Interview with Moog Inc. CEO Robert Brady

Nov.24.08 | About: Moog Inc. (MOG.A)

The Wall Street Transcript recently interviewed Robert Brady, Chairman and Chief Executive Officer of Moog Inc. (NYSE:MOG.A). Key excerpts follow:

TWST: We'd like to begin with a brief historical sketch of the company and a picture of the things you're doing now.

Mr. Brady: Our company was founded in 1951 around the invention of a device called the Servovalve. Bill Moog was a research engineer at Cornell Laboratory, which was then part of Cornell University. He was offered the opportunity to take a leave of absence and attempt to start a business, which he did and he succeeded. The Servovalve became the heart of very high performance hydraulic motion control systems. What our company has done over the intervening 57 years is to elaborate our capabilities in that area and today we are one of the world's leading designers and suppliers of high performance motion control systems. These are the kinds of controls that are used to position flight surfaces on military and commercial aircraft, to steer the rockets that launch satellites and then position the satellites in orbit, and to control various types of high performance industrial machinery. In addition, three years ago, the company established an initiative to enter the medical devices market and we are now a designer and supplier of infusion pumps for both intravenous applications and enteral feeding.

Today, our company just finished a fiscal year with sales of about $1.9 billion, earnings of $119 million. We employ 9,400 people worldwide, 3,800 of whom are citizens of countries outside the US and resident outside the US in an international network of companies in 26 countries. So over the last 57 years we've built on the foundation of the technology that Bill Moog developed and we now are a specialist on a global basis in very high performance motion control systems, both hydraulic and electromechanical.

TWST: I believe you made an important acquisition earlier this year.

Mr. Brady: Yes. We've made a couple of acquisitions this year. One of them, QuickSet International, turned out to be very fortunate in terms of timing. We got interested in this company because of their position as a supplier of pan and tilt mechanisms. These are gimbaling mechanisms used to position surveillance cameras and infrared imagers. The company is well established with the Border Patrol, various parts of the Department of Defense, and all of the major defense contractors that are working in the homeland security business. Our interest in QuickSet was in advancing our participation in the market for homeland security. When we acquired the company, our projection for our fiscal 2008 was that the company would generate revenues of about $32 million and very shortly after we acquired the company, we started receiving orders for a pan and tilt mechanism used on the MRAP, mine-resistant ambush-protected vehicle, that is now in operation in Iraq. This was a big hurry up order and it turns out over the course of the year we shipped something in the neighborhood of 9,000 systems that generated $33 million in sales and drove the total sales for QuickSet over $50 million. So, as I say, every once in a while you make an acquisition and the timing is fortunate and the business turns out to be more productive than you anticipated.

TWST: How will the change of administration affect you?

Mr. Brady: I'm not sure that as far as the defense business is concerned that there'll be any discernible effect in the near term. What's going to happen in 2009 was put in place a year or two ago in the defense budgets and so any change in administration is able, through the Congress, to have an effect a couple of years out. I think it's difficult to predict what the effect will be. It may be that an Obama administration would be in a bigger hurry to exit Iraq; on the other hand he seems to be also more interested in scaling up operations in Afghanistan.

As far as our business is concerned, we believe that the platforms, the programs, the systems that are important in our business — F-18, V-22, the F-35 — and the programs on which we participate in our Defense Controls product line, are well supported in the Congress and that's the important thing and so we're not anticipating any near-term impact on the defense business. I think one could worry about the potential impact on our industrial business if we actually developed a global industrial recession and I think that also may be pretty much independent of which administration comes into office.

In discussions with our European customers about the potential impact of a new President in the US, I hasten to point out that US Presidents don't enjoy the position of emperor. They aren't able to make all of the changes that they promised instantly, if at all, and that everything they do gets run through the Congress and many constituencies have to be addressed before any major change occurs.

TWST: I understand that 2008 was a very good year, but you have scaled down your estimates for 2009.

Mr. Brady: It is our practice to provide guidance for a fiscal year when we're reporting the third quarter of the prior year. So 90 days ago we projected likely results for 2009: sales of about $2.1 billion and earnings in a range — the midpoint of which would produce in the neighborhood of $3.14 a share. Since that time, there have been dramatic changes in the credit situation both in the US and in Europe and also there have been dramatic changes in foreign exchange rates. In terms of sales, our company is a play on a strong euro and a strong yen and when those currencies are strong, that inflates our revenue. The forecast of $2.1 billion was based on a euro, for instance, of $1.52. In the last 90 days, we've redone that forecast with a euro of $1.35 and that alone reduced our sales forecast by about $50 million.

In addition, we've moderated our forecast another $40 million or $50 million in anticipation of somewhat slower revenue in commercial aircraft aftermarket and in some of our industrial businesses. So our current guidance is sales of around $2 billion and earnings that will generate earnings per share of about $3.08, which is still a 12% increase over this year. So we've moderated our forecast somewhat, but we're still projecting increased sales and double-digit increases in earnings per share in the face of what many people believe is going to be a challenging economic circumstance.

TWST: What are the main items on your agenda as you look out over the next two to three years?

Mr. Brady: Our emphasis over the next couple of years will be, first, execution on the programs that are coming through development, particularly in the aircraft business. We are nearing the end of a period of unprecedented program and product development. The F-35 in the aircraft business has just begun flight test; we've completed our design of all of our equipment on the 787, which we're all hoping will fly toward the end of this year. We are watching the production ramp up of some business jets that we've worked on for a number of years; the Challenger 300, the Hawker Beechcraft 4000; and we're beginning work on the A350. So for us there will be a major emphasis on getting new programs in our aircraft business, in Space and Defense and in our Components Group into production and performing to customer schedule and achieving the cost targets that we've established. So that will be an important priority. Secondly, we believe that given the credit situation, many companies will struggle with a lack of available credit. This could be a real advantage to us because although we certainly didn't foresee the credit crunch that was going to develop, the fact is that a few months ago we enhanced our credit availability so that we currently have over $500 million of available credit as well as positive cash flow. So we're optimistic that there'll be numerous acquisition opportunities and we could be in a fortunate position in that we're able to fund the acquisitions that we select. So we'll be active on the acquisition trail as well.

In terms of dealing with a slowdown in certain parts of the economy, we are hopeful that we'll be able to deal with that relatively easily. We have the fortunate circumstance that although we're in a variety of different markets with different products, the fundamental technology is very much the same and therefore we're able to move talent and resources from one part of our business to another. That's worked for us in the past through slowdowns in commercial aircraft and the space business and in the industrial market and we're hopeful that will work out for us again.