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



☐	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	☐

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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

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Moog Inc.

QUARTERLY REPORT ON FORM 10-Q

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PART I	FINANCIAL INFORMATION		PAGE

	Item 1	Financial Statements:

		Consolidated Condensed Statements of Earnings for the Three and Nine Months Ended June 29, 2019 and June 30, 2018	4

		Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 29, 2019 and June 30, 2018	5

		Consolidated Condensed Balance Sheets as of June 29, 2019 and September 29, 2018	6

		Consolidated Condensed Statements of Shareholders' Equity for the Three and Nine Months Ended June 29, 2019 and June 30, 2018	7

		Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 29, 2019 and June 30, 2018	9

		Notes to Consolidated Condensed Financial Statements	10

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

	Item 3	Quantitative and Qualitative Disclosures about Market Risk	45

	Item 4	Controls and Procedures	45


PART II	OTHER INFORMATION

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	46

	Item 6	Exhibits	47

SIGNATURES			48

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

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.

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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.

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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.

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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

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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	)

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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.

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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

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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.

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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

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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

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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.

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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 .

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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.

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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 .

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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 .

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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
	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Warranty accrual at beginning of period	$	24,217		$	28,255		$	25,537		$	25,848
Warranties issued during current period	6,666			3,451			12,691			11,488
Adjustments to pre-existing warranties	(125		)	(80		)	(523		)	(325		)
Reductions for settling warranties	(5,275		)	(3,219		)	(12,144		)	(9,141		)
Foreign currency translation	(102		)	(701		)	(180		)	(164		)
Warranty accrual at end of period	$	25,381		$	27,706		$	25,381		$	27,706

Note 9 - 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 29, 2019 , we had interest rate swaps with notional amounts totaling $105,000 . The interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at 2.99% , including the applicable margin of 1.63% as of June 29, 2019 . 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, the British pound and the Czech koruna, we had outstanding foreign currency forwards with notional amounts of $62,126 at June 29, 2019 . These contracts mature at various times through February 26, 2021 .

We use forward currency contracts to hedge our net investment in certain foreign subsidiaries. As of June 29, 2019 , we had no outstanding net investment hedges.

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 2019 or 2018 .

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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 $137,634 at June 29, 2019 . 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 29, 2019			June 30, 2018			June 29, 2019		June 30, 2018
Net gain (loss)	$	(574	)	$	(1,028	)	$	195	$	(4,037	)

Summary of derivatives

The fair value and classification of derivatives is summarized as follows:



	June 29, 2019	September 29, 2018
Derivatives designated as hedging instruments:

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