Quarterly Report (10-q)

Date : 04/26/2019 @ 3:29PM
Source : Edgar (US Regulatory)
Stock : Moog Inc (MOG.B)
Quote : 90.3  3.92 (4.54%) @ 8:59PM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
___________________________________________
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 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
_________________________________________
MOOGIMAGEA07.JPG
( Exact name of registrant as specified in its charter )
__________________________________________
New York State
16-0757636
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
East Aurora, New York
14052-0018
(Address of principal executive offices)
(Zip Code)
         (716) 652-2000
 (Telephone number including area code)
__________________________________________________________
Former name, former address and former fiscal year, if changed since last report.

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

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

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

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

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

The number of shares outstanding of each class of common stock as of April 23, 2019 was:
Class A common stock, $1.00 par value, 32,477,568 shares
Class B common stock, $1.00 par value, 2,423,575 shares






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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MOOGIMAGE2A09.JPG
Consolidated Condensed Statements of Earnings
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands, except share and per share data)
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Net sales
 
$
718,811

 
$
689,049

 
$
1,398,487

 
$
1,316,584

Cost of sales
 
521,410

 
488,788

 
1,001,584

 
931,938

Inventory write-down - restructuring
 

 
7,329

 

 
7,329

Gross profit
 
197,401

 
192,932

 
396,903

 
377,317

Research and development
 
31,344

 
33,995

 
63,220

 
66,329

Selling, general and administrative
 
99,860

 
98,665

 
196,186

 
193,284

Interest
 
9,939

 
9,089

 
19,621

 
17,735

Restructuring
 

 
24,058

 

 
24,058

Other
 
640

 
1,456

 
4,074

 
2,408

Earnings before income taxes
 
55,618

 
25,669

 
113,802

 
73,503

Income taxes
 
13,259

 
11,704

 
27,374

 
58,239

Net earnings
 
$
42,359

 
$
13,965

 
$
86,428

 
$
15,264

 
 
 
 
 
 
 
 
 
Net earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
1.21

 
$
0.39

 
$
2.48

 
$
0.43

Diluted
 
$
1.20

 
$
0.39

 
$
2.46

 
$
0.42

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.25

 
$
0.25

 
$
0.50

 
$
0.25

 
 
 
 
 
 
 
 
 
Average common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
34,886,541

 
35,770,089

 
34,850,898

 
35,771,247

Diluted
 
35,241,113

 
36,179,858

 
35,183,471

 
36,190,455

See accompanying Notes to Consolidated Condensed Financial Statements.



3


MOOGIMAGE2A09.JPG
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands)
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019

March 31,
2018
Net earnings
 
$
42,359

 
$
13,965

 
$
86,428

 
$
15,264

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
1,106

 
20,297

 
(8,281
)
 
30,661

Retirement liability adjustment
 
4,677

 
4,682

 
9,496

 
8,938

Change in accumulated income (loss) on derivatives
 
(79
)
 
(579
)
 
585

 
655

Other comprehensive income (loss), net of tax
 
5,704

 
24,400

 
1,800

 
40,254

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

 
(47,077
)
 

 
(47,077
)
Comprehensive income (loss)
 
$
48,063

 
$
(8,712
)
 
$
88,228

 
$
8,441

See accompanying Notes to Consolidated Condensed Financial Statements.



4


MOOGIMAGE2A09.JPG
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands)
 
March 30,
2019
 
September 29,
2018
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
112,072

 
$
125,584

Receivables
 
898,801

 
793,911

Inventories
 
489,067

 
512,522

Prepaid expenses and other current assets
 
47,229

 
44,404

Total current assets
 
1,547,169

 
1,476,421

Property, plant and equipment, net of accumulated depreciation of $812,879 and $816,837, respectively
 
569,624

 
552,865

Goodwill
 
791,398

 
797,217

Intangible assets, net
 
88,089

 
95,537

Deferred income taxes
 
15,671

 
17,328

Other assets
 
21,006

 
24,680

Total assets
 
$
3,032,957

 
$
2,964,048

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Short-term borrowings
 
$
90

 
$
3,623

Current installments of long-term debt
 
315

 
365

Accounts payable
 
224,555

 
213,982

Accrued compensation
 
126,819

 
147,765

Contract advances
 
169,836

 
151,687

Contract and contract-related loss reserves
 
49,383

 
42,258

Other accrued liabilities
 
117,094

 
120,944

Total current liabilities
 
688,092

 
680,624

Long-term debt, excluding current installments
 
825,692

 
858,836

Long-term pension and retirement obligations
 
116,466

 
117,471

Deferred income taxes
 
53,272

 
46,477

Other long-term liabilities
 
34,993

 
35,654

Total liabilities
 
1,718,515

 
1,739,062

Commitments and contingencies (Note 19)
 

 

Shareholders’ equity
 
 
 
 
Common stock - Class A
 
43,786

 
43,785

Common stock - Class B
 
7,494

 
7,495

Additional paid-in capital
 
510,538

 
502,257

Retained earnings
 
2,057,435

 
1,973,514

Treasury shares
 
(749,845
)
 
(738,494
)
Stock Employee Compensation Trust
 
(109,506
)
 
(118,449
)
Supplemental Retirement Plan Trust
 
(75,079
)
 
(72,941
)
Accumulated other comprehensive loss
 
(370,381
)
 
(372,181
)
Total shareholders’ equity
 
1,314,442

 
1,224,986

Total liabilities and shareholders’ equity
 
$
3,032,957

 
$
2,964,048

See accompanying Notes to Consolidated Condensed Financial Statements.
 
 
 
 

5


MOOGIMAGE2A09.JPG
Consolidated Condensed Statements of Shareholders' Equity
(Unaudited)
  
 
Three Months Ended
 
Six Months Ended
(dollars in thousands)
 
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
COMMON STOCK
 
 
 
 
 
 
 
 
Beginning and end of period
 
$
51,280

 
$
51,280

 
$
51,280

 
$
51,280

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
 
Beginning of period
 
491,945

 
498,699

 
502,257

 
492,246

Issuance of treasury shares
 
(1,390
)
 
(1,100
)
 
1,070

 
(2,733
)
Equity-based compensation expense
 
1,683

 
1,499

 
3,691

 
3,500

Adjustment to market - SECT, SERP and other
 
18,300

 
(9,043
)
 
3,520

 
(2,958
)
End of period
 
510,538

 
490,055

 
510,538

 
490,055

RETAINED EARNINGS
 
 
 
 
 
 
 
 
Beginning of period
 
2,023,803

 
1,849,118

 
1,973,514

 
1,847,819

Net earnings
 
42,359

 
13,965

 
86,428

 
15,264

Dividends
 
(8,727
)
 
(8,978
)
 
(17,430
)
 
(8,978
)
Adoption of ASC 606
 

 

 
14,923

 

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

 
47,077

 

 
47,077

End of period
 
2,057,435

 
1,901,182

 
2,057,435

 
1,901,182

TREASURY SHARES AT COST
 
 
 
 
 
 
 
 
Beginning of period
 
(747,900
)
 
(739,210
)
 
(738,494
)
 
(739,157
)
Class A and B shares issued related to compensation
 
3,833

 
2,503

 
4,968

 
5,184

Class A and B shares purchased
 
(5,778
)
 
(2,384
)
 
(16,319
)
 
(5,118
)
End of period
 
(749,845
)
 
(739,091
)
 
(749,845
)
 
(739,091
)
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
 
 
 
 
Beginning of period
 
(102,182
)
 
(98,990
)
 
(118,449
)
 
(89,919
)
Issuance of shares
 
8,918

 
1,941

 
17,679

 
1,941

Purchase of shares
 
(5,424
)
 
(4,091
)
 
(7,354
)
 
(7,914
)
Adjustment to market
 
(10,818
)
 
7,810

 
(1,382
)
 
2,562

End of period
 
(109,506
)
 
(93,330
)
 
(109,506
)
 
(93,330
)
SUPPLEMENTAL RETIREMENT PLAN (SERP) TRUST
 
 
 
 
 
 
 
 
Beginning of period
 
(67,597
)
 
(13,311
)
 
(72,941
)
 
(12,474
)
Adjustment to market
 
(7,482
)
 
1,233

 
(2,138
)
 
396

End of period
 
(75,079
)
 
(12,078
)
 
(75,079
)
 
(12,078
)
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
 
Beginning of period
 
(376,085
)
 
(319,637
)
 
(372,181
)
 
(335,491
)
Other comprehensive income (loss)
 
5,704

 
24,400

 
1,800

 
40,254

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

 
(47,077
)
 

 
(47,077
)
End of period
 
(370,381
)
 
(342,314
)
 
(370,381
)
 
(342,314
)
TOTAL SHAREHOLDERS’ EQUITY
 
$
1,314,442

 
$
1,255,704

 
$
1,314,442

 
$
1,255,704



6



MOOGIMAGE2A09.JPG
Consolidated Statements of Shareholders’ Equity, Shares
(Unaudited)
  
 
Three Months Ended
 
Six Months Ended
(share data)
 
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
COMMON STOCK - CLASS A
 
 
 
 
 
 
 
 
Beginning of period
 
43,785,435

 
43,715,586

 
43,784,489

 
43,704,286

Conversion of Class B to Class A
 

 
19,972

 
946

 
31,272

End of period
 
43,785,435

 
43,735,558

 
43,785,435

 
43,735,558

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

 
7,564,127

 
7,495,224

 
7,575,427

Conversion of Class B to Class A
 

 
(19,972
)
 
(946
)
 
(31,272
)
End of period
 
7,494,278

 
7,544,155

 
7,494,278

 
7,544,155

TREASURY SHARES - CLASS A COMMON STOCK
 
 
 
 
 
 
 
 
Beginning of period
 
(10,897,407
)
 
(10,901,537
)
 
(10,872,575
)
 
(10,933,003
)
Class A shares issued related to compensation
 
48,122

 
15,193

 
71,863

 
79,679

Class A shares purchased
 
(33,495
)
 
(4,764
)
 
(82,068
)
 
(37,784
)
End of period
 
(10,882,780
)
 
(10,891,108
)
 
(10,882,780
)
 
(10,891,108
)
TREASURY SHARES - CLASS B COMMON STOCK
 
 
 
 
 
 
 
 
Beginning of period
 
(3,348,499
)
 
(3,328,064
)
 
(3,323,996
)
 
(3,333,927
)
Class B shares issued related to compensation
 
39,536

 
22,361

 
98,329

 
28,239

Class B shares purchased
 
(38,287
)
 
(22,150
)
 
(121,583
)
 
(22,165
)
End of period
 
(3,347,250
)
 
(3,327,853
)
 
(3,347,250
)
 
(3,327,853
)
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
 
(899,864
)
 
(699,415
)
 
(983,772
)
 
(654,753
)
Issuance of shares
 
113,749

 
21,871

 
221,326

 
21,871

Purchase of shares
 
(60,412
)
 
(46,419
)
 
(84,081
)
 
(91,081
)
End of period
 
(846,527
)
 
(723,963
)
 
(846,527
)
 
(723,963
)
SERP - CLASS B COMMON STOCK
 
 
 
 
 
 
 
 
Beginning and end of period
 
(876,170
)
 
(150,000
)
 
(876,170
)
 
(150,000
)


7


MOOGIMAGE2A09.JPG
Consolidated Condensed Statements of Cash Flows
(Unaudited)

 
 
Six Months Ended
(dollars in thousands)
 
March 30,
2019
 
March 31,
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
86,428

 
$
15,264

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
 
Depreciation
 
36,074

 
35,536

Amortization
 
7,212

 
9,425

Deferred income taxes
 
2,182

 
30,709

Equity-based compensation expense
 
3,691

 
3,500

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

 
21,811

Other
 
1,331

 
2,960

Changes in assets and liabilities providing (using) cash:
 
 
 
 
Receivables
 
(16,621
)
 
(30,111
)
Inventories
 
(44,428
)
 
(20,685
)
Accounts payable
 
11,158

 
11,351

Contract advances
 
17,127

 
5,547

Accrued expenses
 
(6,715
)
 
10,558

Accrued income taxes
 
(1,767
)
 
4,953

Net pension and post retirement liabilities
 
13,039

 
(70,309
)
Other assets and liabilities
 
137

 
14,721

Net cash provided by operating activities
 
108,848

 
45,230

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

 
(42,116
)
Purchase of property, plant and equipment
 
(59,971
)
 
(43,924
)
Other investing transactions
 
2,447

 
(3,710
)
Net cash (used) by investing activities
 
(57,524
)
 
(89,750
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net short-term repayments
 
(3,560
)
 

Proceeds from revolving lines of credit
 
327,300

 
209,500

Payments on revolving lines of credit
 
(361,300
)
 
(269,610
)
Proceeds from long-term debt
 

 
10,000

Payments on long-term debt
 
(167
)
 
(20,614
)
Payment of dividends
 
(17,430
)
 

Proceeds from sale of treasury stock
 
2,443

 
2,451

Purchase of outstanding shares for treasury
 
(16,319
)
 
(5,118
)
Proceeds from sale of stock held by SECT
 
9,479

 
1,941

Purchase of stock held by SECT
 
(7,354
)
 
(7,914
)
Net cash (used) by financing activities
 
(66,908
)
 
(79,364
)
Effect of exchange rate changes on cash
 
(50
)
 
11,418

Increase (decrease) in cash, cash equivalents and restricted cash
 
(15,634
)
 
(112,466
)
Cash, cash equivalents and restricted cash at beginning of period
 
127,706

 
386,969

Cash, cash equivalents and restricted cash at end of period
 
$
112,072

 
$
274,503

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

 
$

Equipment acquired through financing
 
148

 

See accompanying Notes to Consolidated Condensed Financial Statements.

8


MOOGIMAGE2A09.JPG
Notes to Consolidated Condensed Financial Statements
Six Months Ended Ended March 30, 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 six months ended March 30, 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
    

9



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 are currently evaluating the effect 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 minimal 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.


10


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 and contract-related loss reserves
 
42,258

 
2,430

 
44,688

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 six months ended March 30, 2019 .

 
 
Three Months Ended

 
Under ASC 605
 
Effect of ASC 606
 
As Reported Under ASC 606
Net sales
 
$
704,600

 
$
14,211

 
$
718,811

Cost of sales
 
511,889

 
9,521

 
521,410

Gross profit
 
192,711

 
4,690

 
197,401

Earnings before income taxes
 
50,928

 
4,690

 
55,618

Income taxes
 
12,025

 
1,234

 
13,259

Net earnings
 
$
38,903

 
$
3,456

 
$
42,359

 
 
Six Months Ended
 
 
Under ASC 605
 
Effect of ASC 606
 
As Reported Under ASC 606
Net sales
 
$
1,381,934

 
$
16,553

 
$
1,398,487

Cost of sales
 
989,768

 
11,816

 
1,001,584

Gross profit
 
392,166

 
4,737

 
396,903

Earnings before income taxes
 
109,065

 
4,737

 
113,802

Income taxes
 
26,128

 
1,246

 
27,374

Net earnings
 
$
82,937

 
$
3,491

 
$
86,428





11


The table below represents the impact of the adoption of ASC 606 on the Consolidated Condensed Balance Sheet as of March 30, 2019 .

 
Under ASC 605
 
Effect of ASC 606
 
As Reported Under ASC 606
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Receivables
 
$
792,124

 
$
106,677

 
$
898,801

Inventories
 
568,287

 
(79,220
)
 
489,067

Total current assets
 
1,519,712

 
27,457

 
1,547,169

Deferred income taxes
 
15,776

 
(105
)
 
15,671

Total assets
 
3,005,605

 
27,352

 
3,032,957

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Contract advances
 
$
169,349

 
$
487

 
$
169,836

Contract and contract-related loss reserves
 
47,223

 
2,160

 
49,383

Other accrued liabilities
 
114,728

 
2,366

 
117,094

Total current liabilities
 
683,079

 
5,013

 
688,092

Deferred income taxes
 
49,658

 
3,614

 
53,272

Total liabilities
 
1,709,888

 
8,627

 
1,718,515

Shareholders’ equity
 
 
 
 
 
 
Retained earnings
 
2,039,021

 
18,414

 
2,057,435

Accumulated other comprehensive loss
 
(370,692
)
 
311

 
(370,381
)
Total shareholders’ equity
 
1,295,717

 
18,725

 
1,314,442

Total liabilities and shareholders’ equity
 
3,005,605

 
27,352

 
3,032,957



The tables below represent the impact of the adoption of ASU 2017-07 on the Consolidated Condensed Statement of Earnings for the three and six months ended March 31, 2018 .
 
 
Three Months Ended

 
As Reported,
March 31, 2018
 
Impact of Adoption
 
As Adjusted,
March 31, 2018
Cost of sales
 
$
489,071

 
$
(283
)
 
$
488,788

Gross profit
 
192,649

 
283

 
192,932

Research and development
 
34,085

 
(90
)
 
33,995

Selling, general and administrative
 
99,999

 
(1,334
)
 
98,665

Other
 
(251
)
 
1,707

 
1,456

 
 
Six Months Ended
 
 
As Reported,
March 31, 2018
 
Impact of Adoption
 
As Adjusted,
March 31, 2018
Cost of sales
 
$
932,497

 
$
(559
)
 
$
931,938

Gross profit
 
376,758

 
559

 
377,317

Research and development
 
66,505

 
(176
)
 
66,329

Selling, general and administrative
 
195,949

 
(2,665
)
 
193,284

Other
 
(992
)
 
3,400

 
2,408




12




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 six months ended March 31, 2018 .
 
 
Three Months Ended
 
 
As Reported,
March 31, 2018
 
Impact of Adoption
 
As Adjusted,
March 31, 2018
Operating profit (loss):
 

 

 

Aircraft Controls
 
$
33,480

 
$
313

 
$
33,793

Space and Defense Controls
 
16,841

 
201

 
17,042

Industrial Systems
 
(6,050
)
 
622

 
(5,428
)
Total operating profit
 
$
44,271

 
$
1,136

 
$
45,407

Deductions from operating profit:
 
 
 
 
 
 
Non-service pension expense
 
$

 
$
1,707

 
$
1,707

Corporate and other expenses, net
 
$
8,014

 
$
(571
)
 
$
7,443

 
 
Six Months Ended
 
 
As Reported,
March 31, 2018
 
Impact of Adoption
 
As Adjusted,
March 31, 2018
Operating profit (loss):
 
 
 
 
 
 
Aircraft Controls
 
$
64,248

 
$
588

 
$
64,836

Space and Defense Controls
 
33,130

 
385

 
33,515

Industrial Systems
 
13,196

 
1,287

 
14,483

Total operating profit
 
$
110,574

 
$
2,260

 
$
112,834

Deductions from operating profit:
 
 
 
 
 
 
Non-service pension expense
 
$

 
$
3,400

 
$
3,400

Corporate and other expenses, net
 
$
15,836

 
$
(1,140
)
 
$
14,696




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.


13


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 for the three and six months ended March 30, 2019 was 65% and 64% , respectively. 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 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 six months ended March 30, 2019 , we recognized lower revenues of $1,321 and higher revenues of $10,438 , 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 six months ended March 30, 2019 .

14



As of  March 30, 2019 , we had contract and contract-related loss reserves of $49,383 . 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.

For the three and six months ended March 30, 2019 , 35% and 36% of revenue, respectively, was recognized at the point in time control transferred to the customer. 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 as of March 30, 2019 are as follows:
 
 
March 30, 2019
 
September 30, 2018
Unbilled receivables
 
$
430,901

 
$
405,610

Contract advances
 
169,836

 
152,608

Net contract assets
 
$
261,065

 
$
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 increase in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. For the three and six months ended March 30, 2019 , we recognized  $46,078  and $93,586 of revenue, respectively, that was included in the contract liability balance at the beginning of the period.
Remaining Performance Obligations
As of March 30, 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 $2,230,000 . We expect to recognize approximately 73% 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.

15


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. The purchase price allocations for this acquisition are complete.
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 March 30, 2019 , we have made total contributions of $5,100 . This operation is included in our Aircraft Controls segment.
Note 4 - Receivables
Receivables consist of:
 
 
March 30,
2019
 
September 29,
2018
Accounts receivable
 
$
240,180

 
$
295,180

Long-term contract receivables:
 
 
 
 
Billed receivables
 
210,464

 
156,414

Unbilled receivables
 
430,901

 
316,489

Total long-term contract receivables
 
641,365

 
472,903

Other
 
21,900

 
30,787

Less allowance for doubtful accounts
 
(4,644
)
 
(4,959
)
Receivables
 
$
898,801

 
$
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:
 
 
March 30,
2019
 
September 29,
2018
Raw materials and purchased parts
 
$
173,916

 
$
197,071

Work in progress
 
244,948

 
240,885

Finished goods
 
70,203

 
74,566

Inventories
 
$
489,067

 
$
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 March 30, 2019 or September 29, 2018 .

16


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
(32
)
(1
)
(4,549
)
(4,582
)
Balance at March 30, 2019
$
179,875

$
261,731

$
349,792

$
791,398


Goodwill in our Space and Defense Controls segment is net of a $4,800 accumulated impairment loss at March 30, 2019 .
Goodwill in our Medical Devices reporting unit, included in our Industrial Systems segment, is net of a $38,200 accumulated impairment loss at March 30, 2019 .
The components of intangible assets are as follows:
 
 
 
 
March 30, 2019
 
September 29, 2018
  
 
Weighted-
Average
Life (years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer-related
 
11
 
$
134,124

 
$
(98,531
)
 
$
135,379

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

 
(51,081
)
 
69,393

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

 
(35,627
)
 
64,988

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

 
(19,518
)
 
23,489

 
(18,868
)
Other
 
10
 
4,164

 
(3,586
)
 
4,305

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

 
$
(208,343
)
 
$
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 $3,402 and $7,085 for the three and six months ended March 30, 2019 and $4,671 and $9,271 for the three and six months ended March 31, 2018 . Based on acquired intangible assets recorded at March 30, 2019 , amortization is expected to be approximately $13,300 in 2019 , $11,600 in 2020 , $9,700 in 2021 , $8,100 in 2022 and $7,300 in 2023 .                                     

17


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:
 
 
March 30,
2019
 
September 29,
2018
U.S. revolving credit facility
 
$
392,000

 
$
430,000

SECT revolving credit facility
 
4,000

 

Senior notes
 
300,000

 
300,000

Securitization program
 
130,000

 
130,000

Obligations under capital leases
 
870

 
918

Senior debt
 
826,870

 
860,918

Less deferred debt issuance cost
 
(863
)
 
(1,717
)
Less current installments
 
(315
)
 
(365
)
Long-term debt
 
$
825,692

 
$
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 March 30, 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 March 30, 2019 , our minimum borrowing requirement was $104,000 .


18


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
 
Six Months Ended
 
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Warranty accrual at beginning of period
 
$
24,256

 
$
27,748

 
$
25,537

 
$
25,848

Warranties issued during current period
 
4,055

 
3,280

 
6,025

 
8,037

Adjustments to pre-existing warranties
 
(307
)
 
(175
)
 
(398
)
 
(245
)
Reductions for settling warranties
 
(3,892
)
 
(3,007
)
 
(6,869
)
 
(5,922
)
Foreign currency translation
 
105

 
409

 
(78
)
 
537

Warranty accrual at end of period
 
$
24,217

 
$
28,255

 
$
24,217

 
$
28,255


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 March 30, 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 March 30, 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 $69,048 at March 30, 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 March 30, 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 six months of 2019 or 2018 .

19


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 $78,359 at March 30, 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
 
Six Months Ended
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Net gain (loss)
 
$
2,419

 
$
(2,381
)
 
$
769

 
$
(3,009
)

Summary of derivatives
The fair value and classification of derivatives is summarized as follows:
 
 
 
March 30,
2019
 
September 29,
2018
Derivatives designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
Other current assets
 
$
690

 
$
659

Foreign currency contracts
Other assets
 
178

 
41

Interest rate swaps
Other current assets
 
673

 
1,444

Interest rate swaps
Other assets
 
24

 
322

 
Total asset derivatives
 
$
1,565

 
$