MOG-A

Business Context and Reporting Period

Company: MOOG INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended June 25, 2005
Business Overview: Moog Inc. is a global designer and manufacturer of high-performance precision motion and fluid controls for aerospace, defense, and industrial markets. Operations are divided into four segments: Aircraft Controls, Space and Defense Controls, Industrial Controls, and Components.

Key Financial Metrics

Note: Total Debt calculated as Notes Payable ($885) + Current Installments of Long-Term Debt ($17,086) + Senior Debt ($119,051) + Senior Subordinated Notes ($150,000) = $187,022.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11% in the third quarter and 10% for the first nine months compared to the prior year, driven by growth across all segments.
• Profitability: Net earnings rose 12% in the quarter and 14% for the nine-month period. Gross margins improved due to higher volume and the absence of specific contract loss reserves recorded in the prior year.
• Debt Structure: On January 10, 2005, the company issued $150 million in senior subordinated notes (6.875% coupon) to repay bank credit facility indebtedness. This increased interest expense but improved liquidity and unused borrowing capacity.
• Acquisitions: The company acquired an industrial systems engineering business and a commercial aircraft repair business in Q2 2005. Subsequent to the period end, it acquired the Power and Data Transmission Group of Kaydon Corporation for $72.4 million.
• Stock Split: A three-for-two stock split was effected on April 1, 2005. All share and per-share data have been restated.

Guidance, Outlook, and Risks

2005 and 2006 Outlook

• 2005 Forecast: Net sales expected to increase 10% to $1,035 million. Operating margin expected to be 11.9%. Net earnings projected at $64.3 million (12% increase) with diluted EPS of $1.63.
• 2006 Forecast: Net sales expected to range between $1,162 million and $1,182 million (12-14% growth). Operating margin expected to be approximately 12%. Net earnings projected between $71.0 million and $74.4 million.

Management Commentary

Management attributes margin improvements to higher sales volume and reduced contract loss reserves compared to 2004. Increased R&D expenses are linked to the Boeing 787 Dreamliner and X-47 unmanned combat aerial vehicle programs. The effective tax rate is expected to rise in 2005 and 2006 due to reduced foreign tax benefits.

Risks and Contingencies

• Government Contracts: Significant dependence on military and government programs which may be terminated or delayed.
• Customer Concentration: Reliance on major customers such as Boeing and Lockheed Martin.
• Accounting Changes: Adoption of SFAS No. 123(R) regarding share-based payment is expected to negatively impact diluted EPS by approximately $0.05 in 2006.
• Pension Costs: Increased pension expense anticipated in 2005 due to updated mortality assumptions and lower discount rates.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the U.S. credit facility covenants, specifically the minimum interest coverage ratio (3.0) and maximum leverage ratio (3.5).
• Acquisition Integration: Monitor the integration and financial performance of the Kaydon Corporation Power and Data Transmission Group acquired in July 2005.
• Contract Loss Reserves: Review future additions to contract loss reserves, particularly for the Joint Common Missile program and business jet development contracts.
• Boeing 787 Program: Assess the impact of continued R&D spending on the Boeing 787 program on the Aircraft Controls segment margin.
• Foreign Currency: Evaluate the impact of foreign currency fluctuations, as nearly one-third of sales are denominated in foreign currencies.