MOG-A

MOOG INC. 10-Q Summary: Quarter Ended June 27, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 27, 2009, and the nine months ended on that date. Moog Inc. is a worldwide designer, manufacturer, and integrator of high-performance precision motion and fluid controls for aerospace, defense, industrial, and medical markets. The company operates through five segments: Aircraft Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 10% in the quarter and 5% for the nine-month period compared to the prior year. The decline was driven primarily by the global recession impacting the Industrial Systems segment and unfavorable foreign currency translation.
• Profitability Pressure: Net earnings dropped 49% in the quarter and 20% for the nine-month period. Gross margins compressed due to lower sales volume, adverse product mix, and increased contract loss reserves.
• Restructuring Costs: The company incurred $9.9 million in restructuring charges in the third quarter, primarily for severance benefits in the Industrial Systems and Aircraft Controls segments to align costs with lower sales.
• Acquisitions: Significant acquisition activity occurred, including the full consolidation of LTi REEnergy GmbH, Fernau Avionics, Videolarm, Insensys, Ethox, and Aitecs. These contributed to a $170.7 million cash outflow for investing activities.
• Effective Tax Rate: The effective tax rate was significantly lower than statutory rates (3.0% for the quarter, 21.7% for nine months) due to tax audit closures, statute of limitations expirations, and foreign tax credits from repatriating cash from Japan.

Guidance, Outlook, and Risks

2009 Outlook: Management expects full-year sales to decrease 4% to approximately $1.82 billion. Operating margins are projected at 9.5% (down from 12.0% in 2008). Net earnings are expected to decrease to $87 million, with diluted EPS of $2.02 (a 27% decrease). Restructuring costs are estimated at $15 million for the full year.

2010 Outlook: Sales are forecast to increase 12% to $2.04 billion. Operating margins are expected to improve to 9.9%. Net earnings are projected to rise to $101 million, with diluted EPS of $2.36.

Risks and Contingencies:

• Economic Conditions: Continued global recession is negatively impacting industrial and commercial aerospace demand.
• Foreign Currency: Weakening of the Euro and other foreign currencies against the U.S. dollar reduced sales by $44 million in the first nine months of 2009.
• Debt Covenants: The company amended its credit facility to increase the maximum leverage ratio to 4.0 and exclude up to $17 million of restructuring charges from EBITDA calculations. Management states it is in compliance with all covenants.
• Medical Segment Losses: The Medical Devices segment reported an operating loss of $6.7 million for the nine months, driven by lower sales volume and purchase accounting adjustments.

Investor Verification Checklist

• Restructuring Execution: Verify the timeline and cash outflow for the $9.9 million severance charge and the remaining $5.1 million of estimated 2009 restructuring costs.
• Industrial Systems Recovery: Monitor the Industrial Systems segment, which saw a 28% sales drop and margin collapse to 0.8%, for signs of stabilization in plastic machinery and metal forming markets.
• Acquisition Integration: Assess the performance of recent acquisitions (LTi REEnergy, Fernau, Videolarm) to ensure they deliver the projected sales growth and margin improvements.
• Debt Capacity: Confirm continued compliance with the amended credit facility covenants, specifically the leverage ratio and interest coverage, given the increased debt load from acquisitions.
• Medical Segment Turnaround: Evaluate the path to profitability for the Medical Devices segment, which is currently operating at a loss due to mix shifts and integration costs.