John Scannell, the chief executive at Moog Inc., which cut 97 jobs worldwide, including 18 locally, earlier this week, still isn’t sure how the Elma motion control equipment maker will be affected by potential cuts in the federal budget.
But Scannell said Friday that this week’s job cuts were one way that Moog is dealing with a general slowdown in defense spending and the possibility of even more severe cuts through the 10 percent spending cuts mandated through sequestration.
“The problem with sequestration is that nobody knows how it will play out,” Scannell said after the company reported a 3 percent increase in its second-quarter profits but lowered its earnings forecast for the current fiscal year.
“Sequestration has gone from a threat 90 days ago to a reality,” he said. “We see defense spending slowing down, and the fact that we could see further slowing through sequestration is why we’re trying to get ahead of it” by reducing staff.
Scannell said if sequestration leads to a 10 percent reduction in Moog’s $750 million to $800 million in annual U.S. defense sales, it could reduce Moog’s revenues by $75 million to $80 million.
But that’s far from certain because the company has long-term contracts to supply systems for some of the major defense programs, such as the F-18 and F-35 fighter jets and the V-22 tilt rotor aircraft. Changes to those programs could take many months or more than a year to enact, he said.
More vulnerable, in the short term, are Moog’s $200 million in annual sales of replacement parts and maintenance services, which could be quickly scaled back as the military flies fewer training flights or makes other day-to-day cutbacks, he said.
“We haven’t seen anything that we can clearly attribute to sequestration,” Scannell said. “But there has been a general slowdown in defense spending.”
Despite that slowdown in defense spending, Moog’s second-quarter profits were slightly better than analysts had expected, as stronger earnings from its aircraft controls and components businesses offset a significant weakening in its industrial products unit.
But Moog executives also warned that the company’s earnings during the current fiscal year would be weaker than they initially forecast.
While Moog lowered its earnings forecast for the current fiscal year, it said earnings still are expected to be about 4 percent better than last year, even after absorbing $2 million in restructuring costs related to the job cuts.
“The news is generally good,” Scannell said. “Our industrial markets remain soft, so fiscal 2013 looks like it will continue to be a challenging year.”
Moog said it expects its earnings to be around $3.45 per share during the fiscal year that ends in September, down from its January forecast of $3.55 per share. It also trimmed its sales forecast by 1 percent to $2.59 billion, down from its previous prediction of $2.62 billion.
During the second quarter, profits strengthened to $36.5 million, or 80 cents per share, from $35.4 million, or 77 cents per share, a year earlier. The earnings were better than the 78 cents that analysts expected.
Moog’s sales also grew by 3 percent to $643 million from $624 million, buoyed by double-digit revenue growth in its aircraft controls and space and defense controls businesses. That offset a 14 percent slide in revenues at its industrial systems business, which was hurt by lower sales of wind energy controls and industrial automation equipment.
Most of the strength during the second quarter came from Moog’s aircraft controls business, which boosted its operating profits by 38 percent to $31.5 million on a 10 percent increase in revenues to $259 million. Moog said its commercial aircraft sales jumped by 22 percent, fueled by stronger revenues from both Boeing Co. and Airbus, the two largest commercial jet manufacturers.
Military aircraft sales, which account for about 56 percent of Moog’s aircraft revenues, rose slightly as higher sales of replacement parts offset lower revenues from the Joint Strike Fighter and V-22 tilt-rotor aircraft programs.
Earnings grew by 14 percent to $15 million at Moog’s components business, where sales increased by 3 percent to $99 million as increased revenues from its energy products offset slightly lower defense sales.
That improvement helped offset a 59 percent plunge in earnings at Moog’s industrial products business, where operating profits dropped to $7.8 million as sales tumbled by 14 percent to $144 million. The company blamed the drop on lower revenues from its industrial automation products and controls for wind energy turbines – a market in China and Europe that Scannell said is “really struggling.”
Earnings slid by 23 percent to $8.8 million at Moog’s space and defense controls business, despite an 18 percent jump in sales, which rose to $106 million because of the impact of a pair of recent acquisitions that make space controls.
Operating profits dipped by 12 percent to $1.3 million at Moog’s medical device business, while sales inched up by 1 percent to $35.5 million.