10-Q 1 a10-qdocumentxfy18xq3.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
___________________________________________
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________

Commission File Number: 1-05129
_________________________________________

moogimagea01.jpg INC.
(Exact name of registrant as specified in its charter)
__________________________________________
New York State
16-0757636
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
East Aurora, New York
14052-0018
(Address of principal executive offices)
(Zip Code)
        (716) 652-2000
 (Telephone number including area code)
__________________________________________________________
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý     Accelerated filer ¨     Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller reporting company ¨    Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨    No ý

The number of shares outstanding of each class of common stock as of July 24, 2018 was:
Class A common stock, $1.00 par value, 32,466,689 shares
Class B common stock, $1.00 par value, 3,322,519 shares






Moog Inc.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2


PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Moog Inc.
Consolidated Condensed Statements of Earnings
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands, except share and per share data)
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net sales
 
$
692,018

 
$
626,183

 
$
2,008,602

 
$
1,848,256

Cost of sales
 
492,234

 
443,769

 
1,424,731

 
1,308,256

Inventory write-down - restructuring
 
2,398

 

 
9,727

 

Gross profit
 
197,386

 
182,414

 
574,144

 
540,000

Research and development
 
31,040

 
36,314

 
97,545

 
107,828

Selling, general and administrative
 
103,053

 
89,144

 
299,002

 
261,271

Interest
 
8,850

 
8,654

 
26,585

 
25,789

Restructuring
 
(1,549
)
 

 
22,509

 

Other
 
1,037

 
29

 
45

 
12,148

Earnings before income taxes
 
54,955

 
48,273

 
128,458

 
132,964

Income taxes
 
14,205

 
8,185

 
72,444

 
31,156

Net earnings attributable to Moog and noncontrolling interest
 
40,750

 
40,088

 
56,014

 
101,808

Net earnings (loss) attributable to noncontrolling interest
 
67

 

 
67

 
(870
)
Net earnings attributable to Moog
 
$
40,683

 
$
40,088

 
$
55,947

 
$
102,678

 
 
 
 
 
 
 
 
 
Net earnings per share attributable to Moog
 
 
 
 
 
 
 
 
Basic
 
$
1.14

 
$
1.12

 
$
1.56

 
$
2.86

Diluted
 
$
1.13

 
$
1.11

 
$
1.55

 
$
2.83

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$

 
$

 
$
0.25

 
$

 
 
 
 
 
 
 
 
 
Average common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
35,762,918

 
35,847,842

 
35,768,471

 
35,868,315

Diluted
 
36,143,367

 
36,212,779

 
36,174,759

 
36,240,794

See accompanying Notes to Consolidated Condensed Financial Statements.



3


Moog Inc.
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018

July 1,
2017
Net earnings attributable to Moog and noncontrolling interest
 
$
40,750

 
$
40,088

 
$
56,014

 
$
101,808

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(40,788
)
 
32,805

 
(10,127
)
 
3,991

Retirement liability adjustment
 
7,080

 
3,566

 
16,018

 
17,609

Change in accumulated income (loss) on derivatives
 
(747
)
 
1,013

 
(92
)
 
2,833

Other comprehensive income (loss), net of tax
 
(34,455
)
 
37,384

 
5,799

 
24,433

Tax Cuts and Jobs Act, reclassification from AOCIL to retained earnings
 

 

 
(47,077
)
 

Comprehensive income (loss)
 
6,295

 
77,472

 
14,736

 
126,241

Comprehensive income (loss) attributable to noncontrolling interest
 
41

 

 
41

 
(870
)
Comprehensive income (loss) attributable to Moog
 
$
6,254

 
$
77,472

 
$
14,695

 
$
127,111

See accompanying Notes to Consolidated Condensed Financial Statements.



4


Moog Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands)
 
June 30,
2018
 
September 30,
2017
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
157,269

 
$
368,073

Receivables
 
757,455

 
727,740

Inventories
 
514,578

 
489,127

Prepaid expenses and other current assets
 
50,215

 
41,499

Total current assets
 
1,479,517

 
1,626,439

Property, plant and equipment, net of accumulated depreciation of $818,644 and $771,160, respectively
 
546,598

 
522,991

Goodwill
 
790,826

 
774,268

Intangible assets, net
 
112,838

 
108,818

Deferred income taxes
 
13,214

 
26,558

Other assets
 
35,860

 
31,518

Total assets
 
$
2,978,853

 
$
3,090,592

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Short-term borrowings
 
$
1,416

 
$
89

Current installments of long-term debt
 
393

 
295

Accounts payable
 
190,092

 
170,878

Accrued compensation
 
144,712

 
148,406

Customer advances
 
163,318

 
159,274

Contract loss reserves
 
41,143

 
43,214

Other accrued liabilities
 
113,956

 
107,278

Total current liabilities
 
655,030

 
629,434

Long-term debt, excluding current installments
 
858,425

 
956,653

Long-term pension and retirement obligations
 
118,862

 
271,272

Deferred income taxes
 
47,722

 
13,320

Other long-term liabilities
 
36,021

 
5,609

Total liabilities
 
1,716,060

 
1,876,288

Commitments and contingencies (Note 18)
 

 

Shareholders’ equity
 
 
 
 
Common stock - Class A
 
43,780

 
43,704

Common stock - Class B
 
7,500

 
7,576

Additional paid-in capital
 
486,510

 
492,246

Retained earnings
 
1,941,902

 
1,847,819

Treasury shares
 
(739,042
)
 
(739,157
)
Stock Employee Compensation Trust
 
(89,904
)
 
(89,919
)
Supplemental Retirement Plan Trust
 
(11,736
)
 
(12,474
)
Accumulated other comprehensive loss
 
(376,743
)
 
(335,491
)
Total Moog shareholders’ equity
 
1,262,267

 
1,214,304

Noncontrolling interest
 
526

 

Total shareholders’ equity
 
1,262,793

 
1,214,304

Total liabilities and shareholders’ equity
 
$
2,978,853

 
$
3,090,592

See accompanying Notes to Consolidated Condensed Financial Statements.
 
 
 
 

5


Moog Inc.
Consolidated Condensed Statements of Shareholders' Equity
(Unaudited)
  
 
 
 
Number of Shares
(dollars in thousands, except share data)
 
Amount
 
Class A Common Stock
 
Class B Common Stock
COMMON STOCK
 
 
 
 
 
 
Beginning of period
 
$
51,280

 
43,704,286

 
7,575,427

Conversion of Class B to Class A
 

 
75,951

 
(75,951
)
End of period
 
51,280

 
43,780,237

 
7,499,476

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
Beginning of period
 
492,246

 
 
 
 
Issuance of treasury shares
 
(2,874
)
 
 
 
 
Equity-based compensation expense
 
4,394

 
 
 
 
Adjustment to market - SECT, SERP and other
 
(7,256
)
 
 
 
 
End of period
 
486,510

 
 
 
 
RETAINED EARNINGS
 
 
 
 
 
 
Beginning of period
 
1,847,819

 
 
 
 
Net earnings attributable to Moog
 
55,947

 
 
 
 
Dividends
 
(8,941
)
 
 
 
 
Tax Cuts and Jobs Act, reclassification from AOCIL to retained earnings
 
47,077

 
 
 
 
End of period
 
1,941,902

 
 
 
 
TREASURY SHARES AT COST
 
 
 
 
 
 
Beginning of period
 
(739,157
)
 
(10,933,003
)
 
(3,333,927
)
Class A and B shares issued related to equity compensation
 
5,325

 
83,193

 
28,460

Class A and B shares purchased
 
(5,210
)
 
(38,590
)
 
(22,469
)
End of period
 
(739,042
)
 
(10,888,400
)
 
(3,327,936
)
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
 
 
Beginning of period
 
(89,919
)
 
(425,148
)
 
(654,753
)
Issuance of shares
 
1,941

 

 
21,871

Purchase of shares
 
(8,444
)
 

 
(97,855
)
Adjustment to market
 
6,518

 

 

End of period
 
(89,904
)
 
(425,148
)
 
(730,737
)
SUPPLEMENTAL RETIREMENT PLAN (SERP) TRUST
 
 
 
 
 
 
Beginning of period
 
(12,474
)
 
 
 
(150,000
)
Adjustment to market
 
738

 
 
 

End of period
 
(11,736
)
 
 
 
(150,000
)
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
Beginning of period
 
(335,491
)
 
 
 
 
Other comprehensive income (loss)
 
5,825

 
 
 
 
Tax Cuts and Jobs Act, reclassification from AOCIL to retained earnings
 
(47,077
)
 
 
 
 
End of period
 
(376,743
)
 
 
 
 
TOTAL MOOG SHAREHOLDERS’ EQUITY
 
1,262,267

 
32,466,689

 
3,290,803

NONCONTROLLING INTEREST
 
 
 
 
 
 
Beginning of period
 

 
 
 
 
Acquisition of noncontrolling interest
 
485

 
 
 
 
Net earnings attributable to noncontrolling interest
 
67

 
 
 
 
Foreign currency translation adjustment
 
(26
)
 
 
 
 
End of period
 
526

 
 
 
 
TOTAL SHAREHOLDERS’ EQUITY
 
$
1,262,793

 
 
 
 


6


Moog Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)

 
 
Nine Months Ended
(dollars in thousands)
 
June 30,
2018
 
July 1,
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings attributable to Moog and noncontrolling interest
 
$
56,014

 
$
101,808

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
 
Depreciation
 
54,693

 
53,027

Amortization
 
13,628

 
14,078

Deferred income taxes
 
35,549

 
2,968

Equity-based compensation expense
 
4,394

 
4,151

Impairment of long-lived assets and inventory write-down associated with restructuring
 
24,246

 

Other
 
4,743

 
15,493

Changes in assets and liabilities providing (using) cash:
 
 
 
 
Receivables
 
(27,597
)
 
176

Inventories
 
(27,840
)
 
3,786

Accounts payable
 
12,778

 
11,312

Customer advances
 
(165
)
 
(3,097
)
Accrued expenses
 
11,709

 
(180
)
Accrued income taxes
 
(1,817
)
 
(2,767
)
Net pension and post retirement liabilities
 
(130,135
)
 
(25,982
)
Other assets and liabilities
 
16,150

 
(5,449
)
Net cash provided by operating activities
 
46,350

 
169,324

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Acquisitions of businesses, net of cash acquired
 
(47,947
)
 
(40,545
)
Purchase of property, plant and equipment
 
(70,759
)
 
(45,349
)
Other investing transactions
 
(3,609
)
 
3,031

Net cash (used) by investing activities
 
(122,315
)
 
(82,863
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net short-term borrowings (repayments)
 
1,357

 
(1,280
)
Proceeds from revolving lines of credit
 
301,500

 
185,045

Payments on revolving lines of credit
 
(411,610
)
 
(235,045
)
Proceeds from long-term debt
 
11,216

 

Payments on long-term debt
 
(21,849
)
 
(133
)
Payment of dividends
 
(8,941
)
 

Proceeds from sale of treasury stock
 
2,451

 
2,135

Purchase of outstanding shares for treasury
 
(5,210
)
 
(5,714
)
Proceeds from sale of stock held by SECT
 
1,941

 
867

Purchase of stock held by SECT
 
(8,444
)
 
(12,162
)
Other financing transactions
 
484

 
(1,656
)
Net cash (used) by financing activities
 
(137,105
)
 
(67,943
)
Effect of exchange rate changes on cash
 
2,266

 
895

Increase (decrease) in cash and cash equivalents
 
(210,804
)
 
19,413

Cash and cash equivalents at beginning of period
 
368,073

 
325,128

Cash and cash equivalents at end of period
 
$
157,269

 
$
344,541

See accompanying Notes to Consolidated Condensed Financial Statements.

7


Moog Inc.
Notes to Consolidated Condensed Financial Statements
Nine Months Ended June 30, 2018
(Unaudited)
(dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for the fair presentation of results for the interim period have been included. The results of operations for the three and nine months ended June 30, 2018 are not necessarily indicative of the results expected for the full year. The accompanying unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the fiscal year ended September 30, 2017. All references to years in these financial statements are to fiscal years.

Certain prior year amounts have been reclassified to conform to current year's presentation. During 2018, we made a change to our segment reporting structure and merged our former Components segment into Space and Defense Controls and Industrial Systems. The Goodwill and Segment footnotes have been restated to reflect these changes.

Recent Accounting Pronouncements Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU no. 2018-02
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
The standard amends existing guidance and allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded deferred tax effects resulting from the Tax Cuts and Jobs Act. The standard requires certain disclosures about stranded deferred tax effects. The provisions of the standard are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.
 
We adopted this standard recording the related stranded deferred tax effects in the period of adoption, resulting in $47,077 being reclassified from accumulated other comprehensive income (loss) to retained earnings as of March 31, 2018.
Date early adopted:
Q2 2018



















8


Recent Accounting Pronouncements Not Yet Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU no. 2014-09
Revenue from Contracts with Customers
(and All Related ASUs)

 
The standard requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The provisions of the standard, as well as all subsequently issued clarifications to the standard, are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard can be adopted using either a full retrospective or modified retrospective approach.
 
We plan to adopt the standard using the modified retrospective method, under which prior years' results are not restated, but supplemental information will be provided in our disclosures that will present fiscal 2019 results before adoption of the standard. In addition, a cumulative adjustment will be necessary to Shareholder's equity at the beginning of fiscal 2019. We have identified, and are in the process of implementing, changes to our financial statements and related disclosures, internal controls, financial policies and information technology systems. We anticipate recognizing more revenue over time primarily related to repair and overhaul arrangements and contracts with the United States government. We have not yet fully quantified the impact on our financial statements and related disclosures.
Planned date of adoption:
Q1 2019
ASU no. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities

 
The standard requires most equity investments to be measured at fair value, with subsequent changes in fair value recognized in net income. The amendment also impacts the measurement of financial liabilities under the fair value option as well as certain presentation and disclosure requirements for financial instruments. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for some, but not all, provisions. The amendment requires certain provisions to be applied prospectively and others to be applied by means of a cumulative-effect adjustment.
 
We are currently evaluating the effect on our financial statements and related disclosures.



Planned date of adoption:
Q1 2019
ASU no. 2016-02
Leases
(and All Related ASUs)

 
The standard requires most lease arrangements to be recognized in the balance sheet as lease assets and lease liabilities. The standard also requires additional disclosures about the leasing arrangements. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted.
 
We are currently evaluating the effect on our financial statements and related disclosures.
Planned date of adoption:
Q1 2020
ASU no. 2017-07
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
 
The standard amends existing guidance on the presentation of net periodic benefit cost in the income statement and what qualifies for capitalization on the balance sheet. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The amendment requires income statement presentation provisions to be applied retrospectively and capitalization in assets provisions to be applied prospectively.
 
We anticipate the adoption of this standard will decrease operating expenses (Cost of sales, Research and development and Selling, general and administrative) and increase other expense by approximately $6,800 for the year ended September 29, 2018 and approximately $12,600 for the year ended September 30, 2017. The adoption of this standard will not have a material impact on our Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements.
Planned date of adoption:
Q1 2019
 
 
 
 
 
 
 
 
 
 

9


 
 
 
 
 
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU no. 2017-12
Targeted Improvements to Accounting for Hedging Activities
 
The standard expands the hedging strategies eligible for hedge accounting, while simplifying presentation and disclosure by eliminating separate measurement and reporting of hedge ineffectiveness. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted.
 
We are currently evaluating the effect on our financial statements and related disclosures.
Planned date of adoption:
Q1 2020

We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.
Note 2 - Acquisitions, Divestitures and Equity Method Investments
On April 30, 2018, we acquired Electro-Optical Imaging, a designer and manufacturer of video trackers and imaging products, located in Florida, for a purchase price net of acquired cash of $5,001. This operation is included in our Space and Defense Controls segment. The purchase price allocation is subject to adjustments as we obtain additional information for our estimates during the measurement period.
On March 29, 2018, we acquired a 100% ownership interest in VUES Brno s.r.o located in the Czech Republic, which includes a 74% ownership interest in a subsidiary located in Germany. The purchase price, net of acquired cash, was $64,337, consisting of $42,960 in cash and $21,377 of assumed debt. VUES designs and manufactures customized electric motors, generators and solutions. This operation is included in our Industrial Systems segment. The purchase price allocation is subject to adjustments as we obtain additional information for our estimates during the measurement period.
On October 3, 2017, we, in collaboration with SIA Engineering Company, announced the joint venture company, Moog Aircraft Services Asia ("MASA"), in Singapore, of which we currently hold a 51% ownership. MASA is intended to provide maintenance, repair and overhaul services for our manufactured flight control systems. As we hold a majority ownership in MASA, but share voting control, we are accounting for this investment using the equity method. At June 30, 2018, we have made total contributions of $5,100. This operation is included in our Aircraft Controls segment.
In 2017, we sold non-core businesses of our Space and Defense Controls segment for $7,210 in cash and recorded losses in other expense of $13,119 related to the sales.
On April 2, 2017, we acquired Rotary Transfer Systems, a manufacturer of electromechanical systems, located in Germany and France for a purchase price, net of acquired cash, of $42,593, consisting of $40,545 in cash and $2,048 in assumed pension obligations. This operation is included in our Industrial Systems segment.

10


Note 3 - Receivables
Receivables consist of:
 
 
June 30,
2018
 
September 30,
2017
Accounts receivable
 
$
293,967

 
$
286,773

Long-term contract receivables:
 
 
 
 
Amounts billed
 
138,862

 
148,087

Unbilled recoverable costs and accrued profits
 
297,527

 
282,154

Total long-term contract receivables
 
436,389

 
430,241

Other
 
31,987

 
15,077

Total receivables
 
762,343

 
732,091

Less allowance for doubtful accounts
 
(4,888
)
 
(4,351
)
Receivables
 
$
757,455

 
$
727,740

We securitize certain trade receivables in transactions that are accounted for as secured borrowings (Securitization Program). We maintain a subordinated interest in a portion of the pool of trade receivables that are securitized. The retained interest, which is included in Receivables in the consolidated condensed balance sheets, is recorded at fair value, which approximates the total amount of the designated pool of accounts receivable. Refer to Note 6, Indebtedness, for additional disclosures related to the Securitization Program.
Note 4 - Inventories
Inventories, net of reserves, consist of:
 
 
June 30,
2018
 
September 30,
2017
Raw materials and purchased parts
 
$
187,483

 
$
189,517

Work in progress
 
251,865

 
229,202

Finished goods
 
75,230

 
70,408

Inventories
 
$
514,578

 
$
489,127

There are no material inventoried costs relating to long-term contracts where revenue is accounted for using the percentage of completion, cost-to-cost method of accounting as of June 30, 2018 or September 30, 2017.

11


Note 5 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
 
Aircraft
Controls
Space and
Defense
Controls
Industrial
Systems
Total
Balance at September 30, 2017
$
181,375

$
259,951

$
332,942

$
774,268

Acquisitions

3,769

17,541

21,310

Foreign currency translation
(780
)
(96
)
(3,876
)
(4,752
)
Balance at June 30, 2018
$
180,595

$
263,624

$
346,607

$
790,826

In 2018, we changed our segment reporting structure as our former Components segment was separated and merged into Space and Defense Controls and Industrial Systems. As a result, the September 30, 2017 balances for those segments were restated to reflect this change. Goodwill for Space and Defense Controls and Industrial Systems increased by $86,995 and $224,194, respectively, than what was previously reported.
Goodwill in our Space and Defense Controls segment is net of a $4,800 accumulated impairment loss at June 30, 2018.
Goodwill in our Medical Devices reporting unit, included in our Industrial Systems segment, is net of a $38,200 accumulated impairment loss at June 30, 2018.
The gross carrying amounts, accumulated amortization and amortization expense in the disclosures below reflect the full write off of intangible assets in relation to restructuring actions taken in our Industrial Systems segment. We recorded this charge during the second quarter of 2018 based on the expected cash flows over the remaining life of the assets. Refer to Note 11, Restructuring, for additional disclosures.
The components of intangible assets are as follows:
 
 
 
 
June 30, 2018
 
September 30, 2017
  
 
Weighted-
Average
Life (years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer-related
 
11
 
$
148,558

 
$
(97,083
)
 
$
175,872

 
$
(128,019
)
Technology-related
 
10
 
72,722

 
(50,766
)
 
71,924

 
(55,069
)
Program-related
 
19
 
65,676

 
(33,168
)
 
66,458

 
(30,675
)
Marketing-related
 
8
 
24,945

 
(18,842
)
 
26,552

 
(19,251
)
Other
 
10
 
4,333

 
(3,537
)
 
4,379

 
(3,353
)
Intangible assets
 
12
 
$
316,234

 
$
(203,396
)
 
$
345,185

 
$
(236,367
)

Substantially all acquired intangible assets other than goodwill are being amortized. Customer-related intangible assets primarily consist of customer relationships. Technology-related intangible assets primarily consist of technology, patents, intellectual property and software. Program-related intangible assets consist of long-term programs represented by current contracts and probable follow on work. Marketing-related intangible assets primarily consist of trademarks, trade names and non-compete agreements.
Amortization of acquired intangible assets was $4,127 and $13,398 for the three and nine months ended June 30, 2018 and $4,680 and $13,880 for the three and nine months ended July 1, 2017. Based on acquired intangible assets recorded at June 30, 2018, amortization is expected to be approximately $17,400 in 2018, $15,300 in 2019, $12,900 in 2020, $10,700 in 2021 and $9,100 in 2022.                                     

12


Note 6 - Indebtedness
We maintain short-term line of credit facilities with banks throughout the world that are principally demand lines subject to revision by the banks.
Long-term debt consists of:
 
 
June 30,
2018
 
September 30,
2017
U.S. revolving credit facility
 
$
430,000

 
$
540,110

Senior notes
 
300,000

 
300,000

Securitization program
 
130,000

 
120,000

Obligations under capital leases
 
962

 
306

Senior debt
 
860,962

 
960,416

Less deferred debt issuance cost
 
(2,144
)
 
(3,468
)
Less current installments
 
(393
)
 
(295
)
Long-term debt
 
$
858,425

 
$
956,653

Our U.S. revolving credit facility matures on June 28, 2021. Our U.S. revolving credit facility has a capacity of $1,100,000 and provides an expansion option, which permits us to request an increase of up to $200,000 to the credit facility upon satisfaction of certain conditions. The credit facility is secured by substantially all of our U.S. assets. The loan agreement contains various covenants which, among others, specify interest coverage and maximum leverage. We are in compliance with all covenants.
At June 30, 2018, we had $300,000 aggregate principal amount of 5.25% senior notes due December 1, 2022 with interest paid semiannually on June 1 and December 1 of each year. The senior notes are unsecured obligations, guaranteed on a senior unsecured basis by certain subsidiaries and contain normal incurrence-based covenants and limitations such as the ability to incur additional indebtedness, pay dividends, make other restricted payments and investments, create liens and certain corporate acts such as mergers and consolidations.
The Securitization Program matures on October 23, 2019 and effectively increases our borrowing capacity by up to $130,000. Under the Securitization Program, we sell certain trade receivables and related rights to an affiliate, which in turn sells an undivided variable percentage ownership interest in the trade receivables to a financial institution, while maintaining a subordinated interest in a portion of the pool of trade receivables. Interest for the Securitization Program is based on 30-day LIBOR plus an applicable margin. A commitment fee is also charged based on a percentage of the unused amounts available and is not material. The agreement governing the Securitization Program contains restrictions and covenants which include limitations on the making of certain restricted payments, creation of certain liens, and certain corporate acts such as mergers, consolidations and sale of substantially all assets. The Securitization Program has a minimum borrowing requirement equal to the lesser of either 80% of our borrowing capacity or 100% of our borrowing base, which is a subset of the trade receivables sold under this agreement. As of June 30, 2018, our minimum borrowing requirement was $104,000.


13


Note 7 - Product Warranties
In the ordinary course of business, we warrant our products against defects in design, materials and workmanship typically over periods ranging from twelve to sixty months. We determine warranty reserves needed by product line based on historical experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Warranty accrual at beginning of period
 
$
28,255

 
$
23,272

 
$
25,848

 
$
21,363

Additions from acquisitions
 

 
433

 

 
433

Warranties issued during current period
 
3,451

 
4,030

 
11,488

 
12,185

Adjustments to pre-existing warranties
 
(80
)
 
(124
)
 
(325
)
 
(495
)
Reductions for settling warranties
 
(3,219
)
 
(4,046
)
 
(9,141
)
 
(9,509
)
Foreign currency translation
 
(701
)
 
420

 
(164
)
 
8

Warranty accrual at end of period
 
$
27,706

 
$
23,985

 
$
27,706

 
$
23,985

Note 8 - Derivative Financial Instruments
We principally use derivative financial instruments to manage interest rate risk associated with long-term debt and foreign exchange risk related to foreign operations and foreign currency transactions. We enter into derivative financial instruments with a number of major financial institutions to minimize counterparty credit risk.
Derivatives designated as hedging instruments
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swaps are designated as hedges of the amount of future cash flows related to interest payments on variable-rate debt that, in combination with the interest payments on the debt, convert a portion of the variable-rate debt to fixed-rate debt. At June 30, 2018, we had interest rate swaps with notional amounts totaling $150,000. The interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at 2.87%, including the applicable margin of 1.63% as of June 30, 2018. The interest will revert back to variable rates based on LIBOR plus the applicable margin upon the maturity of the interest rate swaps. These interest rate swaps mature at various times through June 23, 2020.
We use foreign currency contracts as cash flow hedges to effectively fix the exchange rates on future payments and revenue. To mitigate exposure in movements between various currencies, including the Philippine peso, we had outstanding foreign currency forwards with notional amounts of $40,088 at June 30, 2018. These contracts mature at various times through February 28, 2020.
We use forward currency contracts to hedge our net investment in certain foreign subsidiaries. To mitigate the exposure in foreign currencies, we had an outstanding net investment hedge in Euro, with a notional amount of $27,227 at June 30, 2018, maturing in our fourth quarter of 2018.
These interest rate swaps, foreign currency contracts and net investment hedges are recorded in the consolidated condensed balance sheets at fair value and the related gains or losses are deferred in shareholders’ equity as a component of Accumulated Other Comprehensive Income (Loss) (AOCIL). These deferred gains and losses are reclassified into the consolidated condensed statements of earnings, as necessary, during the periods in which the related payments or receipts affect earnings. However, to the extent the interest rate swaps and foreign currency contracts are not perfectly effective in offsetting the change in the value of the payments and revenue being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was not material in the first nine months of 2018 or 2017.

14


Derivatives not designated as hedging instruments
We also have foreign currency exposure on balances, primarily intercompany, that are denominated in foreign currencies and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the consolidated condensed statements of earnings. To minimize foreign currency exposure, we had foreign currency contracts with notional amounts of $122,408 at June 30, 2018. The foreign currency contracts are recorded in the consolidated condensed balance sheets at fair value and resulting gains or losses are recorded in the consolidated condensed statements of earnings. We recorded the following gains or losses on foreign currency contracts which are included in other income or expense and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other income or expense:
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net gain (loss)
 
$
(1,028
)
 
$
(1,440
)
 
$
(4,037
)
 
$
(539
)
Summary of derivatives
The fair value and classification of derivatives is summarized as follows:
 
 
 
June 30,
2018
 
September 30,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
Other current assets
 
$
370

 
$
551

Foreign currency contracts
Other assets
 
28

 
50

Interest rate swaps
Other current assets
 
1,543

 
552

Interest rate swaps
Other assets
 
439

 
314

 
Total asset derivatives
 
$
2,380

 
$
1,467

Foreign currency contracts
Other accrued liabilities
 
$
1,824

 
$
1,434

Foreign currency contracts
Other long-term liabilities
 
508

 
244

Interest rate swaps
Other accrued liabilities
 

 
10

Interest rate swaps
Other long-term liabilities
 

 
15

Net investment hedge
Other accrued liabilities
 
5

 

 
Total liability derivatives
 
$
2,337

 
$
1,703

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
Other current assets
 
$
461

 
$
95

Foreign currency contracts
Other accrued liabilities
 
$
647

 
$
383


15


Note 9 - Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. The definition of the fair value hierarchy is as follows:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3 – Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.
Our derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market data, such as interest rate yield curves and currency rates, and are classified as Level 2 within the valuation hierarchy.
The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis, all of which are classified as Level 2.
 
 
Classification
 
June 30,
2018
 
September 30,
2017
Foreign currency contracts
 
Other current assets
 
$
831

 
$
646

Foreign currency contracts
 
Other assets
 
28

 
50

Interest rate swaps
 
Other current assets
 
1,543

 
552

Interest rate swaps
 
Other assets
 
439

 
314

 
 
Total assets
 
$
2,841

 
$
1,562

Foreign currency contracts
 
Other accrued liabilities
 
$
2,471

 
$
1,817

Foreign currency contracts
 
Other long-term liabilities
 
508

 
244

Interest rate swaps
 
Other accrued liabilities
 

 
10

Interest rate swaps
 
Other long-term liabilities
 

 
15

Net investment hedge
 
Other accrued liabilities
 
5

 

 
 
Total liabilities
 
$
2,984

 
$
2,086

Our only financial instrument for which the carrying value differs from its fair value is long-term debt. At June 30, 2018, the fair value of long-term debt was $865,650 compared to its carrying value of $860,962. The fair value of long-term debt is classified as Level 2 within the fair value hierarchy and was estimated based on quoted market prices.

16


Note 10 - Employee Benefit Plans
Net periodic benefit costs for our defined benefit pension plans are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
U.S. Plans
 
 
 
 
 
 
 
 
Service cost
 
$
5,634

 
$
6,044

 
$
16,901

 
$
18,087

Interest cost
 
8,073

 
7,659

 
24,219

 
22,930

Expected return on plan assets
 
(13,575
)
 
(13,627
)
 
(40,726
)
 
(40,882
)
Amortization of prior service cost (credit)
 
46

 
46

 
140

 
140

Amortization of actuarial loss
 
6,903

 
8,465

 
20,707

 
25,303

Pension expense for U.S. defined benefit plans
 
$
7,081

 
$
8,587

 
$
21,241

 
$
25,578

Non-U.S. Plans
 
 
 
 
 
 
 
 
Service cost
 
$
1,486

 
$
1,499

 
$
4,475

 
$
4,545

Interest cost
 
1,066

 
794

 
3,213

 
2,291

Expected return on plan assets
 
(1,260
)
 
(1,180
)
 
(3,793
)
 
(3,433
)
Amortization of prior service cost (credit)
 
(15
)
 
(26
)
 
(44
)
 
(80
)
Amortization of actuarial loss
 
630

 
1,145

 
1,902

 
3,374

Curtailment gain
 

 
(150
)
 

 
(150
)
Pension expense for non-U.S. defined benefit plans
 
$
1,907

 
$
2,082

 
$
5,753

 
$
6,547

Pension expense for our defined contribution plans consists of:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
U.S. defined contribution plans
 
$
4,374

 
$
3,926

 
$
12,482

 
$
11,182

Non-U.S. defined contribution plans
 
1,460

 
1,534

 
4,719

 
4,366

Total pension expense for defined contribution plans
 
$
5,834

 
$
5,460

 
$
17,201

 
$
15,548

Contributions for all of our U.S. defined benefit pension plans are expected to be approximately $149,000 in 2018.


17


Note 11 - Restructuring
In 2018, we initiated restructuring actions in conjunction with exiting the wind pitch control business within our Industrial Systems segment. These actions will result in workforce reductions, principally in Germany and China. Charges taken consist of $9,727 of non-cash inventory reserves, $12,316 of non-cash charges for the impairment of intangible assets, $2,203 of non-cash charges, primarily for the impairment of long-lived assets, $6,039 for severance and $1,951 for other costs.
Restructuring activity for severance and other costs is as follows:
 
Aircraft Controls
Industrial Systems
Corporate
Total
Balance at September 30, 2017
$
130

$

$
1,038

$
1,168

Charged to expense - 2018 plan

32,236


32,236

Non-cash charges - 2018 plan

(24,246
)

(24,246
)
Cash payments - 2018 plan

(354
)

(354
)
Cash payments - 2016 plan
(130
)

(446
)
(576
)
Foreign currency translation

(206
)

(206
)
Balance at June 30, 2018
$

$
7,430

$
592

$
8,022

As of June 30, 2018, the restructuring accrual consists of $592 for the 2016 plan and $7,430 for the 2018 plan. Restructuring for all plans is expected to be paid by September 28, 2019.
Note 12 - Income Taxes
The effective tax rates for the three and nine months ended June 30, 2018 were 25.8% and 56.4%, respectively. The effective tax rate for the nine months ended June 30, 2018 is higher than would be expected by applying the U.S. federal statutory tax rate to earnings before income taxes primarily due to the enactment of the Tax Cuts and Jobs Act (the "Act") of 2017 and limited tax benefits associated with the restructuring charges taken in foreign jurisdictions of our Industrial Systems segment.
The Act was enacted on December 22, 2017. It reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of June 30, 2018, we have not completed the accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on the one-time transition tax, withholding taxes on earnings deemed to be repatriated and existing deferred tax balances. These amounts are provisional and subject to change as the determination of the impact of the income tax effects will require additional analysis of historical records, annual data and further interpretation of the Act from yet to be issued U.S. Treasury regulations.
During the nine months ended June 30, 2018, we recorded a $31,300 one-time transition tax on undistributed foreign earnings deemed to be repatriated and a tax charge of $16,085 as an additional provision for taxes on undistributed earnings not considered to be permanently reinvested. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities is not practicable. These charges are partially offset by a $9,487 benefit due to the remeasurement of deferred tax assets and liabilities arising from a lower U.S. corporate tax rate, which took into account our decision to accelerate pension contributions into our 2017 pension plan year. This allows the pension contribution tax deduction to be taken in our 2017 federal income tax return which is taxed at the 35% federal rate.
The effective tax rate for the three and nine months ended July 1, 2017 were 17.0% and 23.4%, respectively. The effective tax rate for these periods are lower than would be expected by applying the U.S. federal statutory tax rate to earnings before income taxes primarily from the tax benefits associated with divesting non-core businesses in Space and Defense Controls and the recognition and timing of U.S. tax incentives.

18


Note 13 - Accumulated Other Comprehensive Income (Loss)
The changes in AOCIL, net of tax, by component for the nine months ended June 30, 2018 are as follows:
 
 
Accumulated foreign currency translation (1)
 
Accumulated retirement liability
 
Accumulated gain (loss) on derivatives
 
Total
AOCIL at September 30, 2017
 
$
(83,166
)
 
$
(251,865
)
 
$
(460
)
 
$
(335,491
)
Other comprehensive income (loss) before reclassifications
 
(10,101
)
 
330

 
(640
)
 
(10,411
)
Amounts reclassified from AOCIL
 

 
15,688

 
548

 
16,236

Other comprehensive income (loss)
 
(10,101
)
 
16,018

 
(92
)
 
5,825

Tax Cuts and Jobs Act, reclassification from AOCIL to retained earnings (2)
 

 
(47,209
)
 
132

 
(47,077
)
AOCIL at June 30, 2018
 
$
(93,267
)
 
$
(283,056
)
 
$
(420
)
 
$
(376,743
)
(1) Net gains and losses on net investment hedges are recorded as cumulative translation adjustments in AOCIL to the extent that the instruments are effective in hedging the designated risk.
(2) In the second quarter of 2018, we early adopted ASU 2018-02 and reclassified the stranded deferred tax effects resulting from the Tax Cuts and Jobs Act to retained earnings.
The amounts reclassified from AOCIL into earnings are as follows:
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Statement of earnings classification
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Retirement liability:
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
 
 
$
(86
)
 
$
22

 
$
(257
)
 
$
61

Actuarial losses
 
 
 
7,405

 
9,488

 
22,224

 
28,311

Reclassification from AOCIL into earnings (1)
 
7,319

 
9,360

 
21,967

 
28,222

Tax effect
 
 
 
(1,791
)
 
(3,450
)
 
(6,279
)
 
(10,301
)
Net reclassification from AOCIL into earnings
 
$
5,528

 
$
5,910

 
$
15,688

 
$
17,921

Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Sales
 
$
(122
)
 
$
801

 
$
(378
)
 
$
3,255

Foreign currency contracts
 
Cost of sales
 
428

 
582

 
1,626

 
1,713

Interest rate swaps
 
Interest
 
(259
)
 
20

 
(375
)
 
198

Reclassification from AOCIL into earnings
 
47

 
1,403

 
873

 
5,166

Tax effect
 
 
 
(18
)
 
(384
)
 
(325
)
 
(1,357
)
Net reclassification from AOCIL into earnings
 
$
29

 
$
1,019

 
$
548

 
$
3,809

(1) The reclassifications are included in the computation of net periodic pension cost and postretirement benefit cost.
The amounts deferred in AOCIL are as follows:
 
 
Net deferral in AOCIL - effective portion
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Foreign currency contracts
 
$
(1,246
)
 
$
68

 
$
(2,073
)
 
$
(2,041
)
Interest rate swaps
 
223

 
(151
)
 
1,470

 
612

Net gain (loss)
 
(1,023
)
 
(83
)
 
(603
)
 
(1,429
)
Tax effect
 
247

 
77

 
(37
)
 
453

Net deferral in AOCIL of derivatives
 
$
(776
)
 
$
(6
)
 
$
(640
)
 
$
(976
)

19


Note 14 - Stock Employee Compensation Trust and Supplemental Retirement Plan Trust
The Stock Employee Compensation Trust (SECT) assists in administering and provides funding for equity-based compensation plans and benefit programs, including the Moog Inc. Retirement Savings Plan (RSP). The Supplemental Retirement Plan (SERP) Trust provides funding for benefits under the SERP provisions of the Moog Inc. Plan to Equalize Retirement Income and Supplemental Retirement Income. Both the SECT and the SERP Trust hold shares as investments. The shares in the SECT and SERP Trust are not considered outstanding for purposes of calculating earnings per share. However, in accordance with the trust agreements governing the SECT and SERP Trust, the trustees vote all shares held by the SECT and SERP Trust on all matters submitted to shareholders.
Note 15 - Earnings per Share
Basic and diluted weighted-average shares outstanding are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Basic weighted-average shares outstanding
 
35,762,918

 
35,847,842

 
35,768,471

 
35,868,315

Dilutive effect of equity-based awards
 
380,449

 
364,937

 
406,288

 
372,479

Diluted weighted-average shares outstanding
 
36,143,367

 
36,212,779

 
36,174,759

 
36,240,794

For the three and nine months ended June 30, 2018, there were 25,570 and 19,780 common shares from equity-based awards, respectively, excluded from the calculation of diluted earnings per share as they would be anti-dilutive. For the three and nine months ended July 1, 2017, there were 67,597 and 94,273 common shares from equity-based awards, respectively, excluded from the calculation of diluted earnings per share as they would be anti-dilutive.
During the second quarter of 2018, the Board of Directors declared a $0.25 per share quarterly dividend payable on issued and outstanding shares of our Class A and Class B common stock on June 1, 2018 to shareholders of record at the close of business on May 15, 2018.

20


Note 16 - Segment Information
Effective October 1, 2017, we made changes to our segment reporting structure that resulted in three reporting segments. Our former Components segment has been separated and merged into Space and Defense Controls and Industrial Systems. All amounts have been restated to reflect this change.
Below are sales and operating profit by segment for the three and nine months ended June 30, 2018 and July 1, 2017 and a reconciliation of segment operating profit to earnings before income taxes. Operating profit is net sales less cost of sales and other operating expenses, excluding interest expense, equity-based compensation expense and other corporate expenses. Cost of sales and other operating expenses are directly identifiable to the respective segment or allocated on the basis of sales, number of employees or profit.
Refer to Note 11, Restructuring, for the impact of amounts charged to expense that are reflected in the operating profit of the Industrial Systems segment.
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net sales:
 
 
 
 
 
 
 
 
Aircraft Controls
 
$
299,605

 
$
282,555

 
$
889,578

 
$
840,666

Space and Defense Controls
 
149,815

 
128,049

 
426,735

 
389,473

Industrial Systems
 
242,598

 
215,579

 
692,289

 
618,117

Net sales
 
$
692,018

 
$
626,183

 
$
2,008,602

 
$
1,848,256

Operating profit:
 
 
 
 
 
 
 
 
Aircraft Controls
 
$
33,342

 
$
29,080

 
$
97,590

 
$
83,372

Space and Defense Controls
 
16,513

 
12,789

 
49,643

 
33,258

Industrial Systems
 
24,283

 
21,726

 
37,479

 
64,154

Total operating profit
 
74,138

 
63,595

 
184,712

 
180,784

Deductions from operating profit:
 
 
 
 
 
 
 
 
Interest expense
 
8,850

 
8,654

 
26,585

 
25,789

Equity-based compensation expense
 
894

 
997

 
4,394

 
4,151

Corporate and other expenses, net
 
9,439

 
5,671

 
25,275

 
17,880

Earnings before income taxes
 
$
54,955

 
$
48,273

 
$
128,458

 
$
132,964

The amounts reclassified for net sales and operating profit as a result of the revised segment reporting structure for the three and nine months ended July 1, 2017 are as follows:
 
 
Three Months Ended
 
Nine Months Ended
Net sales:
 
 
 
 
Space and Defense Controls
 
$
33,531

 
$
96,177

Industrial Systems
 
93,089

 
267,797

Total
 
$
126,620

 
$
363,974

Operating profit:
 
 
 
 
Space and Defense Controls
 
$
2,784

 
$
5,669

Industrial Systems
 
9,255

 
28,664

Total
 
$
12,039

 
$
34,333

Segment assets for Space and Defense Controls and Industrial Systems are approximately $645,000 and $1,120,000, respectively, as of June 30, 2018, primarily as a result of the change to our segment reporting structure. Corporate assets not allocated to our reporting segments, have decreased from $270,411 as of September 30, 2017 to approximately $81,000 as of June 30, 2018, primarily as a result of the repayment of debt and defined benefit pension contributions.


21


Note 17 - Related Party Transactions
On November 20, 2017, John Scannell was elected to the Board of Directors of M&T Bank Corporation and M&T Bank. We currently engage with M&T Bank in the ordinary course of business for various financing activities, all of which were initiated prior to the election of Mr. Scannell to the Board. M&T Bank provides credit extension for routine purchases, which for the nine months ended June 30, 2018 totaled $16,790. At June 30, 2018, we held a $15,000 interest rate swap with M&T Bank and outstanding leases with a total original cost of $28,984. M&T Bank also maintains an interest of approximately 12% in our U.S. revolving credit facility. Further details of the U.S. revolving credit facility can be found in Note 6, Indebtedness.
Note 18 - Commitments and Contingencies
From time to time, we are involved in legal proceedings. We are not a party to any pending legal proceedings which management believes will result in a material adverse effect on our financial condition, results of operations or cash flows.
We are engaged in administrative proceedings with governmental agencies and legal proceedings with governmental agencies and other third parties in the normal course of our business, including litigation under Superfund laws, regarding environmental matters. We believe that adequate reserves have been established for our share of the estimated cost for all currently pending environmental administrative or legal proceedings and do not expect that these environmental matters will have a material adverse effect on our financial condition, results of operations or cash flows.
In the ordinary course of business we could be subject to ongoing claims or disputes from our customers, the ultimate settlement of which could have a material adverse impact on our consolidated results of operations. While the receivables and any loss provisions recorded to date reflect management's best estimate of the projected costs to complete a given project, there may still be significant effort required to complete the ultimate deliverable. Future variability in internal cost as well as future profitability is dependent upon a number of factors including deliveries, performance and government budgetary pressures. The inability to achieve a satisfactory contractual solution, further unplanned delays, additional developmental cost growth or variations in any of the estimates used in the existing contract analysis could lead to further loss provisions. Additional losses could have a material adverse impact on our financial condition, results of operations or cash flows in the period in which the loss may be recognized.
We are contingently liable for $44,232 of standby letters of credit issued by a bank to third parties on our behalf at June 30, 2018.
Note 19 - Subsequent Event
On July 26, 2018, the Board of Directors declared a $0.25 per share quarterly dividend payable on issued and outstanding shares of our Class A and Class B common stock on September 4, 2018 to shareholders of record at the close of business on August 15, 2018.


















22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report filed on Form 10-K for the fiscal year ended September 30, 2017. All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years and amounts may differ from reported values due to rounding.
OVERVIEW
We are a worldwide designer, manufacturer and systems integrator of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and defense and industrial markets.
Within the aerospace and defense market, our products and systems include:
Defense market - primary and secondary flight controls for military aircraft, stabilization and automatic ammunition loading controls for armored combat vehicles, tactical and strategic missile steering controls and gun aiming controls.
Commercial aircraft market - primary and secondary flight controls for commercial aircraft.
Commercial space market - satellite positioning controls and thrust vector controls for space launch vehicles.
In the industrial market, our products are used in a wide range of applications including:
Industrial automation market - injection molding, metal forming, heavy industry, material and automotive testing and pilot training simulators.
Energy market - power generation, oil and gas exploration and wind energy.
Medical market - enteral clinical nutrition and infusion therapy pumps, ultrasonic sensors and surgical handpieces and CT scanners.
We operate under three segments, Aircraft Controls, Space and Defense Controls and Industrial Systems. Our principal manufacturing facilities are located in the United States, Philippines, United Kingdom, Germany, Czech Republic, Costa Rica, India, China, Japan, Italy, Netherlands, Canada, Ireland and Luxembourg.
We have long-term contracts with some of our customers. These contracts are predominantly within Aircraft Controls and Space and Defense Controls and represent 38%, 34% and 33% of our sales in 2017, 2016 and 2015, respectively. We recognize revenue on these contracts using the percentage of completion, cost-to-cost method of accounting as work progresses toward completion. The remainder of our sales are recognized when the risks and rewards of ownership and title to the product are transferred to the customer, principally as units are delivered or as service obligations are satisfied. This method of revenue recognition is predominantly used within the Industrial Systems segment, as well as with aftermarket activity.
We concentrate on providing our customers with products designed and manufactured to the highest quality standards. Our products are applied in demanding applications, "When Performance Really Matters®." We believe we have achieved a leadership position in the high performance, precision controls market, by capitalizing on our core foundational strengths, which are our technical experts working collaboratively around the world and the capabilities we deliver for mission-critical solutions. These strengths yield a broad control product portfolio, across a diverse base of customers and end markets.
By focusing on customer intimacy and commitment to solving their most demanding technical problems, we have been able to innovate our control product franchise from one market to another, organically growing from a high-performance components supplier to a high-performance systems supplier. In addition, we continue achieving substantial content positions on the platforms on which we currently participate, seeking to be the dominant supplier in the current niche markets we serve. We also look for innovation in all aspects of our business, employing new technologies to improve productivity and to develop innovative business models.





23


Our fundamental strategies to achieve our goals center around talent, lean and innovation and include:
a strong leadership team that has positioned the company for growth,
utilizing our global capabilities and strong engineering heritage to innovate,
maintaining our technological excellence by solving our customers’ most demanding technical problems in applications "When Performance Really Matters®,"
continuing to invest in talent development to strengthen employee performance, and
maximizing customer value by implementing lean enterprise principles.
These activities will help us achieve our financial objective of increasing shareholder value with sustainable competitive advantages across our segments. In doing so, we expect to maintain a balanced, diversified portfolio in terms of markets served, product applications, customer base and geographic presence.
We focus on improving shareholder value through strategic revenue growth, both acquired and organic, through improving operating efficiencies and manufacturing initiatives and through utilizing low cost manufacturing facilities without compromising quality. Additionally, we take a balanced approach to capital deployment, which may include strategic acquisitions or further share buyback activity, in order to maximize shareholder returns over the long-term.
Acquisitions, Divestitures and Equity Method Investments
All of our acquisitions are accounted for under the purchase method and, accordingly, the operating results for the acquired companies are included in the consolidated statements of earnings from the respective dates of acquisition. Under purchase accounting, we record assets and liabilities at fair value and such amounts are reflected in the respective captions on the consolidated balance sheets. The purchase price described for each acquisition below is net of any cash acquired, includes debt issued or assumed and the fair value of contingent consideration.
On April 30, 2018, we acquired Electro-Optical Imaging, a designer and manufacturer of video trackers and imaging products, located in Florida, for $5 million. This operation is included in our Space and Defense Controls segment.
On March 29, 2018, we acquired a 100% ownership interest in VUES Brno s.r.o located in the Czech Republic, which includes a 74% ownership interest in a subsidiary located in Germany, for $64 million. VUES designs and manufactures customized electric motors, generators and solutions. This operation is included in our Industrial Systems segment.
On October 3, 2017, we, in collaboration with SIA Engineering Company, announced the joint venture company, Moog Aircraft Services Asia ("MASA"), in Singapore, of which we currently hold a 51% ownership. MASA is intended to provide maintenance, repair and overhaul services for our manufactured flight control systems. As we hold a majority ownership in MASA, but share voting control, we are accounting for this investment using the equity method. At June 30, 2018, we have made total contributions of $5 million to MASA. This operation is included in our Aircraft Controls segment.
In 2017, we acquired Rotary Transfer Systems, a manufacturer of electromechanical systems, located in Germany and France for $43 million. This acquisition is included in our Industrial Systems segment. We also sold non-core businesses in our Space and Defense Controls segment for $7 million and recorded losses in other expense of $13 million related to the sales.

CRITICAL ACCOUNTING POLICIES

On a regular basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, revenue recognition on long-term contracts, contract and contract-related loss reserves, reserves for inventory valuation, reviews for impairment of goodwill, reviews for impairment of long-lived assets, pension assumptions and income taxes. See Note 12 of the Consolidated Condensed Financial Statements included in Item 1, Financial Statements of this report for the impact of the enactment of the Tax Cuts and Jobs Act of 2017.

Other than that described below, there have been no material changes in critical accounting policies in the current year from those disclosed in our 2017 Annual Report on Form 10-K.


24


Reviews for Impairment of Goodwill

Interim Test
Effective October 1, 2017, we changed our segment reporting structure from four to three reporting segments. The former Components reporting segment has been divided and merged into the Space and Defense Controls and Industrial Systems reporting segments. This change also impacted the reporting units we use to review goodwill for impairment. Based on the accounting rules that require aggregation of components with similar economic characteristics, we have changed the number of reporting units from five to four - Aircraft Controls, Space and Defense Controls, Industrial Systems and Medical Devices.
We transferred or allocated the assets and liabilities of the former Components business including the proportionate share of goodwill based on the relative fair value of the business to the new respective reporting units - Space and Defense Controls and Industrial Systems. We then compared the fair values to the carrying values of the reporting units and the resulting fair values exceeded the carrying values, so we determined that goodwill was not impaired.
The fair value of each of these two reporting units exceeded the carrying amounts by over 100%. While any individual assumption could differ from those that we used, we believe the overall fair values of these reporting units are reasonable, as the values are derived from a mix of reasonable assumptions. Had we used discount rates that were 100 basis points higher or a terminal growth rate that was 100 basis points lower than those we assumed, the fair values of each of these reporting units would have continued to exceed their carrying amounts by at least 80%.

RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Condensed Financial Statements included in Item 1, Financial Statements of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates ("ASU").



25


CONSOLIDATED RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
(dollars and shares in millions, except per share data)
June 30, 2018
July 1, 2017
$ Variance
% Variance
 
June 30, 2018
July 1, 2017
$ Variance
% Variance
Net sales
$
692

$
626

$
66

11
%
 
$
2,009

$
1,848

$
160

9
%
Gross margin
28.5
%
29.1
%
 
 
 
28.6
%
29.2
%
 
 
Research and development expenses
$
31

$
36

$
(5
)
(15
%)
 
$
98

$
108

$
(10
)
(10
%)
Selling, general and administrative expenses as a percentage of sales
14.9
%
14.2
%
 
 
 
14.9
%
14.1
%
 
 
Interest expense
$
9

$
9

$

2
%
 
$
27

$
26

$
1

3
%
Restructuring expense
$
(2
)
$

$
(2
)
n/a

 
$
23

$

$
23

n/a

Other
$
1

$

$
1

n/a

 
$

$
12

$
(12
)
(100
%)
Effective tax rate
25.8
%
17.0
%
 
 
 
56.4
%
23.4
%
 
 
Net earnings attributable to Moog
$
41

$
40

$
1

1
%
 
$
56

$
103

$
(47
)
(46
%)
Diluted earnings per share attributable to Moog
$
1.13

$
1.11

$
0.02

2
%
 
$
1.55

$
2.83