Moog Inc CFA Investment Research Challenge Canisius College

Moog Inc. CFA Investment Research Challenge Canisius College Team Kevin Kuhlmann Daniel Schmitt Steve Jerz Thomas Di. Nunzio Anthony Magnano

BUSINESS • Military and Commercial Aircrafts • Satellites and Space Vehicles • Launch Vehicles • Missiles • Industrial Machinery FY 2010 Revenue Breakdown • Wind Energy • Marine Applications 6% 17% Aircraft Controls 36% Space and Defense Industrial Systems • Medical Equipment Components 26% 15% Medical Devices Source: Company Data

Defense Budget Outlook Moog 52 -week Stock Price Financial Condition Concerns $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 11 10 Ja n- v. No 10 p. Se 0 l-1 Ju -1 0 ay M M ar -1 0 Risky Growth Strategy Commercial Aircraft Outlook MOG. A Current Price: $45. 57 Source: Bloomberg Price Target: $39. 67 Source: Scenario Analysis Valuation SELL RECOMMENDATION

U. S. Defense Budget (in billions) DEFENSE BUDGET • The U. S. Defense Budget is Estimated to Remain Relatively Stagnant Over the Next Five Years • 61% of Aircraft Controls Revenue $1, 000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 2000200120022003200420052006200720082009201020112012201320142015 Estimated Comes from the Military Aircraft Controls Revenue Breakdown • Moog’s Space and Defense 11% Segment Will Also be Significantly Affected by the Defense Budget FINANCIAL CONDITION CONCERNS 40% 20% 5% 3% DEFENSE BUDGET OUTLOOK Actual 21% RISKY GROWTH STRATEGY Military Aircraft Military Aftermarket Business Jets Navigation Aids Commercial Aircrafts Commercial Aftermarket Source: Company Data; usgovernmentspending. com COMMERCIAL AIRCRAFT OUTLOOK VALUATION

DIVERSIFICATION • Majority of Moog’s Revenue Concentrated in the U. S. • Military/Government Revenue Accounted for 40% of Total Fiscal Year 2010 Revenues • Boeing and Lockheed Martin Contributed 18% of Revenue Customer Revenue • Extremely Susceptible to Changes in the Defense Budget 40% 60% Geographic Revenue Government/ Military Commercial 44% United States International 56% Source: Company Data; Wall Street Journal DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

V-22 BUDGET CUTS • The F-35 and the V-22 • Moog also Supplies Components to Light Armored Vehicles for the Marines • Almost $80 Billion Has Recently F-35 Been Cut From the Defense Budget, Including Programs to Which Moog Supplies Components Source: Company Data DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Research and Development as a Percentage of Sales 7% 6% 5% 4% 3% INCOME STATEMENT 2% 1% • High Research and Development 0% 2006 Costs as a Percentage of Sales 2007 • Inflated Net Profit Margin Led to Higher Return on Equity 2009 2010 Q 1 2011 Moog Industry Peers • Difficult to Integrate R&D Among Acquired Companies 2008 ROE Decomposition Net Profit Margin (x) Asset Turnover (x) Equity Multipler (=) Return on Equity 2007 2008 2009 3. 68% 6. 26% 4. 60% 0. 86 0. 9 0. 76 2. 26 2. 36 6. 96% 12. 73% 8. 25% 2010 Q 1 FY 2011 5. 11% 6. 03% 0. 79 0. 82 2. 45 2. 38 9. 89% 11. 77% Source: Company Data; Bloomberg DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Long-Term Debt to Goodwill (in millions) $1, 000 $800 BALANCE SHEET • Majority of Moog’s $600 $400 $200 $0 2006 Long-Term Debt is Coming Due Moog’s Acquisition Strategy $300 • Increasing Pension Liabilities $200 $250 $100 $50 $0 2007 2008 Pension Liability FINANCIAL CONDITION CONCERNS 2010 (in millions) 2006 DEFENSE BUDGET OUTLOOK 2009 Pension and Retirement Liability • Large Amount of Goodwill from Net Income 2008 Long-Term Debt Goodwill Within the Next 5 Years • High Pension Expense Relative to 2007 RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK 2009 2010 Source: Company Data VALUATION

Capital Expenditures to Depreciation and Amortization (in millions) STATEMENT OF CASH FLOWS • In 2010, Depreciation and Amortization was Greater Than $160 $140 $120 $100 $80 $60 $40 $20 $0 2006 2007 2008 Decrease in the Next 5 Years • We Estimate Capital Expenditures to Increase Faster Than Depreciation/Amortization 2010 2011 E 2012 E 2013 E 2014 E 2015 E Capital Expenditures Depreciation and Amortization Capital Expenditures • Moog Estimates Amortization to 2009 Amortization Estimates (in millions) $30 $25 $20 $15 $10 $5 $0 2011 E 2012 E 2013 E Amortization DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK 2014 E 2015 E Source: Company Data VALUATION

Segment Growth (in millions) $ 800 Non-Organic Growth • Moog’s Core Markets Have Not Been Growing Organically • Fiscal Year 2010 was Deemed “The Year of the Recovery” However, There was very Little Organic Growth • Without Acquisitions Moog’s Revenue Growth Would Have Been Far Different $ 757 $ 700 $ 663 $ 600 $ 657 $ 546 $ 500 $ 455 $ 476 $ 400 $ 325 $ 275 $ 300 $ 293 $ 200 $ 100 $ - $ 127 $ 103 $ 111 Medical Devices Industrial Systems Aircraft Controls Space and Defense 2009 2010 Without Acquisitions Source: Company Data DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Air Traffic Growth COMMERCIAL AIRCRAFT 12. 00% 10. 00% 8. 00% 6. 00% 4. 00% 2. 00% 0. 00% -2. 00% -4. 00% -6. 00% 2009 • Air Traffic Growth is Supposed to Asia Pacific Grow at an Average 4% Rate Over the Next Few Years • Airlines are Switching to Smaller Planes or Purchasing Aircraft That Can be Delivered Sooner 2010 2011 F North America 2012 F World Total Plane Orders 400 350 300 250 200 150 100 50 0 -50 -100 2004 2005 2006 2007 A 350 2008 787 2009 2010 2011 (Feb) Source: Boeing and Airbus Data DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Economic Value Added TM 2006 2007 2008 2009 2010 1 Q FY 2011 EBIT $142, 010 $173, 289 $205, 774 $149, 882 $188, 178 $45, 780 Less Taxes $38, 803 $42, 815 $48, 967 $25, 516 $41, 342 $12, 373 NOPAT $103, 207 $130, 474 $156, 807 $124, 366 $146, 836 $33, 407 WACC 9. 39% (x) Total Capital $1, 132, 295 $1, 491, 381 $1, 657, 891 $1, 881, 148 $1, 883, 681 $1, 861, 826 Opportunity $106, 323 $140, 041 $155, 676 $176, 640 $176, 791 $43, 706 Cost EVA ($3, 116) ($9, 567) $1, 131 ($52, 274) ($29, 955) ($10, 299) ROIC 9. 11% 8. 75% 9. 46% 6. 61% 7. 80% 7. 18% Economic Value Added TM • Negative EVA in Four of the Previous Five Years • Consistently Destroying Value for Moog Shareholders • We Estimate This to Continue for at Least the Next Two Years • Forward Weighted Average Cost of Capital Effective Tax Rate (Estimate) Cost of Debt (10 yr Bond YTM) Cost of Equity (CAPM) Cost of Capital of 9. 39% Forward 28. 0% 6. 48% 12. 60% WACC Upper Range 28. 0% 6. 48% 13. 21% 9. 39% 9. 75% Lower Range 28. 0% 6. 48% 11. 98% 9. 02% Source: Company Data; Student Estimates DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Present Value of Growth Opportunities PVGO: MOG. A HON Current Price (1 -Apr-11) $45. 57 $59. 26 Forward EPS (Bloomberg) $2. 77 $3. 83 Beta (Bloomberg) 1. 23 1. 32 Cost of Equity (CAPM) 12. 6% 13. 1% PVGO $23. 61 $30. 11 As Percentage of Trading Price 51. 8% 50. 8% 5 yr Growth Est. EPS Growth (Yahoo 10. 80% 15. 10% Finance) Highest PVGO as Percentage of Trading Price Lowest 5 Year Estimated Growth Rate DHR $52. 57 $2. 70 0. 87 10. 1% $25. 71 48. 9% 16. 14% Overvalued Relative to Competitors Source: Company Data; Yahoo Finance; Bloomberg DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Revenue Outlook for Free Cash Flow Model Aircraft Controls Space and Defense Industrial Systems Components Medical Devices Positive Commercial Aerospace Outlook Stagnant Defense Budget over the next few years Strong Growth through Acquisitions Negative Outlook for Aircraft and Defense Components Strong Growth through Acquisitions Negative Military Aerospace Outlook Low Estimated Growth Potential with Budget Cuts Organic Growth as the Economy Recovers Limited Growth with the Defense Budget Cuts Strong Aftermarket Sales Uncertainty in Sales from the V -22 and F-35 Increased Competition for Government Contracts Positive Outlook in Core Markets Partially Offset by Higher Demand in Industrial Markets New Product Offerings Market Underperform Market Outperform Source: Company Data; Student Estimates DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Free Cash Flow Valuation (in millions) Aircraft Controls Space and Defense Controls Industrial Systems Components Medical Devices Net Sales Cost of Goods Sold Research & Development Selling, General & Administrative Other EBIT Taxes NOPAT Depreciation & Amortization Non-cash Losses Compensation Expense Capital Expenditures Change in Net Working Capital FCFF Growth Rate Assumptions Aircraft Controls • 4. 5% for 5 years Space and Defense • 6% for 3 years; 11% for 2 years 2010 757 326 546 360 127 $2, 114 1, 502 103 313 8 $188 41 $147 91 54 5 (66) (7) $225 2011 E 797 348 606 350 140 $2, 241 1, 580 112 336 2012 E 821 369 667 350 155 $2, 362 1, 653 118 359 $213 50 $163 95 56 6 (90) (9) $221 $231 56 $176 97 59 6 (94) (15) $228 2014 E 888 430 785 364 194 $2, 661 1, 836 133 415 $251 61 $190 100 62 6 (106) (40) $212 2015 E 941 482 847 382 218 $2, 871 1, 967 144 454 $277 69 $208 104 67 6 (120) (53) $211 $307 77 $230 108 72 6 (136) (65) $214 Industrial Systems • 11% in 2011; decreasing 1% per year Components • (3%) in 2011; increasing 2% per year Capital Expenditures Growth is Estimated to Outpace Depreciation & Amortization Medical Devices • 10. 5% in 2011; increasing 0. 5% per year DEFENSE BUDGET OUTLOOK 2013 E 846 391 727 354 173 $2, 490 1, 730 124 383 FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY Source: Student Estimates; Company Data COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Weighted Average Cost of Capital Scenario Analysis Risk Base Optimistic Pessimistic Terminal Value (in millions) $2, 490 $2, 990 $2, 279 WACC 9. 39% 9. 02% 9. 75% Cost of Sales 70. 5% 70. 0% 71. 0% Intrinsic Value Base Optimistic Pessimistic $39. 67 Terminal Value $32. 69 $29. 74 WACC $33. 46 $31. 96 Cost of Sales $33. 44 $31. 94 and Cost of Sales Affect the Terminal Value of $2. 99 Billion SCENARIO ANALYSIS • The Scenario Analysis Shows How Changes in Terminal Values, Intrinsic Value • Our Free Cash Flow Price Target WACC of 9. 4% Based on the Scenario Analysis and Cost of Sales of 70. 5% Revenue Estimates is $39. 67 Intrinsic Value of $39. 67 Source: Student Estimates DEFENSE BUDGET OUTLOOK FINANCIAL CONDITION CONCERNS RISKY GROWTH STRATEGY COMMERCIAL AIRCRAFT OUTLOOK VALUATION

Current Trading Price: $45. 57 POSITIVES NEGATIVES Defense Budget Outlook Strong Aircraft Outlook Strong Management Risky Growth Strategy Financial Condition Issues Innovative Company Final Recommendation: SELL