MOG-A

Business Context and Reporting Period

Company: MOOG INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended March 26, 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

(All figures in thousands, except per share data)

Note: Total Debt calculated as Notes Payable ($885) + Current Installments of Long-Term Debt ($17,304) + Senior Debt ($124,395) + Senior Subordinated Notes ($150,000).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 9% in the second quarter and 10% in the first six months compared to the prior year periods, driven by growth across all segments.
• Profitability: Net earnings increased 12% for the quarter and 15% for the six-month period. Diluted EPS increased 14% and 16%, respectively.
• Contract Loss Reserves: The company recorded $3.5 million in additions to contract loss reserves in Q2 2005 (vs. $1.8 million in Q2 2004), primarily related to the A400M and A380 aircraft programs. This impacted the Aircraft Controls margin.
• 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: Two small acquisitions were completed in Q2 2005 (industrial systems engineering and commercial aircraft repair) for a net cost of $4.6 million.

Guidance, Outlook, and Risks

2005 Full-Year Outlook

• Net Sales: Expected to increase 6% to 8% to a range of $995 million to $1,015 million.
• Operating Margin: Expected to increase to approximately 12.2%.
• Net Earnings: Expected to increase 10% to 14% to a range of $63.2 million to $65.4 million.
• Diluted EPS: Expected to increase 10% to 14% to a range of $1.60 to $1.66.
• Interest Expense: Expected to rise to $13 million due to the new senior subordinated notes.

Management Commentary

Management highlighted strong sales volume but noted that gross margin improvements were offset by contract loss reserves on aircraft programs. R&D expenses increased due to development activities on the Boeing 787 Dreamliner. The company anticipates pension costs to increase by approximately $5.0 million in 2005 due to updated mortality assumptions and lower discount rates.

Risks and Contingencies

• 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.
• Tax Legislation: The impact of the American Job Creation Act of 2004 on the repatriation of foreign earnings is currently being evaluated and remains uncertain.
• Market Risks: Dependence on government contracts (nearly half of sales), potential program terminations, and foreign currency fluctuations.

Investor Verification Checklist

• Contract Loss Reserves: Verify the specific impact of the $1.6 million A400M and $0.8 million A380 reserves on future profitability.
• Debt Covenants: Confirm continued compliance with the U.S. credit facility covenants, specifically the minimum interest coverage ratio (3.0) and maximum leverage ratio (3.5).
• Pension Funding: Monitor the anticipated $9.06 million total pension contribution for 2005 and the impact of the new mortality table on future expenses.
• Stock Split: Note the 3-for-2 stock split effective April 1, 2005, which has been restated in all per-share data.
• Acquisition Integration: Assess the performance of the two businesses acquired in Q2 2005.