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Moog Earnings Decline on Weakness in Aerospace, Industrial Systems

By Dan Caplinger - Jul 31, 2015 at 10:02AM

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Currency impacts continue to hit the high-performance systems company.

Source: Moog.

The aerospace industry has a huge ramp-up in aircraft production volume in recent years, and for component maker Moog ( MOG.A 4.53% ) ( MOG.B 3.67% ), that has generally been good news for its business. Yet coming into its fiscal third-quarter report Friday morning, Moog investors were somewhat nervous about the sluggish performance of its share price so far this year, and the reduced guidance earlier this year has weighed on investor confidence. Moog's fiscal third-quarter report gave shareholders bad news in the form of lower earnings and revenue, and downgraded guidance for the full fiscal year also raised questions about the future for the company. Let's take a closer look at Moog's latest results and see what they say about its strength right now.

Moog eases back
Moog's fiscal third-quarter results continued its trend of underwhelming financials. Revenue dropped 7% from the year-ago quarter to $635 million, which was worse than the $638 million that most investors had hoped Moog would bring in during the quarter. Net income fell by nearly 25% to $36.3 million, producing GAAP earnings of $0.94 per share that roughly matched consensus estimates, but Moog said that restructuring costs accounted for about $0.11 per share of the decline. After making revisions based on those one-time costs, Moog's adjusted earnings of $1.05 per share were only marginally less than the $1.08 it earned during the fiscal third quarter of 2014.

On the revenue front, weakness was widespread throughout Moog's major segments. The key aircraft segment suffered a sales drop of 8% year over year, with particular weakness in the commercial aircraft area. Sales results between manufacturers were quite different, though, with European manufacturers ramping up even as sales to U.S. manufacturers fell sharply. Poor performance in sales of commercial aftermarket products and military aircraft also weighed on the segment's results.

Meanwhile, space and defense revenue fell 7%, with the completion of several satellite programs more than offsetting a 13% gain in the defense area. Industrial systems sales dropped 12%, due largely to the strong dollar, and sales of components were down 3% as a poor showing in the energy sector offset gains in aerospace, defense, and general industrial products. Only the medical devices segment showed year-over-year gains in revenue.

Similar trends were evident from operating earnings at the segments. Medical devices saw segment income double from year-ago levels, but the remaining major areas suffered declines of varying severity. Moreover, interest expense more than tripled from 2014's fiscal third quarter, putting further pressure on earnings.

What's next for Moog?
CEO John Scannell noted the difficult times for Moog, characterizing 2015 as "a year of multiple headwinds for our company." Still, Scannell remained optimistic, noting that "our underlying businesses remain strong and we're responding to the short-term challenges to position our company for improvement in fiscal 2016 and beyond."

The problem, though, is that Moog's guidance continues to disappoint investors. For the full 2015 fiscal year, it once again cut its estimates on both sales and earnings. A $10 million reduction in its revenue guidance cut its projected number to $2.53 billion, and it reduced its earnings estimate by a nickel to $3.50 per share. Furthermore, initial 2016 guidance for earnings of $4 per share on revenue of $2.57 billion was substantially weaker than the roughly $2.6 billion in sales and $4.25 per share in earnings that most investors have expected.

With Moog shares already near their lowest levels of the year, further bad news isn't likely to elicit much enthusiasm from investors, even if the company technically beat earnings estimates on an adjusted basis for the quarter. Moog hasn't gotten the same amount of lift from its aerospace business lately that it did in past years, and if that trend continues, then it could be hard for the component maker to break out of its decline and start producing solid growth once again.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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