Quarterly Report (10-q)

Date : 07/26/2019 @ 3:37PM
Source : Edgar (US Regulatory)
Stock : Moog Inc (MOG.B)
Quote : 91.0  -2.1134 (-2.27%) @ 9:14PM
Moog share price Chart

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2019

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
MOOG Inc.
(Exact name of registrant as specified in its charter)
NY
 
16-0757636
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
400 Jamison Rd
East Aurora,
New York
14052-0018
 
(Address of Principal Executive Offices)
(Zip Code)
 
( 716 ) 652-2000
Registrant's telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock
MOG.A
New York Stock Exchange
Class B common stock
MOG.B
New York Stock Exchange

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       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         No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer  
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 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 Act).      Yes          No   

The number of shares outstanding of each class of common stock as of July 22, 2019 was:
Class A common stock, 32,503,359 shares
Class B common stock, 2,434,033 shares






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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MOOGIMAGE2A10.JPG
Consolidated Condensed Statements of Earnings
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands, except share and per share data)
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019
 
June 30,
2018
Net sales
 
$
740,969

 
$
692,018

 
$
2,139,456

 
$
2,008,602

Cost of sales
 
529,050

 
491,959

 
1,530,634

 
1,423,897

Inventory write-down - restructuring
 

 
2,398

 

 
9,727

Gross profit
 
211,919

 
197,661

 
608,822

 
574,978

Research and development
 
31,298

 
30,953

 
94,518

 
97,282

Selling, general and administrative
 
103,655

 
101,722

 
299,841

 
295,006

Interest
 
9,780

 
8,850

 
29,401

 
26,585

Restructuring
 

 
(1,549
)
 

 
22,509

Other
 
5,466

 
2,730

 
9,540

 
5,138

Earnings before income taxes
 
61,720

 
54,955

 
175,522

 
128,458

Income taxes
 
14,255

 
14,205

 
41,629

 
72,444

Net earnings attributable to Moog and noncontrolling interest
 
47,465

 
40,750

 
133,893

 
56,014

 
 
 
 
 
 
 
 
 
Net earnings attributable to noncontrolling interest
 

 
67

 

 
67

 
 
 
 
 
 
 
 
 
Net earnings attributable to Moog
 
$
47,465

 
$
40,683

 
$
133,893

 
$
55,947

 
 
 
 
 
 
 
 
 
Net earnings per share attributable to Moog
 
 
 
 
 
 
 
 
Basic
 
$
1.36

 
$
1.14

 
$
3.84

 
$
1.56

Diluted
 
$
1.35

 
$
1.13

 
$
3.80

 
$
1.55

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.25

 
$

 
$
0.75

 
$
0.25

 
 
 
 
 
 
 
 
 
Average common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
34,904,487

 
35,762,918

 
34,869,021

 
35,768,471

Diluted
 
35,239,834

 
36,143,367

 
35,202,519

 
36,174,759

See accompanying Notes to Consolidated Condensed Financial Statements.



4


MOOGIMAGE2A10.JPG
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
June 29,
2019
 
June 30,
2018
 
June 29,
2019

June 30,
2018
Net earnings attributable to Moog and noncontrolling interest
 
$
47,465

 
$
40,750

 
$
133,893

 
$
56,014

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(996
)
 
(40,788
)
 
(9,277
)
 
(10,127
)
Retirement liability adjustment
 
4,264

 
7,080

 
13,760

 
16,018

Change in accumulated income (loss) on derivatives
 
559

 
(747
)
 
1,144

 
(92
)
Other comprehensive income (loss), net of tax
 
3,827

 
(34,455
)
 
5,627

 
5,799

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

 

 

 
(47,077
)
Comprehensive income (loss)
 
51,292

 
6,295

 
139,520

 
14,736

Comprehensive income (loss) attributable to noncontrolling interest
 

 
41

 

 
41

Comprehensive income (loss) attributable to Moog
 
$
51,292

 
$
6,254

 
$
139,520

 
$
14,695

See accompanying Notes to Consolidated Condensed Financial Statements.



5


MOOGIMAGE2A10.JPG
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands)
 
June 29,
2019
 
September 29,
2018
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
89,045

 
$
125,584

Receivables
 
922,853

 
793,911

Inventories
 
515,055

 
512,522

Prepaid expenses and other current assets
 
44,239

 
44,404

Total current assets
 
1,571,192

 
1,476,421

Property, plant and equipment, net of accumulated depreciation of $825,426 and $816,837, respectively
 
582,105

 
552,865

Goodwill
 
791,678

 
797,217

Intangible assets, net
 
84,629

 
95,537

Deferred income taxes
 
15,736

 
17,328

Other assets
 
20,799

 
24,680

Total assets
 
$
3,066,139

 
$
2,964,048

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Short-term borrowings
 
$
93

 
$
3,623

Current installments of long-term debt
 
292

 
365

Accounts payable
 
227,600

 
208,823

Accrued compensation
 
134,015

 
147,765

Contract advances
 
147,677

 
151,687

Contract loss and contract-related reserves
 
57,556

 
47,417

Other accrued liabilities
 
108,541

 
120,944

Total current liabilities
 
675,774

 
680,624

Long-term debt, excluding current installments
 
825,965

 
858,836

Long-term pension and retirement obligations
 
119,269

 
117,471

Deferred income taxes
 
56,664

 
46,477

Other long-term liabilities
 
32,810

 
35,654

Total liabilities
 
1,710,482

 
1,739,062

Shareholders’ equity
 
 
 
 
Common stock - Class A
 
43,789

 
43,785

Common stock - Class B
 
7,491

 
7,495

Additional paid-in capital
 
525,962

 
502,257

Retained earnings
 
2,096,174

 
1,973,514

Treasury shares
 
(750,326
)
 
(738,494
)
Stock Employee Compensation Trust
 
(124,128
)
 
(118,449
)
Supplemental Retirement Plan Trust
 
(76,751
)
 
(72,941
)
Accumulated other comprehensive loss
 
(366,554
)
 
(372,181
)
Total shareholders’ equity
 
1,355,657

 
1,224,986

Total liabilities and shareholders’ equity
 
$
3,066,139

 
$
2,964,048

See accompanying Notes to Consolidated Condensed Financial Statements.
 
 
 
 

6


MOOGIMAGE2A10.JPG
Consolidated Condensed Statements of Shareholders' Equity
(Unaudited)
  
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
COMMON STOCK
 
 
 
 
 
 
 
 
Beginning and end of period
 
$
51,280

 
$
51,280

 
$
51,280

 
$
51,280

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
 
Beginning of period
 
510,538

 
490,055

 
502,257

 
492,246

Issuance of treasury shares
 
(1,186
)
 
(141
)
 
(116
)
 
(2,874
)
Equity-based compensation expense
 
1,439

 
894

 
5,130

 
4,394

Adjustment to market - SECT, SERP and other
 
15,171

 
(4,298
)
 
18,691

 
(7,256
)
End of period
 
525,962

 
486,510

 
525,962

 
486,510

RETAINED EARNINGS
 
 
 
 
 
 
 
 
Beginning of period
 
2,057,435

 
1,901,182

 
1,973,514

 
1,847,819

Net earnings attributable to Moog
 
47,465

 
40,683

 
133,893

 
55,947

Dividends
 
(8,726
)
 
37

 
(26,156
)
 
(8,941
)
Adoption of ASC 606
 

 

 
14,923

 

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

 

 

 
47,077

End of period
 
2,096,174

 
1,941,902

 
2,096,174

 
1,941,902

TREASURY SHARES AT COST
 
 
 
 
 
 
 
 
Beginning of period
 
(749,845
)
 
(739,091
)
 
(738,494
)
 
(739,157
)
Class A and B shares issued related to compensation
 
1,186

 
141

 
6,154

 
5,325

Class A and B shares purchased
 
(1,667
)
 
(92
)
 
(17,986
)
 
(5,210
)
End of period
 
(750,326
)
 
(739,042
)
 
(750,326
)
 
(739,042
)
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
 
 
 
 
Beginning of period
 
(109,506
)
 
(93,330
)
 
(118,449
)
 
(89,919
)
Issuance of shares
 
557

 

 
18,236

 
1,941

Purchase of shares
 
(5,973
)
 
(530
)
 
(13,327
)
 
(8,444
)
Adjustment to market
 
(9,206
)
 
3,956

 
(10,588
)
 
6,518

End of period
 
(124,128
)
 
(89,904
)
 
(124,128
)
 
(89,904
)
SUPPLEMENTAL RETIREMENT PLAN (SERP) TRUST
 
 
 
 
 
 
 
 
Beginning of period
 
(75,079
)
 
(12,078
)
 
(72,941
)
 
(12,474
)
Issuance of shares
 
4,293

 

 
4,293

 

Adjustment to market
 
(5,965
)
 
342

 
(8,103
)
 
738

End of period
 
(76,751
)
 
(11,736
)
 
(76,751
)
 
(11,736
)
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
 
Beginning of period
 
(370,381
)
 
(342,314
)
 
(372,181
)
 
(335,491
)
Other comprehensive income (loss)
 
3,827

 
(34,429
)
 
5,627

 
5,825

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

 

 

 
(47,077
)
End of period
 
(366,554
)
 
(376,743
)
 
(366,554
)
 
(376,743
)
TOTAL MOOG SHAREHOLDERS’ EQUITY
 
$
1,355,657

 
$
1,262,267

 
$
1,355,657

 
$
1,262,267

NONCONTROLLING INTEREST
 
 
 
 
 
 
 
 
Beginning of period
 

 

 

 

Net earnings attributable to noncontrolling interest
 

 
67

 

 
67

Foreign currency translation adjustment
 

 
(26
)
 

 
(26
)
Acquisition of noncontrolling interest
 

 
485

 

 
485

End of period
 

 
526

 

 
526

TOTAL SHAREHOLDERS’ EQUITY
 
$
1,355,657

 
$
1,262,793

 
$
1,355,657

 
$
1,262,793



7


MOOGIMAGE2A10.JPG
Consolidated Statements of Shareholders’ Equity, Shares
(Unaudited)
  
 
Three Months Ended
 
Nine Months Ended
(share data)
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
COMMON STOCK - CLASS A
 
 
 
 
 
 
 
 
Beginning of period
 
43,785,435

 
43,735,558

 
43,784,489

 
43,704,286

Conversion of Class B to Class A
 
3,612

 
44,679

 
4,558

 
75,951

End of period
 
43,789,047

 
43,780,237

 
43,789,047

 
43,780,237

COMMON STOCK - CLASS B
 
 
 
 
 
 
 
 
Beginning of period
 
7,494,278

 
7,544,155

 
7,495,224

 
7,575,427

Conversion of Class B to Class A
 
(3,612
)
 
(44,679
)
 
(4,558
)
 
(75,951
)
End of period
 
7,490,666

 
7,499,476

 
7,490,666

 
7,499,476

TREASURY SHARES - CLASS A COMMON STOCK
 
 
 
 
 
 
 
 
Beginning of period
 
(10,882,780
)
 
(10,891,108
)
 
(10,872,575
)
 
(10,933,003
)
Class A shares issued related to compensation
 
31,369

 
3,514

 
103,232

 
83,193

Class A shares purchased
 
(13,430
)
 
(806
)
 
(95,498
)
 
(38,590
)
End of period
 
(10,864,841
)
 
(10,888,400
)
 
(10,864,841
)
 
(10,888,400
)
TREASURY SHARES - CLASS B COMMON STOCK
 
 
 
 
 
 
 
 
Beginning of period
 
(3,347,250
)
 
(3,327,853
)
 
(3,323,996
)
 
(3,333,927
)
Class B shares issued related to compensation
 
6,136

 
221

 
104,465

 
28,460

Class B shares purchased
 
(4,000
)
 
(304
)
 
(125,583
)
 
(22,469
)
End of period
 
(3,345,114
)
 
(3,327,936
)
 
(3,345,114
)
 
(3,327,936
)
SECT - CLASS A COMMON STOCK
 
 
 
 
 
 
 
 
Beginning and end of period
 
(425,148
)
 
(425,148
)
 
(425,148
)
 
(425,148
)
SECT - CLASS B COMMON STOCK
 
 
 
 
 
 
 
 
Beginning of period
 
(846,527
)
 
(723,963
)
 
(983,772
)
 
(654,753
)
Issuance of shares
 
6,490

 

 
227,816

 
21,871

Purchase of shares
 
(67,712
)
 
(6,774
)
 
(151,793
)
 
(97,855
)
End of period
 
(907,749
)
 
(730,737
)
 
(907,749
)
 
(730,737
)
SERP - CLASS B COMMON STOCK
 
 
 
 
 
 
 
 
Beginning of period
 
(876,170
)
 
(150,000
)
 
(876,170
)
 
(150,000
)
Issuance of shares
 
50,000

 

 
50,000

 

Beginning and end of period
 
(826,170
)
 
(150,000
)
 
(826,170
)
 
(150,000
)


8


MOOGIMAGE2A10.JPG
Consolidated Condensed Statements of Cash Flows
(Unaudited)

 
 
Nine Months Ended
(dollars in thousands)
 
June 29,
2019
 
June 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings attributable to Moog and noncontrolling interest
 
$
133,893

 
$
56,014

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation
 
53,744

 
54,693

Amortization
 
10,364

 
13,628

Deferred income taxes
 
3,764

 
35,549

Equity-based compensation expense
 
5,130

 
4,394

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

 
24,246

Other
 
2,550

 
4,743

Changes in assets and liabilities providing (using) cash:
 
 
 
 
Receivables
 
(42,267
)
 
(27,597
)
Inventories
 
(68,519
)
 
(27,840
)
Accounts payable
 
19,412

 
12,778

Contract advances
 
(4,670
)
 
(165
)
Accrued expenses
 
(9,450
)
 
11,709

Accrued income taxes
 
(5,564
)
 
(1,817
)
Net pension and post retirement liabilities
 
20,486

 
(130,135
)
Other assets and liabilities
 
10,222

 
16,150

Net cash provided by operating activities
 
129,095

 
46,350

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Acquisitions of businesses, net of cash acquired
 

 
(47,947
)
Purchase of property, plant and equipment
 
(91,083
)
 
(70,759
)
Other investing transactions
 
2,518

 
(3,448
)
Net cash used by investing activities
 
(88,565
)
 
(122,154
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net short-term (borrowings) repayments
 
(3,560
)
 
1,357

Proceeds from revolving lines of credit
 
570,200

 
301,500

Payments on revolving lines of credit
 
(604,513
)
 
(411,610
)
Proceeds from long-term debt
 

 
11,216

Payments on long-term debt
 
(255
)
 
(21,849
)
Payment of dividends
 
(26,156
)
 
(8,941
)
Proceeds from sale of treasury stock
 
2,443

 
2,451

Purchase of outstanding shares for treasury
 
(17,986
)
 
(5,210
)
Proceeds from sale of stock held by SECT
 
10,036

 
1,941

Purchase of stock held by SECT
 
(13,327
)
 
(8,444
)
Proceeds from sale of SERP stock
 
4,293

 

Other financing transactions
 

 
484

Net cash used by financing activities
 
(78,825
)
 
(137,105
)
Effect of exchange rate changes on cash
 
(366
)
 
2,266

Decrease in cash, cash equivalents and restricted cash
 
(38,661
)
 
(210,643
)
Cash, cash equivalents and restricted cash at beginning of period
 
127,706

 
386,969

Cash, cash equivalents and restricted cash at end of period
 
$
89,045

 
$
176,326

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
Treasury shares issued as compensation
 
$
11,795

 
$

Equipment acquired through financing
 
148

 

See accompanying Notes to Consolidated Condensed Financial Statements.

9


MOOGIMAGE2A10.JPG
Notes to Consolidated Condensed Financial Statements
Nine Months Ended Ended June 29, 2019
(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 29, 2019 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 29, 2018 . 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. Management does not consider the amounts reclassified to be material.

Recent Accounting Pronouncements 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 adopted this standard using the modified retrospective method, under which prior years' results are not restated, but supplemental information is provided in our disclosures to present 2019 results before effect of the standard. In addition, a cumulative adjustment was made to shareholders' equity at the beginning of 2019. Supplemental information is provided in our disclosures to present 2019 results before effect of the standard.
Date adopted:
Q1 2019
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 adopted this standard retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the Consolidated Condensed Statement of Earnings. Supplemental information is provided in our disclosures to present 2018 results before effect of the standard.

 
Date adopted:
Q1 2019
    

10



Recent Accounting Pronouncements Not Yet Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
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 plan to adopt the standard using the modified retrospective method without adjusting prior comparative periods. We expect to record a material right-of-use asset and lease liability on the Consolidated Condensed Balance Sheet. 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. Upon adoption, we do not anticipate material changes to our Consolidated Condensed Statement of Earnings or Consolidated Condensed Statement of Cash Flows. We have not yet fully quantified the impact on our financial statements and related disclosures.
Planned date of adoption:
Q1 2020
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
ASU no. 2018-15
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
 
The standard amends ASC 350 to include in its scope implementation costs of a Cloud Computing Arrangement (CCA) that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
 
We are currently evaluating the effect on our financial statements and related disclosures.
Planned date of adoption:
Q1 2021


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 an immaterial impact on our financial statements and related disclosures.
In accordance with SEC Final Rule Release No. 33-10532, we have adopted Rule 3-04 of Regulation S-X during the first quarter of 2019 and have disclosed changes in the Consolidated Condensed Statement of Shareholders' Equity and the amount of dividends per share for each class of shares for all periods presented. Refer to Note 16, Earnings per Share and Dividends.


11


Impact of Recent Accounting Pronouncements Adopted

On September 30, 2018, we adopted ASC 606: Revenue from Contracts with Customers and the related amendments (ASC 606), using the modified retrospective method, as described above. ASC 606 was applied to contracts that were not completed as of September 29, 2018. Prior periods have not been restated and continue to be reported under the accounting standard in effect for those periods. Previously, we recognized revenue under ASC 605: Revenue Recognition (ASC 605).

The cumulative effect from the adoption of ASC 606 as of September 30, 2018 was as follows:

 
September 29, 2018
 
Adjustments due to adoption of ASC 606
 
September 30, 2018
ASSETS
 
 
 
 
 
 
Receivables
 
$
793,911

 
$
89,121

 
$
883,032

Inventories
 
512,522

 
(65,991
)
 
446,531

Deferred income taxes
 
17,328

 
134

 
17,462

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Contract advances
 
$
151,687

 
$
921

 
$
152,608

Contract loss and contract-related reserves
 
47,417

 
2,430

 
49,847

Other accrued liabilities
 
120,944

 
1,139

 
122,083

Deferred income taxes
 
46,477

 
3,851

 
50,328

Retained earnings
 
1,973,514

 
14,923

 
1,988,437



The tables below represent the impact of the adoption of ASC 606 on the Consolidated Condensed Statement of Earnings for the three and nine months ended June 29, 2019 .

 
 
Three Months Ended

 
Under ASC 605
 
Effect of ASC 606
 
As Reported Under ASC 606
Net sales
 
$
737,887

 
$
3,082

 
$
740,969

Cost of sales
 
531,952

 
(2,902
)
 
529,050

Gross profit
 
205,935

 
5,984

 
211,919

Earnings before income taxes
 
55,736

 
5,984

 
61,720

Income taxes
 
12,735

 
1,520

 
14,255

Net earnings
 
$
43,001

 
$
4,464

 
$
47,465

 
 
Nine Months Ended
 
 
Under ASC 605
 
Effect of ASC 606
 
As Reported Under ASC 606
Net sales
 
$
2,119,821

 
$
19,635

 
$
2,139,456

Cost of sales
 
1,521,720

 
8,914

 
1,530,634

Gross profit
 
598,101

 
10,721

 
608,822

Earnings before income taxes
 
164,801

 
10,721

 
175,522

Income taxes
 
38,863

 
2,766

 
41,629

Net earnings
 
$
125,938

 
$
7,955

 
$
133,893





12


The table below represents the impact of the adoption of ASC 606 on the Consolidated Condensed Balance Sheet as of June 29, 2019 .

 
Under ASC 605
 
Effect of ASC 606
 
As Reported Under ASC 606
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Receivables
 
$
813,187

 
$
109,666

 
$
922,853

Inventories
 
592,925

 
(77,870
)
 
515,055

Total current assets
 
1,539,396

 
31,796

 
1,571,192

Deferred income taxes
 
15,783

 
(47
)
 
15,736

Total assets
 
3,034,390

 
31,749

 
3,066,139

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Contract advances
 
$
148,393

 
$
(716
)
 
$
147,677

Contract loss and contract-related reserves
 
55,755

 
1,801

 
57,556

Other accrued liabilities
 
104,656

 
3,885

 
108,541

Total current liabilities
 
670,804

 
4,970

 
675,774

Deferred income taxes
 
53,054

 
3,610

 
56,664

Total liabilities
 
1,701,902

 
8,580

 
1,710,482

Shareholders’ equity
 
 
 
 
 
 
Retained earnings
 
2,073,296

 
22,878

 
2,096,174

Accumulated other comprehensive loss
 
(366,845
)
 
291

 
(366,554
)
Total shareholders’ equity
 
1,332,488

 
23,169

 
1,355,657

Total liabilities and shareholders’ equity
 
3,034,390

 
31,749

 
3,066,139



The tables below represent the impact of the adoption of ASU 2017-07: Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost , on the Consolidated Condensed Statement of Earnings for the three and nine months ended June 30, 2018 .
 
 
Three Months Ended

 
As Reported,
June 30, 2018
 
Impact of Adoption
 
As Adjusted,
June 30, 2018
Cost of sales
 
$
492,234

 
$
(275
)
 
$
491,959

Gross profit
 
197,386

 
275

 
197,661

Research and development
 
31,040

 
(87
)
 
30,953

Selling, general and administrative
 
103,053

 
(1,331
)
 
101,722

Other
 
1,037

 
1,693

 
2,730

 
 
Nine Months Ended
 
 
As Reported,
June 30, 2018
 
Impact of Adoption
 
As Adjusted,
June 30, 2018
Cost of sales
 
$
1,424,731

 
$
(834
)
 
$
1,423,897

Gross profit
 
574,144

 
834

 
574,978

Research and development
 
97,545

 
(263
)
 
97,282

Selling, general and administrative
 
299,002

 
(3,996
)
 
295,006

Other
 
45

 
5,093

 
5,138




13




The tables below represent the impact of the adoption of ASU 2017-07 on operating profit and deductions from operating profit for the three and nine months ended June 30, 2018 .
 
 
Three Months Ended
 
 
As Reported,
June 30, 2018
 
Impact of Adoption
 
As Adjusted,
June 30, 2018
Operating profit:
 

 

 

Aircraft Controls
 
$
33,342

 
$
259

 
$
33,601

Space and Defense Controls
 
16,513

 
176

 
16,689

Industrial Systems
 
24,283

 
689

 
24,972

Total operating profit
 
$
74,138

 
$
1,124

 
$
75,262

Deductions from operating profit:
 
 
 
 
 
 
Non-service pension expense
 
$

 
$
1,693

 
$
1,693

Corporate and other expenses, net
 
$
9,439

 
$
(569
)
 
$
8,870

 
 
Nine Months Ended
 
 
As Reported,
June 30, 2018
 
Impact of Adoption
 
As Adjusted,
June 30, 2018
Operating profit:
 
 
 
 
 
 
Aircraft Controls
 
$
97,590

 
$
847

 
$
98,437

Space and Defense Controls
 
49,643

 
561

 
50,204

Industrial Systems
 
37,479

 
1,976

 
39,455

Total operating profit
 
$
184,712

 
$
3,384

 
$
188,096

Deductions from operating profit:
 
 
 
 
 
 
Non-service pension expense
 
$

 
$
5,093

 
$
5,093

Corporate and other expenses, net
 
$
25,275

 
$
(1,709
)
 
$
23,566




Note 2 - Revenue from Contracts with Customers

We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606. The first step is identifying the contract. The identification of a contract with a customer requires an assessment of each party’s rights and obligations regarding the products or services to be transferred, including an evaluation of termination clauses and presently enforceable rights and obligations. Each party’s rights and obligations and the associated terms and conditions are typically determined in purchase orders. For sales that are governed by master supply agreements under which provisions define specific program requirements, purchase orders are issued under these agreements to reflect presently enforceable rights and obligations for the units of products and services being purchased.

Contracts are sometimes modified to account for changes in contract specifications and requirements. When this occurs, we assess the modification as prescribed in ASC 606 and determine whether the existing contract needs to be modified (and revenue cumulatively caught up), whether the existing contract needs to be terminated and a new contract needs to be created, or whether the existing contract remains and a new contract needs to be created. This is determined based on the rights and obligations within the modification as well as the associated transaction price.


14


The next step is identifying the performance obligations. A performance obligation is a promise to transfer goods or services to a customer that is distinct in the context of the contract, as defined by ASC 606. We identify a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of our assessment, we consider all goods and/or services promised in the contract, regardless of whether they are explicitly stated or implied by customary business practices. The products and services in our contracts are typically not distinct from one another due to their complexity and reliance on each other or, in many cases, we provide a significant integration service. Accordingly, many of our contracts are accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product life cycles. Warranties are provided on certain contracts, but do not typically provide for services beyond standard assurances and are therefore not distinct performance obligations under ASC 606.

The third step is determining the transaction price, which represents the amount of consideration we expect to be entitled to receive from a customer in exchange for providing the goods or services. There are times when this consideration is variable, for example a volume discount, and must be estimated. Sales, use, value-added, and excise taxes are excluded from the transaction price, where applicable.

The fourth step is allocating the transaction price. The transaction price must be allocated to the performance obligations identified in the contract based on relative stand-alone selling prices when available, or an estimate for each distinct good or service in the contract when standalone prices are not available. Our contracts with customers generally require payment under normal commercial terms after delivery. Payment terms are typically within 30 to 60 days of delivery. The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment.

The final step is the recognition of revenue. We recognize revenue as the performance obligations are satisfied. ASC 606 provides guidance to help determine if we are satisfying the performance obligation at a point in time or over time. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative use of the product or service. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.

Under ASC 606, revenue recognized over time using the cost-to-cost method of accounting was 64% for the three and nine months ended June 29, 2019 . The over time method of revenue recognition is predominantly used in Aircraft Controls and Space and Defense Controls. We use this method for U.S. Government contracts and repair and overhaul arrangements as we are creating or enhancing assets that the customer controls as the assets are being created or enhanced. In addition, many of our large commercial contracts qualify for over time accounting as our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed to date. Our over time contracts are primarily firm fixed price.

Revenue is recognized on contracts using the cost-to-cost method of accounting as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. We believe that cumulative costs incurred to date as a percentage of estimated total contract costs at completion is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. Estimates are reviewed and updated quarterly for substantially all contracts. For the three and nine months ended June 29, 2019 , we recognized revenues of $3,898 and $14,336 , respectively, for adjustments made to performance obligations satisfied (or partially satisfied) in previous periods.

Contract costs include only allocable, allowable and reasonable costs which are included in cost of sales when incurred. For applicable U.S. Government contracts, contract costs are determined in accordance with the Federal Acquisition Regulations and the related Cost Accounting Standards. The nature of these costs includes development engineering costs and product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded as a result of the revenue recognized less costs incurred in any reporting period. Variable consideration and contract modifications, such as performance incentives, penalties, contract claims or change orders are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Revenue recognized on contracts for unresolved claims or unapproved contract change orders was not material for the three and nine months ended June 29, 2019 .

15



As of  June 29, 2019 , we had contract loss and contract-related reserves of $57,556 . For contracts with anticipated losses at completion, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. Loss reserves are more common on firm fixed-price contracts that involve, to varying degrees, the design and development of new and unique controls or control systems to meet the customers’ specifications. Contract-related loss reserves are recorded for the additional work needed on completed and delivered products in order for them to meet contract specifications. In accordance with ASC 606, we calculate contract losses at the contract level, versus the performance obligation level.

Revenue recognized at the point in time control was transferred to the customer was 36% for the three and nine months ended June 29, 2019 . This method of revenue recognition is used most frequently in Industrial Systems. We use this method for commercial contracts in which the asset being created has an alternative use. We determine the point in time control transfers to the customer by weighing the five indicators provided by ASC 606 - the entity has a present right to payment; the customer has legal title; the customer has physical possession; the customer has the significant risks and rewards of ownership; and the customer has accepted the asset. When control has transferred to the customer, profit is generated as cost of sales is recorded and as revenue is recognized. Inventory costs include all product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead cost allocations. Shipping and handling costs are considered costs to fulfill a contract and not considered performance obligations. They are included in cost of sales as incurred.
Contract Assets and Liabilities
Unbilled receivables (contract assets) primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. These are included as Receivables on the Consolidated Condensed Balance Sheets. Contract advances (contract liabilities) relate to payments received from customers in advance of the satisfaction of performance obligations for a contract. We do not consider contract advances to be significant financing components as the intent of these payments in advance are for reasons other than providing a significant financing benefit and are customary in our industry.
Total contract assets and contract liabilities are as follows:
 
 
June 29,
2019
 
September 30, 2018
Unbilled receivables
 
$
444,762

 
$
405,610

Contract advances
 
147,677

 
152,608

Net contract assets
 
$
297,085

 
$
253,002



The increase in contract assets reflects the net impact of additional unbilled revenues recorded in excess of revenue recognized during the period. The decrease in contract liabilities reflects the net impact of revenue recognized in excess of additional deferred revenues recorded during the period. For the three and nine months ended June 29, 2019 , we recognized  $17,446  and $111,032 of revenue, respectively, that was included in the contract liability balance at the beginning of the period.
Remaining Performance Obligations
As of June 29, 2019 , the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied), also known as backlog, was approximately $2,150,000 . We expect to recognize approximately 74% of that amount as sales over the next twelve months and the balance thereafter.

Disaggregation of Revenue
See Note 17, Segments, for disclosures related to disaggregation of revenue.

16


Note 3 - Acquisitions, Divestitures and Equity Method Investments
In the first quarter of 2019, we sold a non-core business of our Industrial Systems segment for $4,191 in cash and recorded a gain in other income of $2,641 .
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 $5,442 . 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 ("Vues") located in the Czech Republic, which included a 74% ownership interest in a subsidiary located in Germany. The purchase price, net of acquired cash, was $64,140 , consisting of $42,961 in cash and $21,179 of assumed debt. VUES designs and manufactures electric motors and generators, and provides customized solutions. On September 6, 2018, we acquired the remaining 26% noncontrolling interest for $1,843 in cash. The difference between the cash paid and the adjustment to the noncontrolling interest is reflected in additional paid-in capital. 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. As of June 29, 2019 , we have made total contributions of $5,100 . This operation is included in our Aircraft Controls segment.
Note 4 - Receivables
Receivables consist of:
 
 
June 29,
2019
 
September 29,
2018
Accounts receivable
 
$
230,474

 
$
295,180

Long-term contract receivables:
 
 
 
 
Billed receivables
 
232,600

 
156,414

Unbilled receivables
 
444,762

 
316,489

Total long-term contract receivables
 
677,362

 
472,903

Other
 
20,123

 
30,787

Less allowance for doubtful accounts
 
(5,106
)
 
(4,959
)
Receivables
 
$
922,853

 
$
793,911


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 7, Indebtedness, for additional disclosures related to the Securitization Program.
Note 5 - Inventories
Inventories, net of reserves, consist of:
 
 
June 29,
2019
 
September 29,
2018
Raw materials and purchased parts
 
$
187,167

 
$
197,071

Work in progress
 
261,903

 
240,885

Finished goods
 
65,985

 
74,566

Inventories
 
$
515,055

 
$
512,522


There are no material inventoried costs relating to long-term contracts where revenue is accounted for using the cost-to-cost method of accounting as of June 29, 2019 or September 29, 2018 .

17


Note 6 - 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 29, 2018
$
179,907

$
261,732

$
355,578

$
797,217

Divestitures


(1,237
)
(1,237
)
Foreign currency translation
(1,351
)
(22
)
(2,929
)
(4,302
)
Balance at June 29, 2019
$
178,556

$
261,710

$
351,412

$
791,678


Goodwill in our Space and Defense Controls segment is net of a $4,800 accumulated impairment loss at June 29, 2019 .
Goodwill in our Medical Devices reporting unit, included in our Industrial Systems segment, is net of a $38,200 accumulated impairment loss at June 29, 2019 .
The components of intangible assets are as follows:
 
 
 
 
June 29, 2019
 
September 29, 2018
  
 
Weighted-
Average
Life (years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer-related
 
11
 
$
134,124

 
$
(99,521
)
 
$
135,379

 
$
(96,090
)
Technology-related
 
9
 
69,771

 
(51,731
)
 
69,393

 
(49,731
)
Program-related
 
19
 
64,955

 
(37,088
)
 
64,988

 
(33,740
)
Marketing-related
 
8
 
23,418

 
(19,819
)
 
23,489

 
(18,868
)
Other
 
10
 
4,164

 
(3,644
)
 
4,305

 
(3,588
)
Intangible assets
 
12
 
$
296,432

 
$
(211,803
)
 
$
297,554

 
$
(202,017
)


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 $3,088 and $10,173 for the three and nine months ended June 29, 2019 and $4,127 and $13,398 for the three and nine months ended June 30, 2018 . Based on acquired intangible assets recorded at June 29, 2019 , amortization is expected to be approximately $13,200 in 2019 , $11,500 in 2020 , $9,600 in 2021 , $8,100 in 2022 and $7,200 in 2023 .                                     

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Note 7 - 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 29,
2019
 
September 29,
2018
U.S. revolving credit facility
 
$
391,889

 
$
430,000

SECT revolving credit facility
 
4,000

 

Senior notes
 
300,000

 
300,000

Securitization program
 
130,000

 
130,000

Obligations under capital leases
 
804

 
918

Senior debt
 
826,693

 
860,918

Less deferred debt issuance cost
 
(436
)
 
(1,717
)
Less current installments
 
(292
)
 
(365
)
Long-term debt
 
$
825,965

 
$
858,836


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.
The SECT has a revolving credit facility with a borrowing capacity of $35,000 , maturing on July 26, 2020. Interest is based on LIBOR plus an applicable margin. A commitment fee is also charged based on a percentage of the unused amounts available and is not material.
At June 29, 2019 , we had $300,000 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, effectively increasing our borrowing capacity by up to $130,000 , was extended on October 30, 2018 and now matures on October 30, 2020 . 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 29, 2019 , our minimum borrowing requirement was $104,000 .


19


Note 8 - 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