MOG-A

Business Context and Reporting Period

Company: MOOG INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 2009
Business Overview: Moog 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 3% in the quarter and 2% in the six-month period compared to the prior year. The decline was driven primarily by the global economic recession impacting the Industrial Systems segment and unfavorable foreign currency translation (approx. $29 million impact in the first half).
• Margin Compression: Gross margins declined due to a product mix shift away from higher-margin industrial controls and increased contract loss reserves (approx. $5 million higher in the first half of 2009).
• Acquisition Activity: Significant cash outflows for acquisitions ($149.5 million in the first six months) including Fernau Avionics, Videolarm, Insensys, Ethox International, Aitecs Medical, and Berkeley Process Control. These acquisitions contributed to sales growth in Medical Devices and Space/Defense segments.
• Profitability: Net earnings decreased 17% in the quarter and 4% in the six-month period. Diluted EPS decreased 17% and 3%, respectively.
• Debt Levels: Long-term debt increased significantly due to borrowings used to fund recent acquisitions. Net debt to capitalization rose to 42% from 37%.

Guidance, Outlook, and Risks

2009 Outlook

• Sales: Expected to decrease 3% to approximately $1.84 billion. Anticipated declines in Industrial Systems ($63M), Aircraft Controls ($20M), and Components ($11M), offset by increases in Medical Devices ($21M) and Space/Defense ($17M).
• Margins: Operating margins before restructuring charges expected to be 10.2% (down from 12.0% in 2008).
• Earnings: Net earnings expected to decrease to $84 million; diluted EPS expected to decrease 29% to $1.95 (range +/- $0.20).
• Restructuring: Estimated costs of $15 million related to staff reductions in international industrial operations.

Risks and Contingencies

• Economic Conditions: Continued global recession impacting industrial capital goods and commercial aerospace demand.
• Foreign Currency: Ongoing weakness of foreign currencies (Euro, Yen, Pound) against the U.S. dollar negatively impacting reported sales.
• Contract Risks: Dependence on government contracts subject to funding changes and termination; risk of cost overruns on fixed-price contracts.
• Acquisition Integration: Risks associated with integrating multiple recent acquisitions and potential purchase accounting adjustments.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and sales growth from recent acquisitions (Fernau, Videolarm, Ethox, Aitecs) against the $149 million investment.
• Industrial Segment Exposure: Monitor the severity of the downturn in the Industrial Systems segment, which saw a 20% sales drop in the quarter, and the effectiveness of cost-cutting measures.
• Debt Covenants: Confirm continued compliance with credit facility covenants, specifically the maximum leverage ratio (3.5x) and minimum interest coverage ratio (3.0x), given increased debt levels.
• Contract Loss Reserves: Review the adequacy of contract loss reserves, particularly in the Aircraft Controls segment, which contributed to margin compression.
• Foreign Currency Hedging: Assess the effectiveness of derivative instruments in mitigating the impact of foreign currency fluctuations on earnings.