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Investment Research Challenge.

Ticker: NYSE:MOG.A Recommendation: SELL

Price: $39.27 Price Target: $32.69

Earnings/Share

Jan. Apr. Jul. Oct. Year P/E Ratio

2008A $0.64 $0.66 $0.72 $0.73 $2.75 15.9x

2009A 0.70 0.55 0.52 0.43 2.20 12.8

2010A 0.50 0.57 0.67 0.71 2.45 14.4

2011E 0.64 0.70 0.74 0.64 2.72 14.5

Highlights Moog Names New Executives: The Board of Directors promoted three employees before the

markets opened on December 2, 2010. John Scannell, the most recent chief financial officer (CFO)

and former engineer of the company, was elected as the president and chief operating officer

(COO). His position as CFO will be replaced by the current Vice President of Finance, Donald

Fishback. Both men have served 20 plus years with The Company. In addition, Sean Gartland was

named as the new President of Moog International Group upon the retirement of Stephen Huckvale

at the beginning of the new year. The shares of Moog rose 93 cents, to $39.40 in afternoon trading.

Moog Reports Strong 4Q and FY2010 Results: Net earnings in the quarter rose to $32.3 million,

or 71 cents per share, versus $15.2 million, or 35 cents per share, in the comparable period of 2009.

Net earnings for the year were also quite strong as they rose 27% from last year to $108 million,

while earnings per share grew 19% to $2.36 per share. Sales in the fourth quarter increased 13%

year-over-year to $572 million versus $504.3 million in 4Q 2009. For the year, sales increased

14% to $2.11 billion. The strongest top line growth came from the aircraft controls and space and

defense segments with growth of 14% and 28%, respectively. Robert Brady, Chairman and CEO,

deemed fiscal year 2010 as “the year of recovery.”

Heavy Acquisition Activity for Moog in FY 2010: Moog completed four business combinations

within three of their segments during 2010 for a total purchase price of $35 million. The company

acquired The Pieper Company within their space and defense segment to expand capabilities within

the security and surveillance market. The space and defense segment also acquired Advanced

Integrated Systems, Ltd, which specializes in turret design, fire control systems and vehicle

electronics. The aircraft controls segment acquired Mid America Aviation, Inc. which enhanced

the company’s military aftermarket business. Finally, the industrial systems segment acquired Isel

Robotik USA, LLC in order to add vacuum and atmospheric robots to Moog’s water handling

precision positioning solutions for the semiconductor industry.

Moog Inc.

December 29, 2010

Aerospace & Defense

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Moog Inc

Source: Yahoo Finance Source: Yahoo Finance (unless noted *Bloomberg)

Market Profile 52 Week Price Range $29.23-$40.67

Average Daily Volume (3m) 137,502

Beta *bloomberg 1.23

Dividend Yield (Estimated) 0.00%

Shares Outstanding 45.41M

Market Capitalization $1.79B

Institutional Holdings *bloomberg 93.87%

Insider Holdings *bloomberg 2.02%

Book Value Per Share 24.70

Debt to Capital Ratio 0.40

Return on Equity (ttm) 9.89%

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21%

6%

8%

7%

24%

20%

4%10%

Figure 3. Space and Defense Revenue

Satellite Controls

Space Vehicles/NASALaunch Vehicles

Other

Defense Controls

Missile Steering

Naval Systems

Business Description Moog Incorporated was founded in 1951 by Bill Moog in East Aurora, New York. The company began

selling electric-hydraulic servovalve, which turns electrical impulses into precise, powerful movements. By

1954 the company’s product was in over 50% of US military planes and about 70% of guided missiles. Since

then, the company has been growing mainly through acquisitions reaching the $1 billion revenue mark during

2005, after the acquisition of Litton Poly-Scientific, later named Moog Components Group. Moog Inc.

designs, manufactures, and integrates precision motion and fluid controls, and control systems worldwide.

The company’s main customers are the United States government representing about 35% of 2010 sales and

Boeing amounting to 10% of sales for 2010. The government as well as Boeing are strong entities and

continue to place orders with Moog. The Company is divided into five separate operating segments: Aircraft

Controls, Space and Defense Controls, Industrial Systems, Components, and Medical Devices. The majority

of Moog’s business is done in North America with 56% of the company’s revenue coming from the United

States in fiscal year 2010. The company also gets much of its revenue from aftermarket sales by providing

maintenance and spare parts for its products. Aftermarket sales accounted for 17% of 2010 revenue and the

major aftermarket customers are the U.S. government and commercial airlines.

Aircraft Controls

Aircraft Controls are the company’s largest operating segment consisting of 36% of fiscal year 2010 total

revenue. Moog designs, manufactures and integrates primary and secondary flight controls for military and

commercial aircrafts. The company is involved in developing and production as well as providing

aftermarket support. Moog’s development programs require concentrated periods of research and

development by its engineering teams and involve design, development, testing and integration. This is one

of the reasons the company has such high research and development costs and also why it takes a long time

for the costs to translate into sales. Production programs are also generally long-term manufacturing efforts

that extend for as long as the aircraft builder receives new orders. Aftermarket sales for this segment were

32% of sales, which consists of the maintenance, repair, overhaul and parts supply for both military and

commercial aircraft. The main customers in this segment are Boeing, Airbus and the U.S. government, which

use Moog’s products in airplane production. Therefore, Moog’s revenue in this segment is tied to the overall

plane production around the world.

Space and Defense Controls

Space and Defense Controls, which accounted for 15% of total revenue in 2010, provides controls for

satellites and space vehicles, armored combat vehicles, launch vehicles, tactical and strategic missiles,

homeland security and other defense applications. This division is highly correlated to the United States

defense budget. In 2010, 35% of total sales came from U.S. government contracts, mainly in the aircraft

controls and space and defense controls segments. The defense budget is estimated to remain stagnant in the

near future which will limit the growth in these two divisions. The military and government space market is

primarily dependent on the authorized levels of funding for satellite communications. As the need for

intelligence gathering has risen in recent years, government spending on military satellites has increased

benefiting Moog’s space and defense controls business. However, as the Constellation program and other

NASA programs are being redefined, Moog’s business could face turmoil with all the uncertainty in

government spending over the next few years.

Industrial Systems

Industrial Systems, which accounted for 26% of fiscal year 2010 revenue, serves a global customer base

across a variety of markets such as plastics making machinery, simulation, power generation, test, metal

forming, and wind energy. For the plastics making machinery market, Moog designs, manufactures and

integrates systems for all axes of injection and blow molding machines using leading edge technology, both

hydraulic and electric. In the power generation market, the company designs, manufactures and integrates

complete control assemblies for fuel, steam and variable geometry control applications that include wind

turbines. For the test markets, Moog supplies controls for automotive, structural and fatigue testing. Metal

forming markets use the company’s systems to provide precise control of position, velocity, force, pressure,

acceleration and other critical parameters. For wind energy, Moog makes electric rotor blade pitch controls

and blade monitoring systems for wind turbines. The industrial systems segment was hit the hardest during

the economic recession in 2008-2009 due to lower demand for industrial automation equipment and steel and

automotive manufacturing. Moog spent over $10 million on restructuring charges for this business in 2009

and 2010 to lower costs and improve profitability in this segment.

36%

15%26%

17%

6%

Figure 1. FY2010 Revenue Breakdown by Segment

Aircraft Controls

Space and Defense

Industrial Systems

Components

Medical Devices

Source: company data

40%

3%5%

21%

20%

11%

Figure 2. Aircraft Controls Revenue

Military Aircraft

Business Jets

Navigation Aids

Military Aftermarket

Commercial Aircraft

Commercial Aftermarket




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36%

29%

14%

21%

Figure 4. Medical Devices Revenue

Administrative Sets

Pumps

Sensors and Handipieces

Other

21%

45%

19%

15%

Figure 6. Expected Defense Budget Cuts 2012-2018

Troops

Low-Priority Missions

Health Care & Retierment

Intelligence Community

Components

In fiscal year 2010, 17% of Moog’s revenue came from its components segment. This segment’s three

largest product categories are slip rings, fiber optic rotary joints and motors. Slip rings and fiber optic rotary

joints use sliding contacts and optical technology to allow unimpeded rotation while delivering power and

data through a rotating interface. Industrial markets use the Company’s motors for material handling and

electric pumps and military applications use the motors for gimbals, missiles and radar pedestals.

Medical Devices

Medical Devices accounted for 6% of revenue in fiscal year 2010. This segment operates within four

medical devices market areas: infusion therapy, enteral clinical nutrition, sensors and surgical hand pieces.

For infusion therapy, Moog’s primary products are electronic ambulatory infusion pumps along with the

necessary administration sets as well as disposable infusion pumps. The company manufactures and

distributes a complete line of portable pumps, stationary pumps and disposable sets that are used in the

delivery of enteral nutrition for patients in their own homes, hospitals and long-term care facilities. Moog

also manufactures and distributes ultrasonic and optical sensors used to detect air bubbles in infusion pump

lines and ensure accurate fluid delivery. The company’s surgical hand pieces are used to safely fragment and

aspirate tissue in common medical procedures such as cataract removal.

Industry Overview and Competitive Positioning Aerospace Industry

The global economic recession has affected the operations of the United States airline industry, however

more recently the industry has shown improvement. The United States government has provided assistance

to some airliners, while others have initiated major restructuring; both scenarios have resulted in improved

operations. The long-term outlook for the airline industry remains positive, according to Standard & Poor’s,

which will increase demand for additional aircrafts. The Center for Asia Pacific Aviation estimates that

globally air traffic will increase at an average of 5.3% over the next three years, and 2.5% in North America.

Boeing estimates that by 2028 the global commercial airplane market at $3.2 trillion. During this same time

period, Boeing predicts demand for 29,000 new commercial and freight aircrafts. The demand for these

airplanes will increase sales for airframes, engine components, and aerospace turbine engine repairs. Before

the 2008 recession, the airline industry benefited from major replacement and refurbishment cycles, which

was mainly driven for more fuel efficient and fleet commonality aircrafts. As the industry rebounds from the

recession similar trends should continue. Major providers of aircraft components and repair services, like

Moog, should benefit from the long-term positive outlook for the airline industry. In terms of firm size,

Moog is quite smaller than its competitors. However, its ability to produce high-quality products has allowed

the company to win numerous contracts and has separated itself from its competitors. Revenue from Moog’s

aircraft segment is highly dependent on demand for new airplane orders. AS Figure 8 shows demand for new

aircraft deliveries is expected to increase from 2010-2012 after decreasing from 2009-2010. This positive

indication should provide steady revenue growth in Moog’s aircraft controls segment.

Defense Industry

Moog has benefitted in the past from an increasing trend in the United States Defense Budget. However,

future projections are estimated to decrease the defense budget by 14% over the next seven years with

significant spending cuts aimed to decrease the deficit. Between fiscal years 2012-2018 the Congressional

Budget Office predicts the U.S. government will spend $5.45 trillion on defense. Additionally, any

withdrawals in foreign affairs such as ones from Iraq and Afganhanistan could reduce the budget to $4.75

trillion over those same seven years, a gradual reduction of $788 billion. The reduction would consist of

cutting the total size of the military by 275,000 troops or 19%, in addition to cutting low priority missions,

military compensation, health care, retirement costs, and reforming the intelligence community. Moog’s

space and defense segment is highly correlated to the defense budget and spending on NASA programs,

which is expected to remain stagnant over the next several years. Therefore, we believe Moog will only

experience modest growth in this segment over the next few years.

Industrial Systems

In 2010, Moog’s industrial systems segment benefitted from acquisitions in the wind energy market. Wind

energy acquisitions provided for $86 million of the $91 million total increase in this segment in 2010. Moog

designs and manufactures electric rotor blade pitch controls and blade monitoring systems for wind turbines.

The Wind Energy Market is predicted to grow at 20% per annum through 2030. This is very high for an

industry which manufactures heavy equipment. To date, revenues from these wind energy acquisitions have

been below management’s expectations. Although these acquisitions have underperformed they are

-5.00%

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2009 2010F 2011F 2012F

Figure 5. Air Traffic Growth

Asia Pacific North America World

Source: company Centre for

Asia Pacific Aviation


Source: thewillandthewallet.org


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benificial to Moog. The wind energy market deliver high performance solutions that tend to thrive in harsh

environments, which provide further diversification of Moog’s revenue streams. In addition, this segment is

highly exposed to economic changes, especially in the automotive and aerospace markets though its plastics

and simulation businesses.

The plastic making machinery market has historically been a major driver of revenue for the industrial

systems segment. The plastic machinery industry consists of businesses engaged in plastic compression,

extrusion and injection molding machinery and equipment. The packing industry is the largest end users of

the plastic machinery industry creating products such as plastic bags, bottles, and wraps. Other major end

users include the automotive, aerospace, and medical equipment industries. The plastic making machinery

has suffered a decline in demand for machinery to make plastic products. In particular demand from the

packaging industry is very weak. With declines in most of the manufacturing sectors, caused by the global

economic recession in 2008, there is less demand for packaging materials. In addition to the wind energy

and plastic making machinery market, the industrial systems segment also serves markets such as

simulation, power generation, test, metal forming and heavy industries.

Components

The components segment is the most profitable segment by operating margin percentage. Moog is one of

the largest manufactures in the world of slip-rings and fiber optic joints. The segment serves many of the

same end markets as Moog’s other segments. Moog has the ability to alter its offerings to meet low

volume, highly customized jobs, or the high volume work typical of large OEM orders. This makes Moog

attractive to both large prime contractors and more specialized manufactures. This segment has benefitted

on numerous military programs including de-icing systems for the Blackhawk and V22.

Medical Devices

The total outlook for the medical device manufactures is positive in the long run driven by the

demographics of an aging population, increasing obesity, and more active lifestyles. The current

challenging operating environment has greatly reduced hospitals medical devices purchases. Healthcare

reform is also a concern for delaying certain spending plans. Slow economic growth has put pressure on

government reimbursement plans such as Medicare and Medicaid in the United States. Additionally, a

rising concern for a potential backlash against interest rate hikes imposed on the hospital industry during

recent years. Moog’s medical devices segment was established to focus on the company’s expertise in fluid

and motion control to the infusion pump market. The Medical Devices segment is a collection of acquired

companies which have failed to adequately leverage Moog’s core capabilities. In addition, market

pressures, product recalls and market realignment efforts have weighted heavily on operations. Moog has

experienced many problems in its medical devices segment with higher than expected start-up costs and

lower than expected revenue. Although the company expects a significant amount of future growth to come

from this segment, there is still a great deal of uncertainty, which is a cause for concern.

Investment Summary Economic Value AddedTM

Moog has had negative economic value added in four of the past five years, as shown in Exhibit 12.

Although the company has been profitable, it has not earned a high enough return to satisfy the risk taken on

by the company’s providers of capital. Economic value added in 2009 and 2010 were significantly lower

than previous years due to the economic recession decreasing demand for Moog’s products. If this continues

in the future, we believe the company will underperform the overall market. Although we believe Moog will

see higher earnings growth over the next few years driven by revenue growth, cost saving initiatives and

increased sales volume, we predict that return on invested capital will still not reach the company’s weighted

average cost of capital.

Present Value of Growth Opportunities Analysis

Exhibit 11 shows present value of growth opportunities calculations for Moog and five of its competitors.

Moog currently has a present value of growth opportunities of $17.86, which represents 45.5% of the current

trading price, which is one of the lowest relative to its competitors. However, this is expected because the

company also has one of the lowest five year growth estimates as reported by Yahoo Finance. When

comparing Moog’s PVGO to Danaher’s PVGO, they are relatively similar at approximately 45% of the

current trading price. However, Danaher has a much higher five year growth estimate of 15.7% compared

with Moog’s five year growth estimate of only 11.6%. This could be an indicator that Moog’s stock price is

undervalued relative to Danaher.


$0

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$2,000,000

$3,000,000

2010 2009 2008 2007 2006

Figure 7. Revenue(in thousands)

Moog Revenue


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56%

7%

7%

6%

5%19%

Figure 9. FY2010 Revenue Breakdown by Country

United States

China

Germany

United Kingdom

Japan

Other

456 483 498 497 524 566

441 375481 460

503567

2007 2008 2009 2010E 2011E 2012E

Figure 8. Aircraft Deliveries

Airbus Boeing

Price to Earnings Analysis

Moog’s current price to earnings ratio is 16.03 and its current forward price to earnings ratio is 12.38, as

shown in Exhibit 13. In 2006 and 2007, before the recession, the company had a PE ratio of nearly 20 based

on its future growth potential. However, after the recession, with all the uncertainty in the aerospace and

defense industry and the decrease in company earnings, the PE ratio dropped significantly to 12.21 at the end

of 2008 and 13.43 at the end at 2009. It has since recovered to 16.03, which is closer to historical levels and

more representative of Moog’s future growth potential. The company has the lowest price to earnings ratio

compared with its competitors, as shown in Exhibit 5. We believe that this is justifiable because the company

also has one of the lowest growth potential relative to its competitors.

Market Multiple Analysis

Exhibit 5 compares market multiples between Moog and its competitors. Moog’s current price to sales ratio

is 0.85, which is the lowest relative to the comparison companies. We believe that this is justified because

the company also has one of the lower net profit margins of only 5.11%. Therefore, an investor must pay a

lower price per dollar of sales for Moog relative to the comparative companies, which is justifiable because

Moog is the least successful at turning those sales into earnings.

Moog’s current price to book ratio is 1.61, which is also one of the lowest relative to its competitors. The

only company with a lower price to book ratio is CareFusion, who has a different level of risk. Moog’s price

to book ratio was expected to be lower because of the company’s lower return on equity relative to the

comparison companies, which we believe is justified.

Moog’s current enterprise value to EBITDA ratio is 8.52, which is also one of the lowest relative to its

competitors. This was expected because of the relatively low operating margin. However, when comparing

Moog’s EV/EBITDA multiple to Parker Hannifin’s, Parker Hannifin has a higher multiple of 9.87. However,

it has a lower operating margin and a higher level of risk, measured by its beta. Therefore, this could indicate

that Moog’s stock price is undervalued relative to Parker Hannifin.

Forward Looking Performance

Our current outlook for Moog is underperformance relative to the overall market. We believe that the

company’s aerospace market will see modest growth in commercial aircraft sales led by an increase in

demand for new planes and increased air traffic over the next few years. Figure 8 shows Airbus and Boeing

projected deliveries over the next few years, which are expected to increase after being down during the

recession. However, this will be somewhat offset by the lack of demand for military aircraft products. With

the defense budget remaining stagnant in the near future, we see very limited growth in Moog’s military

aircraft revenue and space and defense revenue. The company’s other segments should see modest growth as

the economy recovers and Moog continues its acquisition growth strategy. A main driver of the company’s

future growth will come from aftermarket sales, which were down during the recession. Moog will also

benefit from growth in the wind energy market as well as the medical devices market as the company

continues to expand these divisions. Although Moog has a lot of growth potential, we believe that with the

uncertainty in the defense budget and growth coming mainly from acquisitions, the company will

underperform the market over the next few years.

Recommendation Summary

Our recommendation for Moog is a SELL based on our forward outlook and the intrinsic value calculation of

$32.69 from the free cash flow to the firm model. With 56% of the company’s revenue in fiscal year 2010

coming from the United States as show in Figure 9, Moog does not have very good geographic

diversification. Therefore, the company is over exposed to problems that may occur within the United States.

Furthermore, 35% of fiscal year 2010 revenue came from government contracts leading Moog to be

extremely susceptible to changes in the defense budget. We also have concern for the company’s acquisition

growth strategy that has led to a very high level of goodwill and intangible assets, which currently represents

approximately one third of Moog’s total assets. The company must be very careful in deciding which

companies to acquire, as its success is very determinant on whether or not acquisitions can be successfully

integrated and benefit Moog. We also have concern for the company’s core business growth, which has been

relatively unsuccessful in recent years. In 2010, aircraft controls revenue increased by $93 million.

However, acquisitions contributed to $101 million in growth. Therefore, Moog’s aircraft controls segment

had negative organic growth. With these growth limitations and our negative industry outlook, we believe

that Moog will underperform the market and we recommend a SELL on shares of the company stock.

Although there are many positives about Moog, we believe the current share price is too high based on the

company’s future growth potential, leading to a negative recommendation.

Source: company Centre for

Asia Pacific Aviation



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$0

$1,000,000

$2,000,000

$3,000,000

2010 2009 2008 2007 2006

Figure 10. Total Assets(in thousands)

Moog Total Assets

Figure 1: Share Price Reaction Analysis

Source: Bloomberg

Earnings Releases Reaction Analysis

During the past two years Moog Inc. has beat analyst estimates several times. Some of the surprises were as

much as 18% whereas the most recent quarterly earnings were just a 1% increase from consensus estimates.

That is showing the maturity growth we see in Moog and makes it easier for analysts to predict the

company’s sales and earnings. Many of the company’s earnings have caused the share price to increase

because the company beat estimates. The company’s share price has been steadily increasing within a

channel since the lows of early 2009.

Acquisition Announcements Reaction Analysis

Moog’s major stock price movements over the past few quarters have all been acquisitions to aid in the

company’s growth. The largest of the purchases was about $90 million with the smallest being around $10

million. Most of the purchases were made using cash. The main acquisitions we mentioned on the graph

were GE Aviation System’s flight control actuation division for $90 million, Pieper GmbH for an undisclosed

amount, VideoAlarm for $45 million, Insensys Ltd. for $11 million, and Ethox International for $15.2

million. The division purchased from GE provides primary and secondary flight control systems, a business

at Moog’s core. The purchase brings about $100 million in annual sales and increases Moog’s market share

of that aerospace segment. Pieper GmbH brought Moog European presence in the security and surveillance

markets. Moog has been expanding more into that market with the acquisition of VideoAlarm which together

should add about $30 million to the company’s sales at current levels. The security and surveillance market

is growing at Moog as the company looks to offer more systems for fighter jets just as Lockheed Martin does.

If Moog can offer more and more products that go into a single project, the company may become the sole

provider of technology for some companies increasing sales and using bundling to increase market share.

Moog bought a controlling stake in Insensys, a company that is the world leader in wind turbine load meters.

The company’s products control pitch for blades as well as deliver real time data for blade and turbine

performance and conditions in the environment in which the wind turbine operates. The company adds green

energy control systems to Moog’s broad array of established control systems. Ethox International is Buffalo,

NY based company that produces a wide range of medical products as well as a contract based provider of

disposables for many industry leading companies. The company brought Moog $18 million in sales for 2009

and increases Moog’s medical industry presence after the initial undertaking in 2006 with the acquisition of

Curlin Medical. The three companies acquired in early 2009 were just before Moog’s share price decreased

substantially. The decrease was mainly due to the general market tanking because of the credit crisis as well

as recession. Moog’s acquisitions have led to substantial goodwill, which is driving up the company’s total

assets as shown in figure 10.



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Valuation Free Cash Flow to the Firm Revenue Forecast Assumptions The FCFF model in Exhibit 6 provides an intrinsic value of $32.69 as shown in Exhibit 8, which is our target

price for Moog forward looking. This target price is based on multiple assumptions to provide growth

estimates. We are predicting aircraft controls revenue to have a 5 year average growth rate of 4.5%, with

lower growth rates in 2011 and 2012 due to uncertainty with F-35 and V-22 Osprey revenue. Revenue from

F-35 was down $23 million in 2010 and the V-22 Osprey is in the third year of a five year production

program with uncertainty to whether or not it will continue after five years. Also, the department of defense

budget request for the V-22 for 2011 is 6.5% lower than it was in 2010. Therefore, most of Moog’s growth

in this segment will come from commercial aircraft revenue. We are predicting space and defense revenue to

increase by 6% for three years and then 11% for two years. We project lower growth for this segment in

2011 and 2012 due to the defense budget remaining stagnant as the government tries to decrease spending.

Industrial systems growth is projected at 11% in 2011, slowly decreasing to 8% in 2015. This higher growth

rate will come mostly through acquisitions and stronger sales as the economy recovers. We are projecting

components revenue to decrease by 3% in 2011, and then increase by 2% per year for four years to 2015.

This segment will be struggling the most due a decline to sales in the aerospace and defense industry as

military aircraft and vehicle programs are winding down. However, as the economy recovers, we expect an

increase in demand for slip rings for wind turbines, which will drive components growth higher. We project

that medical devices will see the most growth as Moog continues its growth through acquisitions strategy and

aims to advance that division of the company. We predict growth of 10.5% in 2011, increasing by 0.5% a

year until 2015. A lot of the segment revenue growth we are projecting will come through acquisitions and

strong aftermarket sales. Moog’s growth strategy is through acquisitions and we believe that will continue in

the foreseeable future. Aftermarket sales will also be a major growth driver because of how much it was hurt

during the recession. During the recession, Moog’s customers used their own spare parts and required less

maintenance, which was the reason aftermarket sales were hurt. However, as the economy picks up and more

spare parts and maintenance is needed, the company’s aftermarket sales should see very successful growth.

Free Cash Flow to the Firm Cost Forecast Assumptions

Cost of goods sold are projected to be 70.5% of sales in 2011, declining by 0.5% a year as Moog benefits

from increases in sales volume. Research and development costs are expected to remain constant at 5% of

sales going forward, which is consistent with historical R&D costs. Selling, general & administrative

expense is expected to be 15% in 2011, increasing by 0.2% per year until 2015. SG&A expense has been

lower in recent years with restructuring costs taking place. However, we expect them to rise slowly back

closer to historical levels as the company continues expansion. Moog’s tax rate is estimated to remain

constant at 28%. Depreciation and amortization is expected to increase only by a modest 4% over the next

five years because of the significant decrease in capital expenditures during 2009 and 2010 due to the

economic recession. We predict capital expenditures to go back up to normal levels at approximately 4% of

sales in 2011, increasing slowly to 5% of sales by 2015. The changes in capital expenditures and

depreciation and amortization have caused free cash flow to the firm to grow at a much lower rate compared

with Moog’s NOPAT and EBIT growth rates. This is because the company is paying much lower capital

expenditures than booking depreciation and amortization, caused by the significant decrease in capital

expenditures during the recession. However, this will not continue forward looking, which is why we predict

capital expenditures to increase much faster than depreciation and amortization. For changes in net working

capital, we predict that all the items will stay constant at historical percentage of sales.

Scenario Analysis

The target price of $32.69 from the FCFF intrinsic value calculation is much lower than the current trading

price of $39.27, leading us to a sell recommendation. To see how certain assumptions affect the intrinsic

value, we ran a scenario analysis with optimistic and pessimistic assumptions as shown in Exhibit 14. One of

the major drivers of the intrinsic value is the terminal value used. The base terminal value used in the FCFF

model was $2,490 million, calculated using an EBITDA multiple of 6, as shown in Exhibit 7. The current

EBITDA multiple is 8.5 and we predict it to go down to 6 as Moog will have less growth potential at the end

of the 5 year FCFF forecast. Using a more optimistic terminal value of $2,990 million based on a NOPAT

multiple of 13, we calculated an intrinsic value of $39.67, which is much closer to the current trading price.

Using a pessimistic terminal value of $2,279 million, we calculated an intrinsic value of $29.74. Although

the range in terminal values affects the intrinsic value, we do not believe it warrants a change in our sell

recommendation. Other optimistic and pessimistic scenarios used were changes in the weighted average cost

of capital as well as changes in the cost of goods sold used. However, these only led to minimal changes in

the final intrinsic value per share calculations.

0

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2010 2009 2008 2007 2006

Figure 11. Five Year Revenue(in thousands)

Aircraft ControlsSpace and DefenseIndustrial SystemsComponentsMedical Devices

0

500

1000

1500

2010 2009 2008

Figure 12. Backlog(in millions)

Aircraft Controls

Space and Defense

Industrial Systems

Components

Medical Devices

Program 2011 Request % Change

F-35 $11.4B 2.1%

V-22 $2.8B -6.5%

Table 1. Budget Requests



Source: DoD Budget Request


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December 29, 2010

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$0

$50,000

$100,000

$150,000

2010 2009 2008 2007 2006

Figure 13. Net Income(in thousands)

Moog Net Income

Financial Analysis Income Statement Analysis

Fiscal 2010 has been dubbed a year of recovery for Moog, as it posted positive sales growth for the first time

since 2008. Sales were up 14% to $2.1 billion in 2010, while net earnings were up 27% to $108.1 million.

However, when taking a closer look at Moog’s sales growth, most of it has come in the form of acquisitions

instead of organically. Moog’s cost of sales in both 2010 and 2009 was 71% of sales. This is up slightly from

2008, where cost of sales was 68% of sales. Because of the nature of Moog’s industry, it is necessary to have

a heavy investment in research and development. For 2010, Moog spent approximately $102.6 million on

R&D, an increase of $2.6 million over the previous year. However, R&D as a percentage of sales was

actually down to 4.9% for 2010 compared to 5.4% for 2009. Moog has spent at least $100 million on research

and development each of the last three years. Selling, general & administrative expenses for 2010 were

$313.4 million, which was also down as a percentage of sales compared to last year. SG&A expenses have

decreased as a percentage of sales each of the last two years. This is due primarily to recent acquisitions that

have lower SG&A cost structures than most of its other product lines.

For the past two years, Moog has initiated restructuring plans in the form of workforce reductions. Expenses

for 2010 and 2009 were $5 million and $15 million, respectively. These restructuring costs are expected to be

completed by 2011. Table 2 breaks down the restructuring charges by segment. The industrial systems

segment had the most amount of restructuring charges with over $10 million dollars of charges in 2009 and

2010. These restructuring charges were very successful, increasing the industrial systems operating margin

from 6.8% in 2009 to 8.8% in 2010, as shown in Exhibit 9.

Moog’s effective tax rate for 2010 was just under 28%. This is higher than the effective tax rate in 2009,

when it was 23%. This lower tax rate in 2008 was a result of a $5 million dollar foreign tax credit. We are

projecting the forward tax rate to remain constant at approximately 28%.

Balance Sheet Analysis

Moog has a substantial amount of goodwill on its balance sheet as a result of its acquisitions. Currently, it has

about $705 million in goodwill, which is about 26% of its total assets. Per accounting standards, goodwill is

tested for impairment on a yearly basis. Moog has not taken any goodwill impairments in the last three years.

Moog has inventories of $460.8 million at the end of fiscal 2010, which is down from $484.2 million in 2009.

Intangible assets of $205.8 million are comprised mainly of customer-related, program-related, and

technology-related intangibles.

In addition to the $757 million in long-term debt on its balance sheet, Moog also has $84 million in operating

leases and $458 million in purchase commitments. $570 million of Moog’s long-term debt is coming due

within the next five years. Currently, Moog has long-term pension and retirement obligations of $281

million. This consists of both the US and non-US plans. The Pension is currently underfunded by $252

million, as shown in Table 3. Starting January 1, 2008, Moog froze enrollment into its pension plan. Pension

expense for 2010 was $12 million. Moog did elect to make cash contributions of $40 million to address the

underfunded status of the pension fund.

Statement of Cash Flow’s Analysis

Net cash provided by operating activities increased $77 million in 2010 to $195 million on increased earnings

and non-cash expenses as well as a smaller increase in working capital requirements. The slow growth in

working capital requirements was partially offset by uses of cash for higher pension contributions. Figure 14

shows cash flows from operations over the past five years, which have been steadily increasing.

Net cash used in investing activities includes $30 million for four acquisitions, two of which were in Space

and Defense Controls and one each in Aircraft Controls and Industrial Systems. Capital expenditures for

2010 were $66 million. This is considerably lower than 2009 and 2008 where it was $82 million and $92

million, respectively. Meanwhile, depreciation and amortization totaled $81 million for 2010. This

discrepancy is slightly disconcerting, but the lower capital expenditures are a result of the poor economic

conditions in 2008 and 2009 and are expected to increase in 2011.

Net cash used in financing activities includes pay downs on its U.S. credit facility and a note issued for the

LTi REEnergy acquisition. In previous years Moog has engaged in repurchasing shares, but this number was

much lower in 2010.

$0

$50,000

$100,000

$150,000

$200,000

$250,000

2010 2009 2008 2007 2006

Figure 14. CF from Operations(in thousands)

Moog CFO

Segment 2010 2009

Aircraft Controls 2423 4940

Space and Defense 1106 59

Industrial Systems 717 9695

Components 512 84

Medical Devices 367 289

Total Charges 5125 15067

Table 2. Restructuring Charges

(in thousands)

Fair Value of Assets 409

Projected Obligations 661

Underfunded Status ($252)

Table 3. Pensions

(in millions)






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December 29, 2010

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Other Items Relative to Valuation Class A Shares vs. Class B Shares

Moog has two different types of common stock available: Class A shares and Class B shares. Class A shares

are the ones available to the public and are held mainly by large financial institutions. Class B shares are not

available to the public and are held by current and past Moog employees as well as the Moog family. There

are six basic differences between the two classes of common stock. The first main difference is that Class A

shares have limited voting rights with only one-tenth the voting power of Class B shares. The second

difference is that Class A shares are subject to certain limitations with only the power to elect 25% of the

board of directors. The third difference is dividends. Cash dividends may be paid on Class A without paying

a cash dividend on Class B, but no cash dividend may be paid on Class B unless at least an equal cash

dividend is paid on Class A. The fourth difference is that Class B shares are convertible at any time into

Class A shares on a one-for-one basis at the option of the shareholder; however, Class A shares are not

convertible. The fifth difference is that Class A shares trade on a regular basis, and while Class B shares also

trade daily, they trade with much lower volume. The final difference is that Class B was the original Moog

Valve common stock and became Class B in 1980 when Class A was created. The major differences for

potential investors are the differences in voting power and dividends. The Class A shares, which are

available to the public, has much less voting power and it is not guaranteed that management will act in the

best interest of the shareholders. The other major difference, dividends, is not as important because Moog

has not paid dividends since 1988 and does not plan to in the foreseeable future.

Acquisition Growth Strategy

Moog current growth strategy is through acquisitions. This is not a new policy for the company, as it has

grown previously in this way. Moog completed four acquisitions in FY2010 one each in both the Aircraft

Controls and Industrial Systems segments, and two in its Space and Defense Controls segments. Most of

Moog’s sales growth in FY2010 was a result of recent acquisitions. Net Sales in FY2010 increased $265

million however; this increase was by and large a result of $200 million in incremental sales from recent

acquisitions mainly in the Aircraft Controls and Industrial Systems segments. Net sales for the Aircraft

Controls segment increased $93 million mainly due to the acquisition of the high lift actuation business

located in Wolverhampton, U.K. at the end of 2009, which contributed $94 million. The Industrial Systems

segment experienced an increase in sales of $91 million, of which $82 million is attributed to acquisitions,

mostly from the wind energy market. The Space and Defense Controls and Medical Devices segments also

experienced incremental sales from acquisitions. The two acquisitions in the Space and Defense Controls

segments in FY2010 lead to an increase of $11 million, of the total $51 million increase in sales. In addition,

sales in the Medical Devices segment increased $16 million, of which $4 million was credited to acquisitions.

Moog made adjustments to goodwill for all recent acquisitions, except LTi REEnergy GmbH.

Contractual Obligations

Moog recorded total contractual obligation of $1,464 million in its FY2010, as shown in Table 5. Moog has

$763 million in long term debt. In addition, it has interest on long term debt totaling $159 million which

includes payments on its fixed rate debt, mainly its senior subordinated notes. Moog recorded operating

leases of $84 million which expire at various times from 2011-2034. Purchase obligation totaled $458

million. The Company also has an underfunded pension, in which it has made payments to in the past, as

shown in Table 6. Moog plans to make a payment of $39 million to in 2011.

Investment Risks Macro Economic Risk

Lockheed Martin and Boeing total about 18% of revenues for 2010 making them substantial customers for

Moog. Demand for certain industrial systems are dependent on other company’s capital investments, growth

of sales volume, and technology upgrades. The commercial airline industry is very cyclical and subject to

fuel price volatility, union dispute, and general economic activity. A reduction in air traffic could reduce

orders for new planes which the company supplies control systems to, lowing the sales Moog receives. A

reduction in air traffic can also reduce the timeliness of payments from customers due to lower revenue on

their end. Boeing and Airbus, two of moog’s larger customers are beginning to lose market share overseas as

Chinese companies such as Comac. With about $480 billion expected to be spent by China within the next

20 years, if Boeing losses some of those revenues it could hurt Moog’s top line as its major customer loses

market share and revenues. Boeing’s outlook going forward is looking strong as many analysts

recommended buys or outperforms with a consensus target price of over a 30% increase from current trading

levels. We don’t foresee Boeing’s future having a negative impact on Moog’s contracts and revenues as air

traffic is supposed to increase by about 6% per year and average capital spending for airline companies,

although down from pre recession levels now, are expected to increase in the coming years.



Acquisitions % ∆ Stock

Adv. Intergrated Sys 4.52%

Pieper GmbH 8.19%

Mid Amer. Aviation 4.87%

Isel Robootik USA 5.76%

Table 4. Acquisitions

Long-Term Debt 763

Interest on LT Debt 159

Operating Leases 84

Purchase Obligations 458

Contractual Obligations $1,464

Table 5. Contractual Obligations

(in millions)

2010 Expense 34

2009 Expense 24

2008 Expense 25

Table 6. Pension Expense

(in millions)

Senior Debt 384

6.25% Subordinated Notes 187

7.25% Subordinated Notes 192

Total Long-Term Debt $763

Table 7. Long-Term Debt

(in millions)




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December 29, 2010

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0

200

400

600

800

1000

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Figure 15. U.S. Defense Budget(in billions)

Estimated Actual

This graph represents total air travel broken down by passenger and freight. As you can see the industry took

a major hit during the recession but has since bounced back with the freight segment leading the way.

Growth is starting to slow as the month over month increases become less substantial and growth returns

back to a more normal phase. The increases were so high in late 2009 early 2010 just because of how low

they were in the previous months.

Reliance on Government Revenue

There is a substantial risk that the government may not have fully funded contracts or they may be terminated

all together depending on new budgets decreasing demand for the company’s products. As government

defense contracts come under pressure, there could be significant declines in the near future causing a decline

in orders for Moog’s products. Moog currently has a lot of the company’s resources dedicated to the

government sector. A decline in government contracts awarded to Moog will make it difficult and costly to

redeploy those resources to other divisions.

Figure 15 shows the estimated defense budget and how it has been increasing over the past few years. The

defense budget trend is expected to increase from current levels due to a ramp up in Afghanistan operations.

This increased spending is good for Moog’s customers and for Moog’s revenue because many outdated

planes and other equipment will be replaced with unmanned or more sophisticated aircraft of which Moog

supplies many of the hardware components too. After the slight increase in 2011, the defense budget is

estimated to remain relatively stagnant for a few years as the government will begin to bring down the deficit.

This could lead to a decline in Moog’s revenue as well as an increase in competition to win government

contracts, which represented 35% of the company’s revenue in 2010. The government also has the right to

terminate contracts at any time, which could significantly hurt Moog’s revenue.

Highly Competitive Industry

In order for Moog to succeed in the future, the company will have to spend significant funds on research and

development to remain a head of the company’s competitors. Historically, the company’s technology has

been developed through internal research and through acquisitions. As demand for new products or certain

features arise in the future, Moog may have to come up with new products not currently offered in order to

compete costing the company substantial amounts of cash. Also competitors may have greater resources

such as more capital and other resources. Competitors may also be able to use economies of scale for certain

products, lowering the price and taking market share away from Moog. Moog’s warranty accruals for 2010

totaled over $14 million versus $7 million in 2008. Even though the dollar amount is insignificant, the

company’s reputation may take a hit as its products require more maintenance or have product defects.

Interest Rate and Currency Risk

Currently Moog has 43% of long term debt subject to rate fluctuation through adjustable rate loans. An

increase in rates may lead to higher interest rate charges for Moog. Changes in the availability of credit for

the company will cause the cost of doing business to increase and will affect Moog’s ability to pursue future

acquisitions. The company has significant manufacturing and sales operations throughout the world.

Changes in currency exchange rates can also negatively impact the company’s earnings; an example is in

2009 the company lost $49 million due to exchange rates between the USD and other currencies however in

2010 Moog gained $11 million. The company currently has over a million dollars of derivates designed to

hedge against interest rate and currency risk as shown in Table 8.

Growth through Acquisitions

The company may not be able to successfully identify suitable companies or implement the acquisitions

properly. Joining two companies does not always work out for the benefit of the parent company. Also sales

to the company being bought may suffer because of the acquisition. Over the past 50 years the average return

for the acquiring firms has been just over 20% if the shares were held for 500 days whereas the market over

those same 500 days has yielded over 30%. Moog's growth strategy is contingent on finding suitable

acquisitions and implementing them properly. Many studies show either a negative or neutral performance

for the majority of acquiring company's so Moog's success is unusual. This makes us believe that Moog will

eventually acquire a company that does not work out well. Either Moog will be faced with additional,

unnecessary debt or will create additional negative economic value for shareholders. The loss of cash will

also create a loss for future opportunities if the company needs to get back on stable ground and then has to

pass on better opportunities. Moog's growth strategy of acquisitions is much more risky than organic growth.

The company also continues to buy companies in its core business which we believe to be declining. Without

several acquisitions the past few years, 3 of the 5 segments Moog operates in have actually declined.

Source: usgovernmentspending.com

Foreign Currency Forwards 590

Interest Rate Swaps 444

Total Derivatives $1,034

Table 8. Derivatives Hedging

(in thousands)



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December 29, 2010

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Exhibit 1: Income Statement with Common Size in thousands

($ thousands) FY2010 FY2009 FY2008 FY2007 FY2006

Aircraft Controls 756,550 35.8% 663,463 35.9% 672,930 35.4% 586,558 37.6% 527,250 40.4%

Space and Defense Controls 325,474 15.4% 274,501 14.8% 253,266 13.3% 184,737 11.9% 147,961 11.3%

Industrial Systems 545,672 25.8% 454,629 24.6% 532,098 28.0% 435,673 28.0% 380,711 29.1%

Components 359,992 17.0% 345,509 18.7% 340,941 17.9% 283,282 18.2% 237,578 18.2%

Medical Devices 126,564 6.0% 110,816 6.0% 103,431 5.4% 67,849 4.4% 12,994 1.0%

Net Sales $2,114,252 100.0% $1,848,918 100.0% $1,902,666 100.0% $1,558,099 100.0% $1,306,494 100.0%

Cost of Sales 1,501,641 71.0% 1,311,618 70.9% 1,293,452 68.0% 1,028,852 66.0% 880,744 67.4%

Gross Profit $612,611 29.0% $537,300 29.1% $609,214 32.0% $529,247 34.0% $425,750 32.6%

Research and Development 102,600 4.9% 100,022 5.4% 109,599 5.8% 102,603 6.6% 68,886 5.3%

Selling, General & Administrative 313,408 14.8% 281,173 15.2% 294,936 15.5% 252,173 16.2% 213,657 16.4%

Restructuring 5,125 0.2% 15,067 0.8%

Interest 38,742 1.8% 39,321 2.1% 37,739 2.0% 29,538 1.9% 21,861 1.7%

Equity Earnings in LTi and Other 3,300 0.2% (8,844) 0.5% (1,095) 0.1% 1,182 0.1% 1,197 0.1%

Earnings Before Income Taxes $149,436 7.1% $110,561 6.0% $168,035 8.8% $143,751 9.2% $120,149 9.2%

Income Taxes 41,342 27.7% 25,516 23.1% 48,967 29.1% 42,815 29.8% 38,803 32.3%

Net Earnings $108,094 5.1% $85,045 4.6% $119,068 6.3% $100,936 6.5% $81,346 6.2%

Net Earnings Per Share

Basic $2.38 $2.00 $2.79 $2.38 $2.01

Diluted $2.36 $1.98 $2.75 $2.34 $1.97

Avg Common Shares Outstanding

Basic 45,363,738 42,598,321 42,604,268 42,429,711 40,558,717

Diluted 45,709,020 42,906,495 43,256,888 43,149,481 41,247,689

Source: Company Documents


Student Research

December 29, 2010

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Exhibit 2: Balance Sheet with Common Size in thousands


Cash and Cash Equivalents 112,421 4.1% 81,493 3.1% 86,814 3.9% 83,856 4.2% 57,821 3.6%

Receivables 619,861 22.9% 547,571 20.8% 517,361 23.2% 431,978 21.5% 333,492 20.7%

Inventories 460,857 17.0% 484,261 18.4% 408,295 18.3% 359,250 17.9% 282,720 17.6%

Deferred Income Taxes 75,367 2.8% 73,673 2.8% 53,102 2.4% 46,789 2.3% 39,950 2.5%

Prepaid Expenses and Other CA 23,773 0.9% 23,400 0.9% 24,813 1.1% 14,978 0.7% 14,118 0.9%

Total Current Assets $1,292,279 47.6% $1,210,398 45.9% $1,090,385 49.0% $936,851 46.7% $728,101 45.3%

Property, Plant and Equipment 486,944 18.0% 481,726 18.3% 428,120 19.2% 386,813 19.3% 310,011 19.3%

Goodwill 704,816 26.0% 698,459 26.5% 560,735 25.2% 538,433 26.8% 450,971 28.1%

Intangible Assets 205,874 7.6% 220,311 8.4% 74,755 3.4% 81,916 4.1% 49,922 3.1%

Other Assets 22,221 0.8% 23,423 0.9% 73,252 3.3% 62,166 3.1% 68,649 4.3%

Total Assets $2,712,134 100.0% $2,634,317 100.0% $2,227,247 100.0% $2,006,179 100.0% $1,607,654 100.0%

Notes Payable 1,991 0.1% 16,971 0.6% 7,579 0.3% 3,354 0.2% 17,119 1.1%

Current Portion of LT Debt 5,405 0.2% 1,541 0.1% 1,487 0.1% 2,537 0.1% 1,982 0.1%

Accounts Payable 154,321 5.7% 125,257 4.8% 128,723 5.8% 113,942 5.7% 99,677 6.2%

Accrued Salaries 103,628 3.8% 91,302 3.5% 107,076 4.8% 97,034 4.8% 86,623 5.4%

Customer Advances 74,703 2.8% 66,811 2.5% 41,507 1.9% 34,224 1.7% 32,148 2.0%

Contract Loss Reserves 40,810 1.5% 50,190 1.9% 20,536 0.9% 12,362 0.6% 15,089 0.9%

Other Accrued Liabilities 98,616 3.6% 94,189 3.6% 70,185 3.2% 56,775 2.8% 54,968 3.4%

Total Current Liabilities $479,474 17.7% $446,261 16.9% $377,093 16.9% $320,228 16.0% $307,606 19.1%

Long-term Debt 757,320 27.9% 814,574 30.9% 661,994 29.7% 611,632 30.5% 367,457 22.9%

Pension/Retirement Obligations 281,830 10.4% 225,747 8.6% 108,072 4.9% 113,354 5.7% 83,587 5.2%

Deferred Income Taxes 69,541 2.6% 76,910 2.9% 80,754 3.6% 80,419 4.0% 83,299 5.2%

Other Long-term Liabilities 3,013 0.1% 5,792 0.2% 4,924 0.2% 3,334 0.2% 2,849 0.2%

Total Liabilities $1,591,178 58.7% $1,569,284 59.6% $1,232,837 55.4% $1,128,967 56.3% $844,798 52.5%

Common Stock 51,280 1.9% 51,280 1.9% 48,605 2.2% 48,605 2.4% 48,605 3.0%

Additional Paid-in Capital 389,376 14.4% 381,099 14.5% 311,159 14.0% 301,778 15.0% 292,565 18.2%

Retained Earnings 880,733 32.5% 772,639 29.3% 688,585 30.9% 570,063 28.4% 469,127 29.2%

Treasury Shares (47,724) -1.8% (47,733) -1.8% (40,607) -1.8% (39,873) -2.0% (40,354) -2.5%

Stock Compensation Trust (13,381) -0.5% (11,426) -0.4% (22,179) -1.0% (15,928) -0.8% (14,652) -0.9%

Accumulated Other Loss (139,328) -5.1% (80,826) -3.1% 8,847 0.4% 12,567 0.6% 7,565 0.5%

Total Shareholders' Equity $1,120,956 41.3% $1,065,033 40.4% $994,410 44.6% $877,212 43.7% $762,856 47.5%

Total Liabilities and Equity $2,712,134 100.0% $2,634,317 100.0% $2,227,247 100.0% $2,006,179 100.0% $1,607,654 100.0%

* Financial Position as of 2-Oct-10 3-Oct-09 27-Sep-08 29-Sep-07 30-Sep-06



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Exhibit 3: Statement of Cash Flows with Common Size in thousands



Net Earnings 108,094 55.4% 85,045 72.1% 119,068 110.4% 100,936 402.4% 81,346

Depreciation 61,112 31.3% 54,762 46.5% 48,065 44.5% 40,226 160.4% 36,239

Amortization 30,104 15.4% 21,622 18.3% 15,311 14.2% 11,867 47.3% 10,838

Provision for Non-cash Losses 54,204 27.8% 43,166 36.6% 36,563 33.9% 20,755 82.7% 30,230

Deferred Income Taxes 11,314 5.8% 13,330 11.3% (5,698) 5.3% (545) 2.2% 15,715

Equity-based Compensation Expense 5,445 2.8% 5,682 4.8% 4,551 4.2% 3,299 13.2% 3,482

Equity Earnings and Other 1,633 0.8% (11,927) 10.1% 1,507 1.4% (116) 0.5% 100

Receivables (70,076) 35.9% 25,576 21.7% (79,302) 73.5% (72,848) 290.4% (26,082)

Inventories 10,220 5.2% 984 0.8% (62,439) 57.9% (64,737) 258.1% (64,468)

Other Assets 1,074 0.6% (5,043) 4.3% (3,190) 3.0% (943) 3.8% (4,355)

Accounts Payable and Accruals (7,295) 3.7% (79,236) 67.2% 16,653 15.4% (1,112) 4.4% 18,753

Other Liabilities and Customer Advances (10,573) 5.4% (36,069) 30.6% 16,803 15.6% (11,698) 46.6% (24,923)

Net Cash Provided by Operating Activities $195,256 100.0% $117,892 100.0% $107,892 100.0% $25,084 100.0% $76,875

Net Acquisitions (29,843) 30.4% (261,193) 80.4% (22,383) 15.0% (136,291) 59.0% (90,138)

Capital Expenditures (65,949) 67.2% (81,688) 25.2% (91,761) 61.6% (96,960) 42.0% (83,555)

Investments and Other (2,285) 2.3% 18,138 5.6% (34,736) 23.3% 2,371 1.0% 4,022

Net Cash Used by Investing Activities ($98,077) 100.0% ($324,743) 100.0% ($148,880) 100.0% ($230,880) 100.0% ($169,671)

Repayments of Notes Payable (15,830) 24.0% (16,996) 8.5% (709) 1.7% (15,707) 6.9% 4,076

Proceeds from Revolving Lines of Credit 543,319 824.1% 1,173,249 584.2% 450,705 1061.2% 666,209 293.9% 298,100

Payments from Revolving Lines of Credit (591,505) 897.2% (1,003,659) 499.7% (599,705) 1412.0% (400,209) 176.6% (262,000)

Payments on Long-term Debt (2,795) 4.2% (2,331) 1.2% (1,933) 4.6% (28,690) 12.7% (15,226)

Net Senior Subordinated Notes (19,981) 9.9% 196,393 462.4%

Proceeds from Sale of Common Stock 74,717 37.2% 84,497

Net Change in Treasury Stock 442 0.7% (6,963) 3.5% 3,172 7.5% 1,567 0.7% 3,488

Stock Employee Compensation Trust 436 0.7% 2,761 1.4% (6,588) 15.5% 2,371 1.0% 787

Tax Benefits from Equity Based Payments 6 0.0% 43 0.0% 1,137 2.7% 1,130 0.5% 1,243

Net Cash Provided by Financing Activities ($65,927) 100.0% $200,840 100.0% $42,472 100.0% $226,671 100.0% $114,965

Exchange Rate Effect (324) 690 1,474 5,160 1,902

Net Change in Cash and Equivalents $30,928 ($5,321) $2,958 $26,035 $24,071

Cash and Equivalents, Beginning of Year $81,493 $86,814 $83,856 $57,821 $33,750

Cash and Equivalents, End of Year $112,421 $81,493 $86,814 $83,856 $57,821


Student Research

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Exhibit 4. Moog Ratios

Liquidity FY2010 FY2009 FY2008 FY2007 FY2006

Current Ratio 2.70 2.71 2.89 2.93 2.37

Quick Ratio 1.73 1.63 1.81 1.80 1.45

Average Collection Period 107.0 108.1 99.2 101.2 93.2

Days in Inventory 112.0 134.8 115.2 127.4 117.2

Days Payables 37.5 34.9 36.3 40.4 41.3

Cash Conversion Cycle 181.5 208.0 178.1 188.2 169.0

Activity FY2010 FY2009 FY2008 FY2007 FY2006

Accounts Receivable Turnover 3.41 3.38 3.68 3.61 3.92

Inventory Turnover 3.26 2.71 3.17 2.86 3.12

Fixed Asset Turnover 4.37 4.06 4.67 4.47 4.56

Total Asset Turnover 0.78 0.70 0.85 0.78 0.81

Leverage FY2010 FY2009 FY2008 FY2007 FY2006

Debt Ratio 0.59 0.60 0.55 0.56 0.53

LT Debt to Capital Ratio 0.40 0.43 0.40 0.41 0.33

Debt to Equity Ratio 0.68 0.76 0.67 0.70 0.48

Financial Leverage 2.42 2.47 2.24 2.29 2.11

Times Interest Earned 4.86 3.81 5.45 5.87 6.50

CF Adequacy 2.96 1.44 1.18 0.26 0.92

Profitability FY2010 FY2009 FY2008 FY2007 FY2006

Revenue Growth 14.35% -2.82% 22.11% 19.26% 24.27%

Gross Profit Margin 28.98% 29.06% 32.02% 33.97% 32.59%

Operating Profit Margin 8.90% 8.11% 10.82% 11.12% 10.87%

Net Profit Margin 5.11% 4.60% 6.26% 6.48% 6.23%

Return on Assets 3.99% 3.23% 5.35% 5.03% 5.06%

Return on Equity 9.64% 7.99% 11.97% 11.51% 10.66%

ROE Decomposition FY2010 FY2009 FY2008 FY2007 FY2006

Net Profit Margin 5.11% 4.60% 6.26% 6.48% 6.23%

Total Asset Turnover 0.78 0.70 0.85 0.78 0.81

Financial Leverage 2.42 2.47 2.24 2.29 2.11

Return on Equity 9.64% 7.99% 11.97% 11.51% 10.66%



Student Research

December 29, 2010

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Exhibit 5. Comparative Ratios

Liquidity MOG.A HON GR PH DHR CFN

Current Ratio 2.70 1.25 2.74 1.63 1.89 3.33

Quick Ratio 1.73 0.88 1.18 0.80 1.32 2.50

Average Collection Period 107.01 73.24 57.93 55.10 62.19 47.56

Days in Inventory 112.02 57.41 164.77 56.43 66.00 87.14

Days Payables 37.51 58.30 46.13 35.78 66.77 31.23

Cash Conversion Cycle 181.52 72.35 176.57 75.75 61.42 103.47

Activity MOG.A HON GR PH DHR CFN

Accounts Receivable Turnover 3.41 4.98 6.23 6.62 5.87 7.67

Inventory Turnover 3.26 6.36 2.22 6.47 5.53 4.19

Fixed Asset Turnover 4.37 6.32 4.70 5.59 9.93 7.68

Total Asset Turnover 0.78 0.86 0.76 1.01 0.57 0.49

Leverage MOG.A HON GR PH DHR CFN

Debt Ratio 0.59 0.75 0.66 0.55 0.41 0.41

LT Debt to Capital Ratio 0.40 0.41 0.40 0.24 0.20 0.23

Debt to Equity Ratio 0.68 0.71 0.69 0.32 0.25 0.29

Financial Leverage 2.42 4.02 2.95 2.22 1.68 1.69

Times Interest Earned 4.86 7.49 7.68 8.29 12.58 4.10

CF Adequacy 2.96 6.48 3.88 9.43 9.55 5.54

Profitability MOG.A HON GR PH DHR CFN

Revenue Growth 14.35% -15.45% -5.33% -3.06% -11.91% -12.71%

Gross Profit Margin 28.98% 24.99% 29.34% 21.48% 47.21% 47.49%

Operating Profit Margin 8.90% 10.94% 13.90% 7.66% 13.79% 12.01%

Net Profit Margin 5.11% 6.97% 8.93% 5.54% 10.30% 4.94%

Return on Assets 3.99% 5.98% 7.36% 5.59% 5.88% 2.44%

Return on Equity 9.64% 24.05% 20.13% 12.42% 9.90% 4.12%

ROE Decomposition MOG.A HON GR PH DHR CFN

Net Profit Margin 5.11% 6.97% 8.93% 5.54% 10.30% 4.94%

Total Asset Turnover 0.78 0.86 0.76 1.01 0.57 0.49

Financial Leverage 2.42 4.02 2.95 2.22 1.68 1.69

Return on Equity 9.64% 24.05% 20.13% 12.42% 9.90% 4.12%

Market Multiples MOG.A HON GR PH DHR CFN

Price Per Share $39.27 $53.30 $87.94 $86.15 $47.16 $25.65

Market Capitalization 1.79B 41.58B 11.03B 13.90B 30.84B 5.72B

Beta (5yr Monthly HPRs vs. S&P500) 1.23 1.36 1.26 1.42 0.85 0.86

Price-to-Earnings (ttm) 16.03 20.15 21.02 19.35 20.10 38.00

Price-to-Sales (Yahoo) 0.85 1.29 1.62 1.31 2.43 1.48

Price-to-Book (Yahoo) 1.61 4.04 3.33 2.83 2.34 1.21

EV/EBITDA (Yahoo) 8.52 11.08 9.93 9.87 12.80 8.54

PEG Ratio (Bloomberg) 1.41 1.37 2.34 1.78 1.36 1.80

Source: Company Documents, Yahoo Finance, Bloomberg


Student Research

December 29, 2010

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Exhibit 6. Five Year Free Cash Flow to the Firm Forecast

(in millions) 2010 2011E 2012E 2013E 2014E 2015E

Aircraft Controls 757 797 821 846 888 941

Space and Defense Controls 326 348 369 391 430 482

Industrial Systems 546 606 667 727 785 847

Components 360 350 350 354 364 382

Medical Devices 127 140 155 173 194 218

Net Sales $2,114 $2,241 $2,362 $2,490 $2,661 $2,871

Cost of Goods Sold 1,502 1,580 1,653 1,730 1,836 1,967

Research & Development 103 112 118 124 133 144

Selling, General & Administrative 313 336 359 383 415 454

Other 8

EBIT $188 $213 $231 $251 $277 $307

Taxes 41 50 56 61 69 77

NOPAT $147 $163 $176 $190 $208 $230

Depreciation & Amortization 91 95 97 100 104 108

Non-cash Losses 54 56 59 62 67 72

Compensation Expense 5 6 6 6 6 6

Capital Expenditures (66) (90) (94) (106) (120) (136)

Change in Net Working Capital (7) (9) (15) (40) (53) (65)

FCFF $225 $221 $228 $212 $211 $214

Net Working Capital Worksheet (in millions) 2010 2011E 2012E 2013E 2014E 2015E

Accounts Receivable 620 650 661 697 745 804

Inventory 461 493 520 548 585 632

Deferred Income Taxes 75 67 71 75 80 86

Other Current Assets 24 22 24 25 27 29

Accounts Payable 154 157 165 174 186 201

Accruals 202 247 260 274 293 316

Customer Advances 75 67 71 75 80 86

Contract Loss Revenues 41 45 47 50 53 57

Increase in NWC ($7) ($9) ($15) ($40) ($53) ($65) Source: Company Documents, Student Estimates


Student Research

December 29, 2010

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Exhibit 7. Terminal Value Calculations

5 Year Terminal Value (in millions)

NOPAT Multiple 230*13 $2,990

EBITDA Multiple 415*6 $2,490

Last FCFF/WACC 214/9.39% $2,279

Source: Student Estimates

Exhibit 8. Intrinsic Value per Share Estimate

Five Year FCFF Valuation

FY11 FY12 FY13 FY14 FY15

Free Cash Flow to the Firm $221 $228 $212 $211 $214

Terminal Value $2,490

Cash Flow's $221 $228 $212 $211 $2,704

PV Entity (@9.39%) $2,429

Less BV Debt $763

Less Underfunded Pension $252

Surplus Cash (nonoperating) $80

PV Equity $1,494

Diluted Shares Outstanding (M) 45.7

Intrinsic Value Per Share $32.69

Source: Company Documents, Student Estimates


Student Research

December 29, 2010

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Exhibit 9. Sales Breakdown

($ millions) FY2010 FY2009 FY2008 Military Aircraft 458 9.3% 419 6.1% 395 Commercial Aircraft 262 22.4% 214 -21.0% 271 Navigation Aids 37 23.3% 30 328.6% 7

Aircraft Controls Revenue $757 14.2% $663 -1.5% $673

Operating Profit 76 46.2% 52 -5.5% 55 Operating Margin 10.0% 28.0% 7.8% -4.0% 8.2%

Backlog 567 11.6% 508 36.6% 372

($ millions) FY2010 FY2009 FY2008

Space and Defense Revenue $325 18.2% $275 8.7% $253

Operating Profit 36 -10.0% 40 37.9% 29 Operating Margin 11.1% -23.8% 14.5% 26.9% 11.5%

Backlog 213 5.4% 202 32.0% 153


Industrial Systems Revenue $546 20.0% $455 -14.5% $532


Backlog 233 18.9% 196 21.7% 161


Components Revenue $360 4.0% $346 1.5% $341


Backlog 153 -16.4% 183 9.6% 167


Medical Devices Revenue $127 14.4% $111 7.8% $103

Operating Profit (4) 42.9% (7) 177.8% 9 Operating Margin -3.1% -50.1% -6.3% 172.2% 8.7%

Backlog 15 36.4% 11 37.5% 8


Total Revenue $2,115 14.3% $1,850 -2.7% $1,902


Backlog 1181 7.4% 1100 27.8% 861 Source: Company Documents


Student Research

December 29, 2010

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Exhibit 10. Weighted Average Cost of Capital

Weighted Average Cost of Capital

Forward Upper Range Lower Range

Book Value of Debt (thousands) $762,725 $762,725 $762,725

Book Value of Equity (thousands) $1,120,956 $1,120,956 $1,120,956

Total Capital (thousands) $1,883,681 $1,883,681 $1,883,681

Weight in Debt 0.40 0.40 0.40

Weight in Equity 0.60 0.60 0.60

Assumptions:

Beta (Bloomberg) 1.228 1.228 1.228

Risk Free Rate (10yr T-bill) 3.35% 3.35% 3.35%

Expected Market Return (Bloomberg) 10.88% 11.38% 10.38%

Effective Tax Rate (Estimate) 28.0% 28.0% 28.0%

Cost of Debt (10yr Bond YTM) 6.48% 6.48% 6.48%

Cost of Equity (CAPM) 12.60% 13.21% 11.98%

WACC 9.39% 9.75% 9.02%

Source: Company Documents, Yahoo Finance, Bloomberg, Student Estimates

Exhibit 11. Present Value of Growth Opportunities

Present Value of Growth Opportunities

PVGO: MOG.A HON GR PH DHR CFN

Current Price (29-Dec-10) $39.27 $53.30 $87.94 $86.15 $47.16 $25.65

Forward EPS (Bloomberg) $2.70 $2.38 $4.77 $5.89 $2.56 $1.46

Assumptions:

Risk Free Rate (10yr T-bill) 3.35%

Market Risk Premium (Bloomberg) 7.53%

Beta (Bloomberg) 1.23 1.36 1.26 1.42 0.85 0.86

Cost of Equity (CAPM) 12.6% 13.6% 12.8% 14.0% 9.8% 9.8%

PVGO $17.86 $35.79 $50.78 $44.21 $20.90 $10.79

As Percentage of Trading Price 45.5% 67.1% 57.7% 51.3% 44.3% 42.1%

5yr Growth Est (Yahoo Finance) 11.60% 15.32% 12.00% 11.45% 15.70% 6.05%

Source: Company Documents, Yahoo Finance, Bloomberg


Student Research

December 29, 2010

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Exhibit 12. Economic Value Added

Economic Value AddedTM

EVA = NOPAT - (WACC x Cost of Capital)

ROIC = NOPAT/Total Capital

NOPAT = EBIT - Taxes * in thousands

2010 2009 2008 2007 2006

EBIT $188,178 $149,882 $205,774 $173,289 $142,010

Less Taxes $41,342 $25,516 $48,967 $42,815 $38,803

NOPAT $146,836 $124,366 $156,807 $130,474 $103,207

WACC 9.39% 9.39% 9.39% 9.39% 9.39%

(x) Total Capital $1,883,681 $1,881,148 $1,657,891 $1,491,381 $1,132,295

Opportunity Cost $176,791 $176,640 $155,676 $140,041 $106,323

EVA ($29,955) ($52,274) $1,131 ($9,567) ($3,116)

ROIC 7.80% 6.61% 9.46% 8.75% 9.11%

Source: Company Documents, Student Estimates

Exhibit 13. Price to Earnings Analysis

Price-to-Earnings Analysis

29-Dec-10 30-Dec-09 30-Dec-08 28-Dec-07 28-Dec-06

Closing Price $39.27 $29.54 $33.57 $46.62 $38.50

EPS (ttm) $2.45 $2.20 $2.75 $2.34 $1.97

Price-to-Earnings Ratio (ttm) 16.03 13.43 12.21 19.92 19.54

Forward EPS Estimate *Yahoo $2.72

Forward P/E (1yr) *Yahoo 12.38

Source: Company Documents, Yahoo Finance, Student Calculations


Student Research

December 29, 2010

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Exhibit 14. Scenario Analysis

Scenario Analysis

Risk Base Optimistic Pessimistic

Terminal Value (in millions) $2,490 $2,990 $2,279

Weighted Average Cost of Capital 9.39% 9.02% 9.75%

2011 Cost of Sales 70.5% 70.0% 71.0%

Intrinsic Value Base IV Optimistic Pessimistic

Terminal Value $32.69 $39.67 $29.74

Market Risk Premium $33.46 $31.96

Cost of Sales $33.44 $31.94

Source: Student Calculations

Disclosures:

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