MOG-A

Business Context and Reporting Period

Company: MOOG INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended December 30, 2006 (13 weeks).
Business Overview: Moog is a global designer and manufacturer 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 Controls, Components, and Medical Devices.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15% year-over-year, driven by growth in all segments. Foreign currency translation contributed approximately $7 million to the sales increase due to a stronger Euro and British Pound.
• Profitability: Net earnings rose 43% to $24.1 million. Diluted EPS increased 30% despite a 9.5% increase in average shares outstanding due to a 2006 equity offering.
• Expenses: Research and development (R&D) expenses surged 63% to $22.2 million, primarily due to development activities for the Boeing 787 Dreamliner. Selling, general, and administrative (SG&A) expenses as a percentage of sales decreased to 15.9% from 17.3%.
• Contract Loss Reserves: Additions to contract loss reserves were $7 million, compared to $5 million in the prior year, largely associated with aircraft development contracts.
• Acquisitions: The company formed a new "Medical Devices" segment following the acquisition of Curlin Medical and McKinley Medical, contributing $11.0 million in sales.

Guidance, Outlook, and Risks

2007 Outlook

• Sales: Expected to increase 9% to 11% to a range of $1.43 billion to $1.45 billion.
• Margins: Operating margins expected to be 13.0% (up from 12.4% in 2006).
• Earnings: Net earnings projected between $98 million and $101 million; Diluted EPS expected between $2.26 and $2.34 (15% to 19% increase).
• Segment Specifics:
  • Aircraft Controls: Sales expected to rise 4%; margins expected to decline to 11.9% due to high R&D on the 787.
  • Space and Defense: Sales expected to rise 18% driven by defense programs (LAV-25, Future Combat Systems).
  • Medical Devices: First full year of operations; sales expected to be $40 million with a 20.0% operating margin.

Risks and Contingencies

• Government Contracts: Approximately 40% of sales are related to military/government programs, which face risks of termination, delay, or funding changes.
• Customer Concentration: Significant dependence on major customers like Boeing and Lockheed Martin.
• Development Risks: High R&D costs for new programs (e.g., Boeing 787) may not yield expected returns or may face cost overruns.
• Accounting Changes: The company is evaluating the impact of new FASB pronouncements (FIN 48, SFAS 157, SFAS 158) on its financial statements.

Investor Verification Checklist

• Boeing 787 Progress: Verify the timeline for the transition from development to production for the 787 program to assess the sustainability of high R&D expenses.
• Contract Loss Reserves: Monitor the $7 million in contract loss reserves, specifically regarding the Airbus A400M and business jet programs, for potential future increases.
• Medical Segment Integration: Assess the performance of the newly formed Medical Devices segment against the $40 million sales and 20% margin targets.
• Debt Covenants: Confirm continued compliance with the amended $600 million credit facility covenants (minimum net worth, interest coverage, and leverage ratios).
• Foreign Currency Exposure: Evaluate the impact of currency fluctuations on the Industrial Controls segment, where ~39% of the recent sales increase was attributed to currency translation.