months Ended
6/30/94 6/30/93 6/30/94 6/30/93
Net sales $51,015 $46,179 $148,575 $138,991
Intersegment sales 1,691 1,047 5,791 5,779
Total sales $52,706 $47,226 $154,366 $144,770
Operating profit $ 6,187 $ 5,606 $ 13,245 $ 15,990
Non-recurring restructuring charge and
inventory obsolescence charge
included in operating profit - - 3,150 -
Earnings before extraordinary
item and cumulative effect of
change in accounting principle 1,897 2,137 2,522 5,430
Backlog 163,166 154,535
INTERNATIONAL CONTROLS manufactures and markets precision control
components for industrialized economies in Europe and the Far East.
Three Months Ended Nine Months Ended
6/30/94 6/30/93 6/30/94 6/30/93
Net sales $22,200 $25,972 $ 68,585 $ 76,118
Intersegment sales 1,575 760 4,158 2,630
Total sales $23,775 $26,732 $ 72,743 $ 78,748
Operating profit $ 647 $ 1,725 $ 355 $ 4,213
Non-recurring restructuring charge and
inventory obsolescence charge
included in operating profit - - 1,531 -
Foreign currency exchange (gain) loss 68 133 (153) 482
Loss before extraordinary
item and cumulative effect of
change in accounting principle (640) (672) (2,357) (1,494)
Backlog 32,153 37,773
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING HIGHLIGHTS
(dollars in thousands)
CONSOLIDATED SALES AND EARNINGS
Three Months Ended Nine Months Ended
6/30/94 6/30/93 6/30/94 6/30/93
Net sales $73,215 $72,151 $217,160
$215,109
Operating profit 6,834 7,331 13,600
20,203
Deductions from operating profit:
Interest expense 2,654 2,724 7,377
8,446
Currency exchange (gain) loss (118) 88 (339)
420
Other expenses-net 2,079 2,103 6,289
5,286
Eliminations 68 (120) (51)
(139)
Total deductions 4,683 4,795 13,276
14,013
Earnings before income taxes,
extraordinary item and cumulative
effect of change in
accounting principle 2,151 2,536 324
6,190
Income taxes 939 1,014 155
2,155
Earnings before extraordinary item
and cumulative effect of change
in accounting principle 1,212 1,522 169
4,035
Extraordinary item - loss from
early extinguishment of debt - - -
(357)
Cumulative effect of change in
accounting principle - -
505 -
Net earnings $ 1,212 $ 1,522 $ 674 $
3,678
Backlog $195,319
$192,308
Operating profit for each segment consists of total revenue less cost of
sales and segment specific operating expenses. The deductions from
operating profit have been charged to the respective segments by being
directly identified with a segment or allocated to the segments on the
basis of identifiable net assets in calculating net earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of the third quarter and first nine
months of fiscal 1994 compared with the third quarter and first nine months
of fiscal 1993, unless otherwise noted.
ACQUISITION OF HYDRAULIC AND MECHANICAL ACTUATION SYSTEMS PRODUCT LINES OF
ALLIEDSIGNAL - On June 17, 1994, Moog Inc. acquired the hydraulic and
mechanical actuation systems product lines (the Product Lines) of
AlliedSignal Inc. located in Torrance, California. The Product Lines
acquired are used on a wide variety of commercial and military aircraft.
Mechanical actuators include drive systems for the leading edge flaps on
the F/A-18 C/D, and hydraulic actuators include the primary flight controls
for the Boeing 747 and 757 and the Airbus A330 and A340. The acquisition
strengthens Moog's position in the actuation market, and provides the
opportunity to improve utilization of Moog's existing manufacturing
facilities and overhead structure. The Product Lines are expected to add
approximately $75 million in annual revenue. The purchase price for the
product lines including payment for specified transition services was $78
million in cash. The transition services principally relate to computer
usage and support, engineering, and manufacturing support for a period of
approximately one year.
In conjunction with the acquisition, the Company refinanced its Domestic
credit facilities. On June 15, 1994, the Company closed on a $152 million
Revolving Credit and Term Loan Agreement with a banking group. The
Agreement provides for $85 million in a revolving facility and a $67
million term loan. The refinancing is discussed further in the Financial
Condition and Liquidity section.
GENERAL - For the third quarter of 1994, the Company generated net earnings
of $1.2 million, or $.16 per share, compared to $1.5 million, or $.20 per
share, in the third quarter of 1993. On a year-to-date basis, the Company
reported net earnings of $.7 million, or $.09 per share, in the current
year, compared to $3.7 million, or $.48 per share in the previous year.
Included in current year-to-date net earnings are $2.9 million in after-
tax second quarter restructuring and inventory obsolescence charges, along
with a benefit from a first quarter cumulative effect of a change in
accounting principle of $.5 million due to the adoption of SFAS 109,
"Accounting for Income Taxes."
The pre-tax inventory obsolescence charge of $2.6 million for Domestic
inventories reflects the recent decline in repair activities and spare
parts requirements on many government programs. Last quarter, the Company
initiated a program to dispose of inventory identified as obsolete. Of the
consolidated reserve for inventory obsolescence at March 31, 1994 of $8.5
million, $6.5 million related to Domestic operations. Approximately $5.0
million of inventory associated with the Domestic operations will be
physically disposed of before the end of fiscal 1994. The physical
disposition of the obsolete inventory will in turn generate cash tax
benefits of $1.9 million.
The restructuring charges include $1.7 million in pre-tax charges
associated with severance costs for approximately 100 employees in the
Company's operations in England, Germany and Denmark. The workforce
reduction is expected to provide annual pre-tax savings from reduced
salaries, wages and benefits of an estimated $4.0 million. The related
severance costs are expected to be paid principally in the third and fourth
quarters of fiscal 1994. The remaining $.4 million in restructuring
charges relates to an estimate of additional costs for the disposition of a
leased facility. When this facility is disposed, the Company will realize
$1.1 million in annual savings. The cost savings from the restructuring
actions are expected to be fully realized during the first and second
quarters of fiscal 1995.
Net earnings for the nine months ended June 30, 1994 also included the
aforementioned first quarter benefit of $.5 million for the cumulative
effect of adopting Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Net earnings for the nine months ended June
30, 1993 included an extraordinary after-tax charge of $.4 million for
prepayment costs on the early extinguishment of 12-7/8% debt. After the
effects of the non-recurring charges for inventory and restructuring
described above, and before the cumulative effect of the change in
accounting principle and the extraordinary item, net earnings for the first
nine months of 1994 was $.2 million or $.03 per share compared with net
earnings in 1993 of $4.0 million or $.53 per share.
In addition to adopting Statement No. 109, "Accounting for Income Taxes",
the Company also adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions" in the first quarter of 1994. Statement No. 106 costs are being
expensed at $1.1 million annually, including the amortization of the
initial transition obligation of $7.9 million over 20 years. The 1994 cost
is $.4 million greater than the annual cost of post-retirement benefits
other than pensions in 1993 of $.7 million, determined on a cost-incurred
basis.
Operating profit for the Domestic Controls segment for the third quarter of
1994 was $6.2 million, or 11.7% of segment sales. This compares to $5.6
million, or 11.9% of segment sales, in the third quarter of 1993. The
increase in operating profit is due to increased revenue and improved gross
margins on the Aircraft Controls product line, principally due to activity
related to the B-2 program, whose production cycle is scheduled to be
completed by mid-1995, and commercial aircraft spares. In part, the
improvement in Aircraft Controls was offset by declining revenues and
profitability in the Missiles product line, principally due to lower sales
on U.S. defense-related programs. For the International Controls segment,
operating profit in the third quarter was $.6 million, or 2.7% of segment
sales, compared to $1.7 million, or 6.4% of segment sales, in the third
quarter of fiscal 1993. The principal reasons for the decline are lower
sales in Germany, mainly in aerospace and defense markets, a decline in
industrial sales in England, and reduced electronic equipment sales in the
Danish operation. Concurrently, the Pacific operations have also
experienced reduced profits, principally from lower industrial sales in
Japan.
Year-to-date operating profit for the Domestic Controls segment excluding
the second quarter 1994 restructuring and inventory obsolescence charges
was $16.4 million, or 10.6% of segment sales, compared to $16.0 million, or
11.1% of segment sales a year ago. Within Domestic Controls, the Aircraft
Controls product line has improved its revenue and operating profit due to
strong sales and operating margins on the B-2 program in particular and in
the commercial aircraft business more generally. The improvement in the
Aircraft Controls product line has been offset by reduced operating profit
on the Missiles product line. The Missiles product line operating profit
decline is in part due to favorable cost experience in 1993 on various
long-term development contracts nearing completion along with the
aforementioned reduction in U.S. defense-related programs. For the
International Controls segment, year-to-date operating profit excluding the
second quarter 1994 restructuring and inventory obsolescence charges, was
$1.9 million, or 2.6% of segment sales. This compares with $4.2 million,
or 5.4% of segment sales in the prior year. A major contributor to the
decline is the Company's English subsidiary, which has experienced a
significant downturn on a variety of its industrial products. In response,
the English subsidiary has reduced its staffing level by approximately 16%.
Concurrently, operating profit in the Pacific Rim has declined, principally
due to a slow Japanese economy and very strong shipments in 1993 on
aerospace programs in Korea.
FINANCIAL CONDITION AND LIQUIDITY - On June 15, 1994, the Company closed on
a new $152 million Revolving Credit and Term Loan facility (the Credit
Facilities) with a banking group. The new Credit Facilities consist of an
$85 million revolving credit facility and a $67 million term loan. The
revolving credit facility is for a five-year period, with the facility
total reducing by $5 million per year commencing in October 1995. The term
loan is a seven-year arrangement, with quarterly principal payments
commencing on January 1, 1995. The credit facilities provide for interest
at LIBOR plus 2.125%, compared to the previous Domestic revolving credit
arrangements of LIBOR plus .625%. In order to provide protection from
interest rate increases, the Company has entered into $60 million of
interest rate swap arrangements. This has the effect of converting the $60
million into fixed rate debt for two years at 8.2%. In addition to the new
credit facilities, the Company amended the terms of its existing $20
million, 10.25% term loan. This loan, which previously required $5 million
in annual principal payments from 1996 through 1999, has been amended to
require annual principal payments of $1.7 million in 1995, $2.7 million in
1996, and $3.0 million from 1997 through 2001.
The proceeds from the refinancing were used principally to acquire the
AlliedSignal hydraulic and mechanical actuation product lines and pay off
existing Domestic term loans. The new $152 million Credit Facilities and
amended $20 million term loan are secured by substantially all of the
Company's domestic assets. In addition, the stock of all domestic and
foreign subsidiaries has been pledged. The Credit Facilities and amended
term loan include customary covenants for transactions of this nature,
including requirements to maintain various financial ratios.
Cash Provided by Operating activities for the nine months ended June 30,
1994 was $6.5 million compared with $9.6 million a year ago. Other than
the $4.7 million of non-recurring charges previously discussed, the most
notable items affecting the comparison of 1994 with 1993 Cash Provided by
Operating activities include Accounts receivable, Accounts payable and
accrued expenses, and Other liabilities. Accounts receivable collections
in 1993 provided cash as a result of expected revenue declines in the
Domestic segment from reduced Defense expenditures. Also, in 1994, the
Company generated receivables related to the newly acquired Product Lines.
The use of cash in 1993 resulting from the decrease in Accounts Payable and
accrued expenses is due to the payment of severance for amounts accrued in
1992. The source of cash in 1994 from the increase in Accounts Payable and
accrued expenses offsets the use of cash from the decrease in Other
liabilities. This is mainly due to the change in the classification of a
reserve for a loss expected on the sublease of a facility from noncurrent
to current. The use of cash in 1994 related to the remaining decrease in
Other liabilities is also due to pension contributions made in excess of
amounts accrued.
As of June 30, 1994, the Company has worldwide unused lines of credit of
$28.6 million, plus cash and cash equivalents of $9.8 million. In
comparison, the Company had worldwide unused lines of credit of $18.4
million and cash of $18.6 million at September 30, 1993.
Total consolidated assets at June 30, 1994 of $390 million were 22.5%
higher than the $318 million at September 30, 1993. The increase in assets
is primarily due to the $78 million acquisition of the hydraulic and
mechanical actuation Product Lines. Other increases relate to changes in
deferred tax asset accounting of approximately $4.6 million from the
adoption of SFAS 109, increases in refundable income taxes of $4.7 million
resulting from accelerated pension payments and the expected physical
disposition of obsolete inventory, and approximately $4.3 million related
to strengthening foreign currencies. These increases have been offset by
reductions in cash balances of $8.8 million, and depreciation in excess of
capital expenditures of $5.6 million, reducing fixed assets.
In December 1992, the Company prepaid $10.2 million of long-term debt with
an interest rate of 12-7/8% in order to take advantage of the significant
decline in U.S. market interest rates. The estimated annual pre-tax
savings, based upon the new credit facilities, is approximately $.7 million
as compared with the pre-tax extraordinary charge recorded in the first
quarter financial statements of $.5 million. The Company utilized
previously existing revolving lines of credit to finance this prepayment.
During 1993, the Company sold various machinery and equipment for $5.8
million and leased this equipment back under an operating lease. There was
no gain or loss recognized on the transaction.
Capital expenditures for the first nine months of 1994 were $5.3 million
compared with depreciation of $10.7 million. Capital expenditures in 1994
also compared with $8.1 million a year ago. Additions to property, plant
and equipment for all of 1994 are expected to remain well below
depreciation levels.
The Company monitors total debt to equity as a key financial ratio. This
ratio includes short-term and long-term debt and subordinated debentures.
The ratio at June 30, 1994 was 2.19 compared with 1.49 at September 30,
1993 and with 1.32 at June 30, 1993. The increase in the ratio as of June
30, 1994 compared to September 30, 1993 resulted from the acquisition of
the hydraulic and mechanical actuation Product Lines which was entirely
debt financed. The increase in the ratio at September 30, 1993 from June
30, 1993 related to the Company borrowing the balance of its then unused
portion of its Domestic revolving credit facilities. This was done to
ensure that the then available terms and conditions would be in place for
the maximum amount of the then existing facilities.
Working capital at June 30, 1994 was $132 million compared with $124
million at September 30, 1993 and with $105 million at June 30, 1993. The
current ratio was 2.6 at June 30, 1994, compared to 2.3 at September 30,
1993 and 2.1 at June 30, 1993. The working capital amount at June 30, 1994
does not reflect the allocation of the purchase price related to the
Product Lines to the appropriate balance sheet captions. The Company is
awaiting final financial information from AlliedSignal and appraisals
necessary to complete the allocation.
NET SALES for the third quarter were $73.2 million, or 1.5% above net
sales of $72.2 million in the previous third quarter. Net sales for the
Domestic Controls segment in the third quarter were $51.0 million, an
increase of 10.5% over the $46.2 million from the 1993 third quarter. Of
the $4.8 million increase in Domestic segment sales, $3.7 million relates
to revenues from the recently acquired Product Lines. The remainder of the
increase is principally attributable to overall stronger sales in the
Commercial Aircraft and Space Products product lines, offset in part by a
decline in the Missiles product line. Within the International Controls
segment, sales declined 14.5% from $26.0 million in the third quarter of
fiscal 1993 to $22.2 million in the current quarter. Excluding currency
effects, sales declined 11.4%. The majority of the International sales
decline is attributable to European operations. In particular, European
sales were effected by lower aerospace sales in the Company's German
subsidiary, lower electronic equipment sales in the Danish subsidiary, and
lower industrial sales in the English and French subsidiaries. The
European sales decline is indicative of the on-going capital goods
recession in European markets. In the Pacific Rim, sales were down 1.8%.
Excluding the effect of the strengthening currencies, particularly the
Japanese Yen, sales were down 6.8% when measured in local currencies. The
decline in the Japanese subsidiary's sales in real terms were principally
related to the industrial product line.
For the nine months ended June 30, 1994, sales increased 1.0%, to $217
million from $215 million in the same 1993 period. For the Domestic
Controls segment, sales increased 6.9%, from $139 million for the nine
months ended June 30, 1993 to $149 million in the current year. The
increase in 1994 year-to-date sales relates principally to increased sales
on the B-2 Program and on the acquired Product Lines, offset by the
Defense-driven decline in the Missiles product line along with the Engine
Controls product line, which has been affected by the industry downturn for
both commercial and military aircraft. For the International Controls
segment, net sales have decreased 9.9% to $68.6 million for the first nine
months of 1994 from $76.1 million for the first nine months of 1993.
Weaker average foreign currencies relative to the U.S. dollar accounted for
18%, or $1.4 million, of the decline. The decline is principally
attributable to lower sales in Germany in aerospace and defense markets, in
conjunction with lower industrial sales in England and France due to the
persistently weak European capital goods market, along with a decline in
Korea due to strong shipments in 1993 on certain aerospace programs.
Within the Company's International activities, operations are conducted in
more than ten countries. Accordingly, the Company experiences a leveling
effect from currencies after translation of operating results into U.S.
dollars.
OTHER INCOME was $.8 million in the third quarter of 1994 compared with
$1.3 million a year ago. On a year-to-date basis, other income was $1.7
million in 1994 compared to $2.3 million in the prior year. The decline in
other income is principally attributable to $.4 million in interest income
accrued in the third quarter of 1993 related to anticipated tax refunds.
Other income generally includes rental income, interest, gains on sales of
equipment, and royalty income.
COST OF SALES for the third quarter of the current year was 68.1% of sales,
compared to 71.1% in the prior year third quarter. Third quarter 1994 cost
of sales was favorably impacted by a better product mix in the form of more
high margin commercial aircraft spares sales, along with favorable cost
experience on a major contract within the Military Aircraft product line.
On a year-to-date basis, cost of sales percentages have remained fairly
consistent with 1993 for both the Domestic and International Controls
segments. Domestically, cost of sales as a percentage of sales has
improved in Aircraft products for the aforementioned factors. This
Aircraft improvement has been offset by increases in the cost of sales
percentage in the Missiles product line, for which cost experience was
favorably impacted in 1993 on various long-term development contracts
nearing completion. Within the International Group, cost of sales as a
percentage of sales has been consistent despite the decline in sales as
1993 was unfavorably impacted by various low margin aerospace and defense
contracts.
RESEARCH AND DEVELOPMENT EXPENSE was $5.4 million, or 7.4% of net sales in
the current quarter, compared to $3.6 million, or 4.9% of net sales in the
third quarter of 1993. On a year-to-date basis, R&D expense was $15.4
million, or 7.1% of net sales, compared to $12.1 million, or 5.6% of net
sales, in the prior year.
The Company has seen R&D increase as a result of a shift in emphasis toward
Company sponsored R&D projects from customer sponsored projects. The
increase in R&D in the quarter relates to efforts on entertainment
simulators in the Motion Systems product line, brushless motor development
and radio controls within the Electronics and Systems product line, "smart"
actuation research in the Aircraft Controls product line, and work related
to developing a high performance engine valve within the Engine Controls
product line. Further, the Company's German subsidiary had a lower level
of development activity sold to customers in the current quarter. Year-to-
date, development has increased due to the above mentioned activities and
due to efforts earlier this year related to another engine valve.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $13.8 million in the
third quarter of 1994, or 18.9% of net sales, compared to $13.0 million in
the prior third quarter, or 18.1% of sales. The increase in absolute terms
relates to the addition of approximately $.4 million in SG&A costs
associated with the acquired Product Lines, along with increased emphasis
by the engineering staff on sales-related activities. Year-to-date, SG&A
was $40.2 million, or 18.5% of net sales, compared to $39.7 million, also
18.5% of net sales in the prior year.
INTEREST EXPENSE was $2.7 million in both the current quarter as well as
the third quarter of 1993. For the current quarter, interest expense was
3.6% of sales compared to 3.8% of net sales in the prior third quarter.
Year-to-date through June 30, interest expense was $7.4 million, or 3.4% of
sales, compared to $8.4 million, or 3.9% in the prior year. In the
quarter, the additional interest costs arising from the purchase of the
Product Lines and related higher average U.S. interest rates from
refinancing the domestic debt structure offset lower average comparable
borrowing levels which existed before the acquisition and refinancing.
Year-to-date, interest is down due to lower average debt levels in
conjunction with lower average worldwide interest rates, in addition to the
savings realized from the December 1992 prepayment of $10.2 million of 12-
7/8% debt.
FOREIGN EXCHANGE gain was $.1 million in the third quarter of 1994 compared
to a loss of $.1 million in the same quarter a year ago. Year-to-date,
foreign exchange gains of $.3 million compared to a loss of $.4 million in
the previous year. Most of the 1993 loss was incurred by the Company's
Italian subsidiary which had a large net Deutsche Mark payable to the
German subsidiary. The Italian subsidiary was also using the Deutsche Mark
as its functional currency for measuring operating results. Since that
time, the Italian company has reduced its exposure by increasing its
borrowings in Italian currency. In conjunction with providing its own
long-term financing, the Italian subsidiary converted its functional
currency to the Italian Lira.
OTHER EXPENSES were $.1 million in the current third quarter, comparable to
the same quarter in 1993. Year-to-date, other expenses were $.6 million in
the current year compared to $.3 in the prior year. The increase is
attributable principally due to the write-off of costs associated with
previous Domestic financing arrangements, and non-recurring costs
associated with funding a development effort by the Japanese subsidiary.
INVENTORY OBSOLESCENCE CHARGE of $2.6 million in the second quarter of 1994
represents a non-recurring charge for the write-off of Domestic obsolete
inventory. This charge reflects a recent decline in repair activities and
spare parts requirements on many government programs in addition to
accelerating the cash tax benefits by physically disposing of this excess
inventory in this fiscal year. Approximately $5.0 million of this reserve
will be scrapped prior to year end resulting in cash tax benefits of
approximately $1.9 million.
RESTRUCTURING EXPENSE of $2.1 million recorded in the second quarter of
1994 represents the costs to restructure the Company's operations,
primarily in England, Germany and Denmark. Approximately $1.7 million
represents severance benefit costs for workforce reductions and $.4 million
relates to the disposition of a facility which is in the process of being
subleased.
INCOME TAXES - The effective tax rate at June 30, 1994 is 47.8% and
represents the rate forecasted for the entire fiscal year. The
determination of this rate assumes that the operating results of the
Company's German subsidiary, which has available net operating loss
carryforwards, will improve in the fourth quarter of 1994 compared with the
first nine months. Recent increases in industrial new orders indicate that
it is reasonable to expect improved results at the Company's German
subsidiary in the fourth quarter. The relatively low effective tax rate in
1993 of 34.8% resulted primarily from tax benefits to be received through
utilization of Domestic net operating loss carryforwards and credits.
As previously mentioned, the Company adopted Statement No. 109, "Accounting
for Income Taxes" in the first quarter of 1994. The effect of this change
in accounting principle was to increase net earnings by $.5 million,
primarily resulting from the recognition of deferred tax assets in the U.S.
and Japan. No deferred tax assets are recorded at June 30, 1994 related to
the German subsidiary, which had net operating loss carryforwards of $5.5
million at September 30, 1993. These German tax losses, which may be
carried forward indefinitely, will be used to reduce taxes otherwise due to
German income earned in future years.
BACKLOG was $195 million at June 30, 1994 compared with $181 million at
September 30, 1993 and with $192 million at June 30, 1993. Backlog for the
Domestic Controls segment was $163 million at June 30, 1994 compared with
$149 million at September 30, 1993 and with $155 million at June 30, 1993.
Domestic backlog at June 30, 1994 includes $42.1 million related to the
acquired Product Lines. Excluding the newly acquired Product Lines,
Domestic backlog declined to $121 million, primarily attributable to the
Aircraft Controls product line, particularly the B-2 Program, and to the
Engine Controls product line as a result of the current slowdown in the
production of military and commercial aircraft engines. Backlog for the
International Controls segment was $32.2 million at June 30, 1994 compared
with $32.0 million at September 30, 1993 and with $37.8 million at June 30,
1993. Most of the backlog decline since June 30, 1993 within the
International Controls segment is attributable to Germany and reflects low
new order rates on the Aerospace product line.
ENVIRONMENTAL MATTERS - The Company continues to participate as a
Potentially Responsible Party (PRP) in the clean-up of two Superfund sites
in Western New York. In addition, the Company was notified in 1993 by a
PRP group at a third site that it will seek contribution from the Company
and others to the extent the group is responsible for remediation costs at
the related site. At June 30, 1994, the Company believes that adequate
reserves have been established for these environmental issues. Because of
the uncertainties associated with environmental matters, the Company could
be requested to participate in future remediation activities, if any, at
the three sites. With respect to the third site referenced above, the New
York State Department of Environmental Conservation has recently estimated
the cost of a phase one clean-up, and the Company's share of this will be
immaterial.
In conjunction with the acquisition of the AlliedSignal hydraulic and
mechanical actuation product lines and related refinancing of the Company's
Domestic credit facilities, environmental assessments were made of the
former AlliedSignal facility in Torrance, California and the Company's
existing facilities in East Aurora, New York. These assessments identified
certain environmental conditions with respect to the Torrance, California
facilities which are presently being addressed by AlliedSignal and others.
The Company has obtained certain contractual indemnifications from
AlliedSignal. With respect to the East Aurora facilities, an area of
property which has been leased to a third party since 1988 was, subsequent
to the refinancing, identified as a site which may require a clean-up
effort. This matter has been reported to governmental authorities. The
estimated cost of this clean-up and the Company's share, if any, of such
cost are uncertain. However, at this time, any cost associated with this
clean-up effort is not expected to have a material impact on the Company's
financial position.
Based upon currently available data, while it is difficult to predict with
certainty, the Company does not expect that these environmental matters
will have a material affect on the financial position of the Company in
excess of amounts currently reserved.
GOVERNMENT CONTRACTING ENVIRONMENT - Current industry conditions continue
to represent significant challenges for the Company. Sales to U.S. and
Foreign governments for military and space hardware on programs that extend
over many years are expected to be approximately 50% of consolidated net
sales this year. In comparison, prior to this year approximately 60% of
the Company's sales were to either U.S. or various Foreign governments.
Government procurements of hardware within most of these programs are
generally authorized in annual quantities and are constrained by the annual
government budgeting process. The Company shares risks of cancellation as
a participant in these programs similar to the risk assumed by all
government contractors.
Many of the Company's products are on the leading edge of new technologies.
Development problems on projects on which the Company is performing under
fixed-price contracts and is unable to recover the additional costs are
part of the risks of being on the forefront of such technology. In this
regard, the Company's risk of technical development and design problems is
similar to other high-technology companies. Since the production of these
products involves highly precise, complex operations and vendor supplied
component parts, a similar risk exists for products in the production
phase.
Continued Government emphasis on audit and investigative activity in the
U.S. Defense Industry presents risks of unanticipated financial exposure
for companies with substantial activity in Government contract work. The
audit process is an on-going one which includes post-award reviews and
audits of compliance with the various procurement requirements. Although
Government regulations provide that under certain circumstances a
contractor may be fined, penalized, have its progress payments withheld or
be debarred from contracting with the Government, the Company does not
anticipate a material financial impact from the various and on-going
procurement reviews. The Company believes that adequate reserves have been
established for any issues on which financial exposure is known and
quantifiable as of June 30, 1994.
The last 30 years have produced a continuing stream of opportunities for
the Company on precision hydraulic servosystems. However, continual
improvements in the power density of electric motors and the current
carrying capacity of controller circuitry continually erode the application
base for hydraulic controls. Recognizing this phenomenon, the Company
broadened its purview and is a supplier of high performance industrial
control systems rather than just a supplier of components for hydraulic
systems. The Industrial world today is shifting to digital control for
increased functionality. The Company plans to provide increasingly
intelligent digital control as part of its electric drive systems and as a
complement to its hydraulic controls. The Company's objective is to offer
the world's most advanced systems capability together with the world's
highest performance hydraulic and electric drives, to manufacture these
products in world class facilities and to present them to markets around
the world through a network of sales and application engineering
subsidiaries.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
None.
b. Reports on Form 8-K.
Reference Item 2 Form 8-K dated June 15, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Moog Inc.
(Registrant)
Date: August 12, 1994 By S/Robert R. Banta/S
Robert R. Banta
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1994 By S/Donald R. Fishback
Donald R. Fishback
Controller
(Principal Accounting Officer)