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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 28, 2019

OR

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

Commission file number 1-05129
MOOG Inc.
(Exact name of registrant as specified in its charter)
New York
 
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

Securities registered pursuant to Section 12(g) of the Act:     None

Indicate by check mark if the registrant is a well-known issuer, as defined in Rule 405 of the Securities Act. Yes   No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes   No  
 
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   


1


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes    No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company
                
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No  
The aggregate market value of the common stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the common stock on the New York Stock Exchange on March 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2,833 million.
The number of shares outstanding of each class of common stock as of November 5, 2019 was:
Class A common stock, 32,235,795 shares
Class B common stock, 2,416,828 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Moog Inc. Proxy Statement for the Annual Meeting of Shareholders to be held on February 11, 2020 ("2019 Proxy") are incorporated by reference into Part III of this Form 10-K.


























2




MOOGIMAGEA11.JPG
FORM 10-K INDEX
 
 
PART I
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 

3


Disclosure Regarding Forward-Looking Statements
Information included or incorporated by reference in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in this report.
 


4


PART I
The Registrant, Moog Inc., a New York corporation formed in 1951, is referred to in this report as “Moog” or in the nominative “we” or the possessive “our.”
Unless otherwise noted or the context otherwise requires, all references to years in this report are to fiscal years.  
Item 1. 
  
Business.
Description of the Business. Moog is a worldwide designer, manufacturer and systems integrator of high performance precision motion and fluid controls and controls systems for a broad range of applications in aerospace and defense and industrial markets. We have three operating segments: Aircraft Controls, Space and Defense Controls and Industrial Systems.
Additional information describing the business and comparative segment revenues, operating profits and related financial information for 2019, 2018 and 2017 are provided in Note 20, Segments, of Item 8, Financial Statements and Supplementary Data of this report.
Distribution. Our sales and marketing organization consists of individuals possessing highly specialized technical expertise. This expertise is required in order to effectively evaluate a customer’s precision control requirements and to facilitate communication between the customer and our engineering staff. Our sales staff is the primary contact with customers. Manufacturers’ representatives are used to cover certain domestic aerospace markets. Distributors are used selectively to cover certain industrial and medical markets.
Industry and Competitive Conditions. We experience considerable competition in our aerospace and defense and industrial markets. We believe that the principal points of competition in our markets are product quality, reliability, price, design and engineering capabilities, product development, conformity to customer specifications, timeliness of delivery, effectiveness of the distribution organization and quality of support after the sale. We believe we compete effectively on all of these bases. Competitors in our three operating segments include:
Aircraft Controls: Curtiss-Wright, Liebherr, Nabtesco, Parker Hannifin, UTC and Woodward.
Space and Defense Controls: Aerojet Rocketdyne, Airbus, ATA Engineering, Bradford Engineering, Chess Dynamics, Cobham, Curtiss-Wright, ElectroMiniatures, EOS, ESW, Fulcrum Concepts LLC, General Dynamics, Glenair, Honeywell, IHI-Aerospace, JASC, Kearfott, Kollmorgan, Kongsberg, LORD, Marotta, Mission Systems, Ram, RUAG, Rafael, PVP Advanced, Sargent Aerospace & Defense, Schleifring, SEAKR, Silent Sentinel, SL Montevideo, SwRI, UTC, Vacco, Valcor, ValveTech and Woodward.
Industrial Systems: Allied Motion, Baumüller, Atos, Bosch Rexroth, Cardinal Health, Eaton, MTS Systems, Parker-Hannifin, Schleifring, Shinano Kenshi, Smiths Medical, Stemman, Woodward.
Government Contracts. All U.S. Government contracts are subject to termination by the U.S. Government. In 2019, sales under U.S. Government contracts represented 35% of total sales and were primarily within our Aircraft Controls and Space and Defense Controls segments.
Backlog. Our twelve-month backlog represents confirmed orders we believe will be recognized as revenue within the next twelve months. As noted in Item 6, Selected Financial Data of this report, as of September 28, 2019, our twelve-month backlog was $1.5 billion, an increase of 1% compared to September 29, 2018. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report for a discussion on the various business drivers and conditions contributing to the twelve-month backlog change.
Raw Materials. Materials, supplies and components are purchased from numerous suppliers. We believe the loss of any one supplier, although potentially disruptive in the short-term, would not materially affect our operations in the long-term.
Working Capital. See the discussion on operating cycle in Note 1, Summary of Significant Accounting Policies, of Item 8, Financial Statements and Supplementary Data of this report.
Seasonality. Our business is generally not seasonal; however, certain products and systems, such as those in the energy market of our Industrial Systems segment, do experience seasonal variations in sales levels.

5


Patents. We maintain a patent portfolio of issued or pending patents and patent applications worldwide that generally includes the U.S., Europe, China, Japan and India. The portfolio includes patents that relate to electrohydraulic, electromechanical, electronics, hydraulics, components and methods of operation and manufacture as related to motion control and actuation systems. The portfolio also includes patents related to wind turbines, robotics, surveillance/security, vibration control and medical devices. We do not consider any one or more of these patents or patent applications to be material in relation to our business as a whole. The patent portfolio related to certain medical devices is significant to our position in this market as several of these products work exclusively together, and provide us future revenue opportunities.
Research Activities. Research and development activity has been, and continues to be, significant for us. Research and development expense was at least $125 million in each of the last three years and represented approximately 4% of sales in 2019.
Employees. On September 28, 2019, we employed 12,809 full-time employees.
Customers. Our principal customers are Original Equipment Manufacturers, or OEMs, and end users for whom we provide aftermarket support. Aerospace and defense OEM customers collectively represented 56% of 2019 sales. The majority of these sales are to a small number of large companies. Due to the long-term nature of many of the programs, many of our relationships with aerospace and defense OEM customers are based on long-term agreements. Our industrial OEM sales, which represented 32% of 2019 sales, are to a wide range of global customers and are normally based on lead times of 90 days or less. We also provide aftermarket support, consisting of spare and replacement parts and repair and overhaul services, for all of our products. Our major aftermarket customers are the U.S. Government and commercial airlines. In 2019, aftermarket sales accounted for 12% of total sales.
Significant customers in our three operating segments include:
Aircraft Controls: Boeing, Airbus, Lockheed Martin, United Technologies, Northrup Grumman, Japan Aerospace, General Dynamics, Honeywell, Bombardier, BAE Systems Aerospace and the U.S. Government.
Space and Defense Controls: Lockheed Martin, Northrup Grumman, Raytheon, Aerojet Rocketdyne, General Dynamics, Boeing, United Launch Alliance, United Technologies, Honeywell, Airbus, and the U.S. Government.
Industrial Systems: McKesson, Phillips Healthcare, CAE, Nutricia, Integrated Medical Systems, Flight Safety, TurboChef Technologies, MacArtney, Mitsubishi Hitachi Power Systems, and Becton Dickinson.
International Operations. Our operations outside the United States are conducted primarily through wholly-owned foreign subsidiaries and are located predominantly in Europe and the Asia-Pacific region. See Note 20, Segments, of Item 8, Financial Statements and Supplementary Data of this report for information regarding sales by geographic area and Exhibit 21 of Item 15, Exhibits and Financial Statement Schedules of this report for a list of subsidiaries. Our international operations are subject to the usual risks inherent in international trade, including currency fluctuations, local government contracting regulations, local governmental restrictions on foreign investment and repatriation of profits, exchange controls, regulation of the import and distribution of foreign goods, as well as changing economic and social conditions in countries in which our operations are conducted.
Environmental Matters. See the discussion in Note 22, Commitments and Contingencies, of Item 8, Financial Statements and Supplementary Data of this report.
Website Access to Information. Our internet address is www.moog.com. We make our annual reports on Form 10‑K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports, available on the investor relations portion of our website. The reports are free of charge and are available as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. We have posted our corporate governance guidelines, Board committee charters and code of ethics to the investor relations portion of our website. This information is available in print to any shareholder upon request. All requests for these documents should be made to Moog’s Manager of Investor Relations by calling 716-687-4225.




6


Information about our Executive Officers. Other than the changes noted below, the principal occupations of our executive officers for the past five years have been their employment with us in the same positions they currently hold.
On March 4, 2019, Michael J. Swope was named Controller and Principal Accounting Officer. He most recently served as Principal at Tronconi Segarra & Associates LLP and as Senior Manager at that firm since November 2017. Prior to that, he was employed by EY where he was was promoted from Manager to Senior Manager in October 2015.
On January 5, 2018, Jennifer Walter was named Vice President - Finance. Previously, she was Controller and Principal Accounting Officer, a position she held since 2008.
On December 1, 2017, Paul Wilkinson was named Vice President and Chief HR Officer. Previously, he was a Group Vice President and Global HR Director, Aircraft Group.
On August 11, 2015, Maureen M. Athoe was named Vice President and President, Space and Defense Group. Previously, she was a Group Vice President, Group General Manager and Site Manager.
On August 11, 2015, R. Eric Burghardt was named Vice President and President, Aircraft Group. Previously, he was a Group Vice President and Finance Director. Effective May 3, 2019 he stepped down as President, Aircraft Group.
On August 11, 2015, Mark J. Trabert was named Vice President and President, Aircraft Group. Previously, he was a Group Vice President and Deputy General Manager.
Executive Officers
 
Age
 
Year First Elected Officer
 
 
 
 
 
John R. Scannell
 
 
 
 
Director; Chairman of the Board; Chief Executive Officer
 
56
 
2006
Donald R. Fishback
 
 
 
 
Director; Vice President; Chief Financial Officer
 
63
 
1985
Maureen M. Athoe
 
 
 
 
Vice President
 
61
 
2015
Timothy P. Balkin
 
 
 
 
Treasurer; Assistant Secretary
 
60
 
2000
R. Eric Burghardt
 
 
 
 
Vice President
 
60
 
2015
Patrick J. Roche
 
 
 
 
Vice President
 
56
 
2012
Michael J. Swope
 
 
 
 
Controller; Principal Accounting Officer
 
35
 
2019
Mark J. Trabert
 
 
 
 
Vice President
 
60
 
2015
Jennifer Walter
 
 
 
 
Vice President - Finance
 
48
 
2008
Paul Wilkinson
 
 
 
 
Vice President
 
39
 
2017
In addition to the executive officers noted above, Robert J. Olivieri, 69, was elected Secretary in 2014. Mr. Olivieri's principal occupation is partner in the law firm of Hodgson Russ LLP.

7


Item 1A. 
  
Risk Factors.
The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operating results to fluctuate. The markets we serve are sensitive to fluctuations in general business cycles, domestic and foreign governmental tariff, trade and monetary policies, and economic conditions and events. For example, our defense programs are largely contingent on U.S. Department of Defense funding. In addition, our space programs rely on the same governmental funding as well as investment for commercial and exploration activities. Our aerospace programs are dependent on the highly cyclical commercial airline industry, driven by fuel price increases, demand for travel and economic conditions. Demand for our industrial products is dependent upon several factors, including capital investment, product innovations, economic growth, the price of oil and natural gas, cost-reduction efforts and technology upgrades. If global economic uncertainties continue or economic conditions deteriorate, our operations could be negatively impacted through declines in our sales, profitability and cash flows due to lower orders, payment delays and price pressures for our products.
We operate in highly competitive markets with competitors who may have greater resources than we possess. Many of our products are sold in highly competitive markets. Some of our competitors, especially in our industrial markets and medical markets, are larger, more diversified and have greater financial, marketing, production and research and development resources. Within the aerospace industry, suppliers have consolidated to widen their product offerings and secure long-term sole-source positions. As a result, these competitors may be better able to withstand the effects of periodic economic downturns, and their program wins could reduce the total number of viable suppliers and increase their market share. Our sales and operating margins will be negatively impacted if our competitors: 
develop products that are superior to our products,
develop products of comparable quality and performance that are more competitively priced than our products,
develop more efficient and effective manufacturing methods for their products and services, or
adapt more quickly than we do to technological innovations or evolving customer requirements.
We believe that the principal points of competition in our markets are product quality, reliability, design and engineering capabilities, price, innovation, conformity to customers' specifications, timeliness of delivery, effectiveness of the distribution organization and quality of support after the sale. Maintaining or improving our competitive position requires continued investment in manufacturing, engineering, quality standards, marketing, customer service and support and our distribution networks. If we do not maintain sufficient resources to make these investments, are not successful in meeting our quality or delivery standards or are not successful in maintaining our competitive position, we could face pricing pressures or loss in market share, causing our operations and financial performance to suffer.
We depend heavily on government contracts that may not be fully funded or may be terminated, and the failure to receive funding or the termination of one or more of these contracts could reduce our sales and increase our costs. Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our business. In 2019, sales under U.S. Government contracts represented 35% of our total sales, primarily within Aircraft Controls and Space and Defense Controls. Sales to foreign governments represented 7% of our total sales. Funding for government programs can be structured into a series of individual contracts and depend on annual congressional appropriations, which are cyclical. At times when there are perceived threats to national security, U.S. Defense spending can increase; at other times, defense spending can decrease. Future levels of defense spending beyond 2019 are uncertain and subject to congressional debate. Any reduction in future Department of Defense spending levels could adversely impact our sales, operating profit and our cash flow. We have resources applied to specific government contracts and if any of those contracts are rescheduled or terminated, we may incur substantial costs redeploying those resources.

8


We make estimates in accounting for over-time contracts, and changes in these estimates may have significant impacts on our earnings. We have over-time contracts with some of our customers. These contracts are predominantly within Aircraft Controls and Space and Defense Controls. Revenue representing 64% of 2019 sales was accounted for using an input method that uses costs incurred to measure progress toward completion ("cost-to-cost"). Under this method, we recognize revenue 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. Changes in these required estimates could have a material adverse effect on sales and profits. Any adjustments are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting. For contracts with anticipated losses at completion, we establish a provision for the entire amount of the estimated remaining loss and charge it against income in the period in which the loss becomes known and can be reasonably estimated. Amounts representing performance incentives, penalties, contract claims or impacts of scope change negotiations are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Due to the substantial judgments involved with this process, our actual results could differ materially or could be settled unfavorably from our estimates.
We enter into fixed-price contracts, which could subject us to losses if we have cost overruns. In 2019, fixed-price contracts represented 91% of our sales that were accounted for using the cost-to-cost method. On fixed-price contracts, we agree to perform the scope of work specified in the contract for a predetermined price. Depending on the fixed price negotiated, these contracts may provide us with an opportunity to achieve higher profits based on the relationship between our total contract costs and the contract's fixed price. However, we bear the risk that increased or unexpected costs may reduce our profit or cause us to incur a loss on the contract, which would reduce our net earnings. Contract loss reserves are most commonly associated with fixed-price contracts that involve the design and development of innovative control systems to meet the customer's specifications.
We may not realize the full amounts reflected in our backlog as revenue, which could adversely affect our future revenue and growth prospects. As of September 28, 2019, our total backlog was $2.2 billion, which represents confirmed orders we believe will be recognized as revenue. There is no assurance that our customers will purchase all the orders represented in our backlog, due in part to governments' abilities to modify, curtail or terminate major programs. Due to the uncertain nature of our contracts with the U.S. Government and other foreign governments, we may never realize revenue from some of the orders that are included in our backlog. A portion of our backlog also relates to commercial aircraft programs as well as industrial programs. If there are aircraft entry into service delays, lower than anticipated aircraft deliveries due to production issues or overall weakening economic outlooks, we may never realize the full amounts included in our backlog. If this occurs, our future revenue and growth prospects may be adversely affected.
If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted. We rely on subcontracts with other companies to perform portions of the service we provide to our customers on many of our contracts. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract or our hiring of personnel of a subcontractor. Failure by our subcontractors to satisfactorily provide on a timely basis the agreed-upon, defect-free supplies, or perform the agreed-upon services, may materially and adversely impact our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and substantially impair our ability to compete for future contracts and orders. In addition, a delay or failure in our ability to obtain components and equipment parts from our suppliers may adversely affect our ability to perform our obligations to our customers.
We may not be able to prevent, or timely detect, issues with our products and our manufacturing processes which may adversely affect our operations and our earnings. We must continuously improve product development and manufacturing processes and systems to ensure we deliver high-quality, technically advanced products. Due to growth in operations, there is a risk our current manufacturing processes and systems are unable to maintain our high-quality and on-time delivery standards for our customers. If we are unable to maintain these standards, we could experience late deliveries and penalties, recalls, increased warranty costs, order cancellations and litigation.


9


Contracting on government programs is subject to significant regulation, including rules related to bidding, billing and accounting kickbacks, and any false claims or non-compliance could subject us to fines, penalties or possible debarment. Like all government contractors, we are subject to risks associated with this contracting, including substantial civil and criminal fines and penalties. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by U.S. and foreign government agencies and authorities. The failure to comply with the terms of our government contracts could harm our business reputation. It could also result in our progress payments being withheld or our suspension or debarment from future government contracts, which could have a material affect on our operational and financial results.
The loss of The Boeing Company as a customer or a significant reduction in sales to The Boeing Company could adversely impact our operating results. We provide The Boeing Company, or Boeing, with controls for both military and commercial applications, which totaled 13% of our 2019 sales. Sales to Boeing's commercial airplane group are generally made under a long-term supply agreements. Boeing operates in a competitive environment and continues to evaluate the size, scope and cost of their supplier base. Any detrimental impact to Boeing's production rates or a reduction in our awarded content could reduce our orders from Boeing. A reduction in sales or the loss of Boeing as a customer could reduce our sales and earnings.
Our new products and technology research and development efforts are substantial and may not be successful which could reduce our sales and earnings. Technologies related to our products have undergone, and in the future may undergo, significant changes. In order to maintain a leadership position in the high-performance, precision controls market in future, we have incurred, and we expect to continue to incur, expenses associated with lengthy research and development activities during the introduction of new products. Our technology has been developed through customer-funded and internally-funded research and development, as well as through business acquisitions. If we fail to predict customers' preferences or fail to provide viable technological solutions, we may experience inefficiencies that could delay or prevent the acceptance of new products or product enhancements. Also, the research and development expenses we incur may exceed our cost estimates and the new products we develop may not generate sales sufficient to offset our costs. Additionally, our competitors may develop technologies and products that have more competitive advantages than ours and render our technology uncompetitive or obsolete.
Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete. Protecting our intellectual property is critical in order to maintain a competitive advantage. We therefore rely on internally developed and acquired patents, trademarks, proprietary knowledge and technologies. Our inability to defend against the unauthorized use of these rights and assets could have an adverse effect on our competitive position and on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. This litigation could result in significant costs and divert management's focus away from operations.
Our business operations may be adversely affected by information systems interruptions, intrusions or new software implementations. We are dependent on various information technologies throughout our company and third parties to administer, store and support multiple business activities. In addition, we store sensitive data including proprietary business information, intellectual property and confidential employee data on our servers and databases. Furthermore, we may have access to sensitive, confidential or personal information that may be subject to privacy and security laws and controls. Although we continue to review and enhance our computer systems and cybersecurity controls, information system disruptions, equipment failures or cybersecurity attacks, such as unauthorized access, malicious software and other intrusions, could still occur and may lead to potential data corruption and exposure of proprietary and confidential information. Any intrusion may cause operational stoppages, fines, penalties, diminished competitive advantages through reputational damages and increased operational costs. Additionally, we may incur additional costs to comply with our customers', including the U.S. Government's, increased cybersecurity protections and standards in our products. Prior cyberattacks directed at us have not had a material impact on our financial results. In addition, we have embarked on a multi-year business information system transformation and standardization project. This endeavor will occupy additional resources, diverting attention from other operational activities, may cause our information systems to perform unexpectedly and may increase our exposure to cyber risks. While we expect to invest significant resources throughout the planning and project management process, unanticipated delays could occur and would adversely affect our financial results.


10


Our indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility. We have incurred significant indebtedness, and may incur additional debt for acquisitions, operations, research and development and capital expenditures. Our ability to make interest and scheduled principal payments and operate within the restrictive covenants could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These changes could increase our cost of business, limiting our ability to pursue acquisition opportunities, react to market conditions and meet operational and capital needs, thereby placing us at a competitive disadvantage.
Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could adversely affect our earnings and equity and increase our pension funding requirements. Pension costs and obligations are determined using actual results as well as actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality tables. Other assumptions include salary increases and retirement age. Some of these assumptions, such as the discount rate and return on pension assets, are reflective of economic conditions and largely out of our control. Despite fully funding our largest pension plan, changes in the pension assumptions could adversely affect our earnings, equity and funding requirements.
A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth. Goodwill and other intangible assets are a substantial portion of our assets. At September 28, 2019, goodwill was $784 million and other intangible assets were $80 million of our total assets of $3.1 billion. Our goodwill and other intangible assets may increase in the future since our growth strategy includes acquisitions. However, we may have to write off all or part of our goodwill or other intangible assets if their value becomes impaired. Although this write-off would be a non-cash charge, it could reduce our earnings and our financial condition significantly.
Our sales and earnings may be affected if we cannot identify, acquire or integrate strategic acquisitions, or if we engage in divesting activities. Acquisitions are a key part of our growth strategy. Our historical growth has depended, and our future growth is likely to depend, in part, on our ability to successfully identify, acquire and integrate acquired businesses. We intend to continue to seek additional acquisition opportunities, both to expand into new markets and to enhance our position in existing markets throughout the world. Growth by acquisition involves risk that could adversely affect our financial condition and operating results. We may not know the potential exposure to unanticipated liabilities. Additionally, the expected benefits or synergies might not be fully realized, integrating operations and personnel may be slowed and key employees, suppliers or customers of the acquired business may depart. We may also continue to engage in divesting activities if we deem the operations as non-strategic or underperforming. Divestitures could adversely affect our profitability and, under certain circumstances, require us to record impairment charges or a loss as a result of a transaction. In pursuing acquisition opportunities, integrating acquired businesses, or divesting business operations, management's time and attention may be diverted from our core business, while consuming resources and incurring expenses for these activities.
Our operations in foreign countries expose us to political and currency risks and adverse changes in local legal and regulatory environments. We have significant manufacturing and sales operations in foreign countries. In addition, our domestic operations sell to foreign customers. In 2019, 39% of our net sales were to customers outside of the United States. Our financial results may be adversely affected by fluctuations in foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S. dollars. We expect international operations and export sales to contribute to our earnings for the foreseeable future. Both the sales from international operations and export sales are subject in varying degrees to risks inherent in doing business outside of the United States. Such risks include the possibility of unfavorable circumstances arising from host country laws or regulations including privacy laws protecting personal data, changes in tariff and trade barriers and import or export licensing requirements. In addition, any local or global health issue or uncertain political climates, international hostilities, natural disasters, or any other terrorist activities could adversely affect customer demand, our operations and our ability to source and deliver products and services to our customers.
The United Kingdom's decision to exit the European Union may bring short-term and long-term adverse impacts on our results of operations. In 2019, our United Kingdom operations represented approximately 7% of our consolidated net sales across all three segments. The outcome of the United Kingdom's decision to leave the European Union ("Brexit") could adversely affect our business and our results of operations. In the short-term, volatility in the British Pound could continue, which would negatively impact our financial results. In the longer term, any impact from Brexit on our United Kingdom operations will depend on the outcome of yet-to-be negotiated tariff, trade, regulatory and other matters. While we have established cross-segment teams and adopted measures to mitigate the potential risks within the current uncertain environment, such measures may negatively impact our operations and our financial results.

11


Escalating tariffs, restrictions on imports or other trade barriers between the United States and various countries may impact our results of operations. There is currently significant uncertainty about the future relationship between the United States and other countries, both where we source products and where we have large customers, with respect to trade policies, treaties, government regulations and tariffs. The current U.S. administration has called for substantial changes to U.S. foreign trade policy including imposing greater restrictions on international trade with significant increases in tariffs on goods imported into the U.S. In the near-term, we expect these tariffs will negatively impact our costs to in-source materials, primarily from China, which could negatively impact our operating results. In the longer-term, these tariffs may negatively impact customer order volume, specifically related to the new European commercial aircraft, if the resulting higher prices for aircraft restrict future orders. The potential loss of orders would negatively impact our financial results including lower sales, operating profits and cash flow.
Unforeseen exposure to additional income tax liabilities may affect our operating results. Our distribution of taxable income is subject to domestic and, as a result of our significant manufacturing and sales presence in foreign countries, foreign tax jurisdictions. Our effective tax rate and earnings may be affected by shifts in our mix of earnings in countries with varying statutory tax rates, changes in the valuation of deferred tax assets and outcomes of any audits performed on previous tax returns. Additionally, any alterations to tax regulations or interpretations could have significant impacts on our effective tax rates and on our deferred tax assets and liabilities.
Government regulations could limit our ability to sell our products outside the United States and otherwise adversely affect our business. In 2019, approximately 19% of our sales were subject to compliance with the United States export regulations. Our failure to obtain, or fully adhere to the limitations contained in the requisite licenses, meet registration standards or comply with other government export regulations would hinder our ability to generate revenues from the sale of our products outside the United States. In addition, the U.S. Government has established and, from time to time, revises sanctions that restrict or prohibit U.S. companies and their subsidiaries from doing business with certain foreign countries, entities and individuals. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In order to sell our products in European Union countries, we must satisfy certain technical requirements. If we are unable to comply with those requirements with respect to a significant quantity of our products, our sales in Europe would be restricted. Doing business internationally also subjects us to numerous U.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, anti-bribery, privacy regulations and anti-boycott provisions. From time to time, we may file voluntary disclosure reports with the U.S. Department of State and the Department of Commerce regarding certain violations of U.S. export laws and regulations discovered by us in the course of our business activities, employee training or internal reviews and audits. To date, our voluntary disclosures have not resulted in a fine, penalty, or export privilege denial or restriction that has materially impacted our financial condition or ability to export. Our failure, or failure by an authorized agent or representative that is attributable to us, to comply with these laws and regulations could result in administrative, civil or criminal liabilities. In the extreme case, these failures could result in financial penalties, suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on us.
The failure or misuse of our products may damage our reputation, necessitate a product recall or result in claims against us that exceed our insurance coverage, thereby requiring us to pay significant damages. Defects in the design and manufacture of our products or our subcontractors' products may necessitate a product recall. We include complex system designs and components in our products that could contain errors or defects, particularly when we incorporate new technologies into our products. If any of our products are defective, we could be required to redesign or recall those products, pay substantial damages or warranty claims and face actions by regulatory bodies and government authorities. Such an event could result in significant expenses, delay sales, inflate inventory, affect our company's and our products' reputations, and cause us to withdraw from certain markets. We are also exposed to product liability claims. Many of our products are used in applications where their failure or misuse could result in significant property loss and serious personal injury or death. We carry product liability insurance consistent with industry norms. However, these insurance coverages may not be sufficient to fully cover the payment of any potential claim. A product recall or a product liability claim not covered by insurance could have a material adverse effect on our business, financial condition and results of operations.
We are involved in various legal proceedings, the outcome of which may be unfavorable to us. Our business may be adversely impacted by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty. We estimate loss contingencies and establish reserves based on our assessment where liability is deemed probable and reasonably estimable given the facts and circumstances known to us at a particular point in time. Subsequent developments may affect our assessment and estimates of the loss contingencies recorded as liabilities.

12


Future terror attacks, war, natural disasters or other catastrophic events beyond our control could negatively impact our business. Terror attacks, war or other civil disturbances, natural disasters and other catastrophic events could lead to economic instability and decreased demand for commercial products, which could negatively impact our business, financial condition, results of operations and cash flows. From time to time, terrorist attacks worldwide have caused instability in global financial markets and the aviation industry. In 2019, 24% of our net sales were in the commercial aircraft market. Also, our facilities and suppliers are located throughout the world and could be subject to damage from fires, floods, earthquakes or other natural or man-made disasters. Although we carry third party property insurance covering these and other risks, our inability to meet customers' schedules as a result of a catastrophe may result in the loss of customers or significantly increase costs, including penalty claims under customer contracts.
Our operations are subject to environmental laws, and complying with those laws may cause us to incur significant costs. Our operations and facilities are subject to numerous stringent environmental laws and regulations. Although we believe that we are in material compliance with these laws and regulations, future changes in these laws, regulations or interpretations of them, or changes in the nature of our operations may require us to make significant capital expenditures to ensure compliance. We have been and are currently involved in environmental remediation activities. The cost of these activities may become significant depending on the discovery of additional environmental exposures at sites that we currently own or operate, at sites that we formerly owned or operated, or at sites to which we have sent hazardous substances or wastes for treatment, recycling or disposal.

13


Item 1B.
  
Unresolved Staff Comments.
None.
Item 2.
  
Properties.
On September 28, 2019, we occupied 5,178,000 square feet of space, distributed by segment as follows:
  
 
Square Feet
  
 
                 Owned
 
                  Leased
 
                     Total
Aircraft Controls
 
1,383,000

 
416,000

 
1,799,000

Space and Defense Controls
 
869,000

 
357,000

 
1,226,000

Industrial Systems
 
1,632,000

 
499,000

 
2,131,000

Corporate Headquarters
 
20,000

 
2,000

 
22,000

Total
 
3,904,000

 
1,274,000

 
5,178,000

We have principal manufacturing facilities in the United States and countries throughout the world in the following locations:
Aircraft Controls - U.S., Philippines and United Kingdom.
Space and Defense Controls - U.S., United Kingdom and Ireland.
Industrial Systems - U.S., Germany, Czech Republic, Italy, Costa Rica, China, United Kingdom, Netherlands, Luxembourg, Philippines, Japan, Canada, India and Lithuania.
Our corporate headquarters is located in East Aurora, New York.
We believe that our properties have been adequately maintained and are generally in good condition. Operating leases for our properties expire at various times from 2020 through 2057. Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases for alternative locations at market terms.
Item 3.
  
Legal Proceedings.
From time to time, we are involved in legal proceedings. We are not a party to any pending legal proceedings that management believes will result in a material adverse effect on our financial condition, results of operations or cash flows.
Item 4.
  
Mine Safety Disclosures.
Not applicable.


14


PART II
Item 5.
 
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our two classes of common shares, Class A common stock and Class B common stock, are traded on the New York Stock Exchange ("NYSE") under the ticker symbols MOG.A and MOG.B.
The number of shareholders of record of Class A common stock and Class B common stock was 609 and 656, respectively, as of November 5, 2019.
The following table summarizes our purchases of our common stock for the quarter ended September 28, 2019.
Issuer Purchases of Equity Securities 
Period
(a) Total
Number of
Shares
Purchased (1)(2)
 
(b) Average
Price Paid
Per Share
 
(c) Total Number
of Shares
Purchased as
Part of Publicly
Announced  Plans
or Programs (3)
 
(d) Maximum
Number  (or  Approx.
Dollar Value) of
Shares that May
Yet Be Purchased
Under Plans or
Programs (3)
June 30, 2019 - July 31, 2019
100,454

 
$
87.58

 
35,919

 
3,252,727

August 1, 2019 - August 31, 2019
195,213

 
77.66

 
194,685

 
3,058,042

September 1, 2019 - September 28, 2019
12,114

 
80.35

 
10,735

 
3,047,307

Total
307,781

 
$
81.00

 
241,339

 
3,047,307


(1)
Reflects purchases by the Moog Inc. Stock Employee Compensation Trust Agreement ("SECT") of shares of Class B common stock from the Moog Inc. Retirement Savings Plan ("RSP") as follows: 16,399 shares at $92.79 per share during July. Also reflects purchases by the SECT of shares of Class B common stock from the Moog Inc. Employee Stock Purchase Plan ("ESPP") as follows: 3,409 shares at $90.06 per share during July, 528 shares at $79.15 during August and 1,074 shares at $84.06 during September. In connection with the issuance of shares to the Employee Stock Purchase Plan ('ESPP"), we purchased 42,859 Class B shares at $92.26 per share from the SECT during July.

(2)
In connection with the exercise of equity-based compensation awards, we accept delivery of shares to pay for the exercise price and withhold shares for tax withholding obligations. In July, we accepted delivery of 1,868 shares at $94.28 per share and in September, we accepted delivery of 305 shares at $84.89 per share, in connection with the exercise of equity-based awards.

(3)
The Board of Directors has authorized a share repurchase program. This program has been amended from time to time to authorize additional repurchases up to an aggregate 13 million common shares. The program permits the purchase of shares of Class A or Class B common stock in open market or privately negotiated transactions at the discretion of management. In July, we purchased 35,700 Class A and 219 Class B shares at averages prices of $78.95 and $90.88, respectively. In August, we purchased 194,109 Class A and 576 Class B shares at average prices of $77.65 and $79.52, respectively. In September, we purchased 10,677 Class A and 58 Class B shares at average prices of $79.81 and $86.83, respectively. The purchases identified with notes (1) and (2) in column (a) are not included in this program.



15



Performance Graph

The following graph and tables show the performance of the Company's Class A common stock compared to the NYSE Composite-Total Return Index and the S&P Aerospace & Defense Index for a $100 investment made on September 30, 2014, including reinvestment of any dividends.

 
CHART-A70C63127665517F80E.JPG
 
 
9/14
 
9/15
 
9/16
 
9/17
 
9/18
 
9/19
Moog Inc. - Class A Common Stock
 
$
100.00

 
$
79.05

 
$
87.05

 
$
121.97

 
$
126.47

 
$
120.77

NYSE Composite - Total Return Index
 
100.00

 
93.83

 
105.41

 
123.06

 
135.13

 
137.87

S&P Aerospace & Defense Index
 
100.00

 
103.76

 
122.29

 
175.54

 
217.15

 
231.28

 

16


Item 6.
 
    Selected Financial Data.
For a more detailed discussion of 2017 through 2019, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and Item 8, Financial Statements and Supplementary Data of this report.
(dollars in thousands, except per share data)
2019(1)(3)
2018(1)(3)
2017(1)(3)
2016(1)(2)(3)
2015(1)
RESULTS FROM OPERATIONS
 
 
 


Net sales
$
2,904,663

$
2,709,468

$
2,497,524

$
2,411,937

$
2,525,532

Net earnings (4)
179,748

96,507

141,280

126,745

131,883

Net earnings per share (4)
 
 
 


Basic
$
5.16

$
2.71

$
3.94

$
3.49

$
3.39

Diluted
$
5.11

$
2.68

$
3.90

$
3.47

$
3.35

Dividends declared per share
$
1.00

$
0.50

$

$

$

Weighted-average shares outstanding
 
 
 


Basic
34,854,614

35,661,638

35,852,448

36,277,445

38,945,880

Diluted
35,178,968

36,052,307

36,230,043

36,529,344

39,334,520

FINANCIAL POSITION

 



Cash and cash equivalents
$
89,702

$
125,584

$
368,073

$
325,128

$
309,853

Working capital
901,315

797,919

997,005

938,295

931,297

Total assets
3,114,237

2,964,048

3,090,592

3,004,974

3,036,573

Indebtedness - total
833,233

862,824

957,037

1,006,393

1,069,643

Shareholders’ equity
1,322,481

1,224,986

1,214,304

988,411

994,532

Shareholders’ equity per common share outstanding
$
38.12

$
35.20

$
33.94

$
27.56

$
27.09

SUPPLEMENTAL FINANCIAL DATA
 



Capital expenditures
$
118,422

$
94,517

$
75,798

$
67,208

$
80,693

Depreciation and amortization
85,260

88,572

90,167

98,732

103,609

Research and development
126,453

129,838

144,157

147,336

132,271

Total backlog
2,232,605

n/a
n/a
n/a
n/a
Twelve-month backlog (5)
1,502,028

1,481,230

1,211,797

1,224,878

1,273,495

RATIOS

 



Net return on sales
6.2
%
3.6
%
5.7
%
5.3
%
5.2
%
Return on shareholders’ equity
13.8
%
7.8
%
13.3
%
12.6
%
11.3
%
Current ratio
2.2

2.2

2.6

2.6

2.5

Net debt to capitalization (6)
36.0
%
37.6
%
32.7
%
40.8
%
43.3
%

(1)
Includes the effects of our share repurchase program. See the Consolidated Statements of Shareholders' Equity and Consolidated Statements of Cash Flow at Item 8, Financial Statements and Supplementary Data of this report.
(2)
Includes goodwill impairment charge. See Note 7, Goodwill and Intangible Assets, at Item 8, Financial Statements and Supplementary Data of this report.
(3)
Includes the effects of acquisitions and divestitures. See Note 3, Acquisitions, Divestitures and Equity Method Investments, at Item 8, Financial Statements and Supplementary Data of this report.
(4)
Represents net earnings attributable to common shareholders and net earnings per share attributable to common shareholders.
(5)
Twelve-month backlog is defined as confirmed orders we believe will be recognized as revenue within the next twelve months.
(6)
Net debt is total debt less cash and cash equivalents. Capitalization is the sum of net debt and shareholders’ equity.


17


Item 7.
 
 Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
We are a worldwide designer, manufacturer and systems integrator of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and defense and industrial markets.
Within the aerospace and defense market, our products and systems include:
Defense market - primary and secondary flight controls for military aircraft, stabilization and automatic ammunition loading controls for armored combat vehicles, tactical and strategic missile steering controls and gun aiming controls.
Commercial aircraft market - primary and secondary flight controls for commercial aircraft.
Space market - satellite positioning controls and thrust vector controls for space launch vehicles.
In the industrial market, our products are used in a wide range of applications including:
Industrial automation market - injection molding, metal forming, heavy industry, material and automotive testing and pilot training simulators.
Medical market - enteral clinical nutrition and infusion therapy pumps, ultrasonic sensors and surgical handpieces and CT scanners.
Energy market - power generation and oil and gas exploration.
We operate under three segments, Aircraft Controls, Space and Defense Controls and Industrial Systems. Our principal manufacturing facilities are located in the United States, Philippines, United Kingdom, Germany, Czech Republic, Italy, Costa Rica, China, Netherlands, Luxembourg, Japan, Canada, India and Lithuania.
Under ASC 606, 64% of revenue was recognized over time for the year ended September 28, 2019, using the cost-to-cost method of accounting. 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. 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.
For the year ended September 28, 2019, 36% of revenue 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. When control has transferred to the customer, profit is generated as cost of sales is recorded and as revenue is recognized.
We concentrate on providing our customers with products designed and manufactured to the highest quality standards. Our technical experts work collaboratively around the world, delivering capabilities for mission-critical solutions. These core operational principles are necessary as our products are applied in demanding applications, "When Performance Really Matters®." By capitalizing on these core foundational strengths, we believe we have achieved a leadership position in the high performance, precision controls market. Additionally, these strengths yield a broad control product portfolio, across a diverse base of customers and end markets.
By focusing on customer intimacy and commitment to solving their most demanding technical problems, we have been able to expand our control product franchise to multiple markets; organically growing from a high-performance components manufacturer to a high-performance systems designer, manufacturer and systems integrator. In addition, we continue expanding our content positions on our current platforms, seeking to be the dominant supplier in the niche markets we serve. We also look for innovation in all aspects of our business, employing new technologies to improve productivity and operational performance.






18


Our fundamental strategies to achieve our goals center around talent, lean and innovation and include:
a strong leadership team that has positioned the company for growth,
utilizing our global capabilities and strong engineering heritage to innovate,
maintaining our technological excellence by solving our customers’ most demanding technical problems in applications "When Performance Really Matters®,"
continuing to invest in talent development to strengthen employee performance, and
maximizing customer value by implementing lean enterprise principles.
These activities will help us achieve our financial objective of increasing shareholder value with sustainable competitive advantages across our segments. In doing so, we expect to maintain a balanced, diversified portfolio in terms of markets served, product applications, customer base and geographic presence.
We focus on improving shareholder value through strategic revenue growth, both acquired and organic, through improving operating efficiencies and manufacturing initiatives and through utilizing low cost manufacturing facilities without compromising quality. Additionally, we take a balanced approach to capital deployment in order to maximize shareholder returns over the long-term. Our activities may include strategic acquisitions, further share buybacks and dividend payments.
Financial Highlights
Net sales for fiscal 2019 increased 7% to $2.9 billion.
Total operating profit increased 22% to $321 million, as the prior year's $39 million of charges related to our exit of the wind pitch controls business did not repeat.
Effective tax rate was 23.1%.
Net earnings attributable to Moog increased to $180 million.
Diluted earnings per share increased to $5.11.
Cash from operating activities was $181 million.

Acquisitions, Divestitures and Equity Method Investments
All of our acquisitions are accounted for under the purchase method and, accordingly, the operating results for the acquired companies are included in the consolidated statements of earnings from the respective dates of acquisition. Under purchase accounting, we record assets and liabilities at fair value and such amounts are reflected in the respective captions on the consolidated balance sheets. The purchase price described for each acquisition below is net of any cash acquired, includes debt issued or assumed and the fair value of contingent consideration.
In 2019, we sold a non-core business of our Industrial Systems segment for $4 million in cash and recorded a gain in other income of $3 million.
In 2018, we sold a non-core business of our Space and Defense Controls segment for $5 million in cash, plus a $1 million note receivable and record a loss in other expense of $2 million.
On April 30, 2018, we acquired Electro-Optical Imaging, a designer and manufacturer of video trackers and imaging products, located in Florida, for $5 million. This operation is included in our Space and Defense Controls segment.
On March 29, 2018, we acquired a 100% ownership interest in VUES Brno s.r.o located in the Czech Republic, which included a 74% ownership interest in a subsidiary located in Germany, for $64 million. VUES designs and manufactures customized electric motors, generators and solutions. This operation is included in our Industrial Systems segment. On September 6, 2018, we acquired the remaining 26% noncontrolling interest for $2 million in cash.
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 September 28, 2019, we have made total contributions of $5 million to MASA. This operation is included in our Aircraft Controls segment.




19


CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 1, Summary of Significant Accounting Policies, of Item 8, Financial Statements and Supplementary Data of this report. We believe the accounting policies discussed below are the most critical in understanding and evaluating our financial results. These critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.
Revenue Recognition on Over-Time Contracts
We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606. For contracts that qualify for over time treatment, we recognize revenue as control of the promised goods or services is being transferred to the customer. Revenue recognized over time for the year ended September 28, 2019 was 64%. Revenue is recognized on contracts using the cost-to-cost method of accounting 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 this 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. Revenue and cost estimates for substantially all over-time contract performance obligations are reviewed and updated quarterly. For additional discussion on revenue recognition, see Note 2, Revenue from Contracts with Customers, of Item 8, Financial Statements and Supplementary Data, of this report.
Contract Reserves
At September 28, 2019, we had contract reserves of $61 million. Contract reserves are comprised of contract loss reserves, recall reserves, and contract-related reserves. Contract loss reserves are recorded for open contracts where it is anticipated that contract costs will be greater than contract income and are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. In accordance with ASC 606, we calculate contract losses at the contract level, versus the performance obligation level. Recall reserves are recorded when additional work is needed on completed products for them to meet contract specifications. Contract-related reserves are recorded for other reasons, such as delivery issues outside of the ordinary scope of the contract. For all three types of reserves, a provision for the entire amount of the loss is charged against income in the period in which the loss becomes known and can be reasonably estimated by management.
Reserves for Inventory Valuation
At September 28, 2019, we had net inventories of $535 million, or 33% of current assets. Reserves for inventory were $134 million, or 20% of gross inventories. Inventories are stated at the lower of cost or net realizable value with cost determined primarily on the first-in, first-out method of valuation.
We record valuation reserves to provide for slow-moving or obsolete inventory by principally using a formula-based method that increases the valuation reserve as the inventory ages. We also take specific circumstances into consideration. We consider overall inventory levels in relation to firm customer backlog in addition to forecasted demand including aftermarket sales. Changes in these and other factors, such as low demand and technological obsolescence, could cause us to increase our reserves for inventory valuation, which would negatively impact our gross margin. As we record provisions within cost of sales to increase inventory valuation reserves, we establish a new, lower cost basis for the inventory.


20


Reviews for Impairment of Goodwill
At September 28, 2019, we had $784 million of goodwill, or 25% of total assets. We test goodwill for impairment for each of our reporting units at least annually, during our fourth quarter, and whenever events occur or circumstances change, such as changes in the business climate, poor indicators of operating performance or the sale or disposition of a significant portion of a reporting unit. We also test goodwill for impairment when there is a change in reporting units.
We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We aggregate certain components based upon an evaluation of the facts and circumstances, including the nature of products and services and the extent of shared assets and resources. As a result, we have four reporting units.

Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units. Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we consider in determining whether to perform a quantitative test.

When we evaluate the potential for goodwill impairment using a qualitative assessment, we consider factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.

Quantitative testing first requires a comparison of the fair value of each reporting unit to its carrying value. We principally use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash flows based on each reporting unit's current business, expected developments and operational strategies typically over a five-year period. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.

In measuring the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit's assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.

The determination of our assumptions is subjective and requires significant estimates. Changes in these estimates and assumptions could materially affect the results of our reviews for impairment of goodwill.
For our annual test of goodwill for impairment in 2019, we performed a qualitative assessment for each of our four reporting units.
We evaluated the potential for goodwill impairment by considering macroeconomic conditions, industry and market conditions, cost factors, both current and future expected financial performance, and relevant entity-specific events for each of the reporting units. We also considered our overall market performance discretely as well as in relation to our peers. The results of our qualitative assessment indicated that is more likely than not that the fair value of each of the reporting units exceed its carrying value; and therefore, a quantitative two-step impairment test was not necessary.

21


Reviews for Impairment of Long-Lived Assets
Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test.

During 2019, we recorded $4 million of impairment charges for capitalized software costs that will not be placed in service.
Pension Assumptions
We maintain various defined benefit pension plans covering employees at certain locations. Pension expense for all defined benefit plans for 2019 was $40 million. Pension obligations and the related costs are determined using actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, mortality rates and the long-term expected return on assets. Other assumptions include salary increases and retirement age.
We use the spot rate approach to estimate the service and interest cost components of the net periodic benefit cost for most of our plans. Under this approach the service cost is determined by applying the discount rates along the yield curve to the specific service cost cash flows to determine the present value. The interest cost component is computed by using each assumed discount rate along the curve. The discount rates used in determining expense for the U.S. Employees’ Retirement Plan, our largest plan, in 2019 were 4.4% for service cost and 4.1% for interest cost, compared to 4.2% and 3.5%, respectively, in 2018. A 50 basis point decrease in the discount rates would increase our annual pension expense by $6 million. The discount rates are used to state expected future cash flows at present value. Using a higher discount rate decreases the present value of pension obligations and decreases pension expense. We use the Aon Hewitt AA Above Median yield curve to determine the discount rate for our U.S. defined benefit plans at year end. We believe that the Aon Hewitt AA Above Median yield curve best mirrors the yields of bonds that would be selected by management if actions were taken to settle our obligation.
Mortality rates are used to estimate the life expectancy of plan participants during which they are expected to receive benefit payments. We use a modified version of the mortality table and projection scale published by the Society of Actuaries (SOA), which reflects improvements consistent with the Social Security Administration, as a basis for our mortality assumptions for our U.S. plans. We believe the use of this modified table and projection scale best reflects our demographics and anticipated plan outcomes.
The long-term expected return on assets assumption reflects the average rate of return expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. In determining the long-term expected return on assets assumption, we consider our current and target asset allocations. We consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future benefit payment requirements. In determining the 2019 expense for our largest plan, we used a 5.25% return on assets assumption, compared to 7.00% for 2018. A 25 basis point decrease in the long-term expected return on assets assumption would increase our annual pension expense by $2 million.
Income Taxes
Our annual tax rate is based on our earnings before tax by jurisdiction, applicable statutory tax rates, the impacts of permanent differences, tax incentives and tax planning opportunities in the various jurisdictions in which we operate.  Significant judgment is required in determining our annual tax rate and in evaluating our tax positions.
An estimated annual effective tax rate is applied to our quarterly ordinary operating results. For certain significant, unusual or infrequent events, we recognize the tax impact in the quarter in which it occurs.
We record reserves against tax benefits when it’s more likely than not that we will not sustain a position if the appropriate taxing jurisdiction had full information and examined our position. We adjust these reserves when facts and circumstances change, such as when progress is made by taxing authorities in their review of our position. There is a considerable amount of judgment in making these assessments. There were no significant reserves taken in 2019. 

22


Valuation allowances associated with deferred tax assets is another area that requires judgment. We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. We consider recent earnings projections, allowable tax carryforward periods, tax planning strategies and historical earnings performance to determine the amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would impact our income tax expense when we determine that these factors have changed.
At September 28, 2019, we had gross deferred tax assets of $177 million and deferred tax asset valuation allowances of $13 million. The deferred tax assets principally relate to benefit accruals, inventory obsolescence, tax benefit carryforwards and contract reserves. The deferred tax assets include $13 million related to tax benefit carryforwards associated with net operating losses and tax credits, for which $10 million of deferred tax asset valuation allowances are recorded.


23


CONSOLIDATED RESULTS OF OPERATIONS
  
 
 
  
 
 
2019 vs. 2018
2018 vs. 2017
(dollars and shares in millions, except per share data)
2019
 
2018
 
2017
$ Variance
% Variance
$ Variance
% Variance
Net sales
$
2,905

 
$
2,709

 
$
2,498

 
$
195

 
7
%
 
$
212

 
8
%
Gross margin
28.1
%
 
28.6
%
 
29.4
%
 

 


 

 

Research and development expenses
$
126

 
$
130

 
$
144

 
$
(3
)
 
(3
%)
 
$
(14
)
 
(10
%)
Selling, general and administrative expenses as a percentage of sales
13.9
%
 
14.3
%
 
13.9
%
 

 


 

 


Interest expense
$
39

 
$
36

 
$
35

 
$
3

 
8
%
 
$
2

 
5
%
Restructuring expense
$

 
$
29

 
$

 
$
(29
)
 
(100
%)
 
$
29

 
n/a

Other
$
12

 
$
7

 
$
27

 
$
5

 
68
%
 
$
(20
)
 
(74
%)
Effective tax rate
23.1
%
 
47.4
%
 
22.7
%
 

 


 

 


Net earnings attributable to Moog and noncontrolling interest
$
180

 
$
97

 
$
140

 
$
83

 
86
%
 
$
(44
)
 
(31
%)
Diluted average common shares outstanding
35

 
36

 
36

 
(1
)
 
(2
%)
 

 
%
Diluted earnings per share
$
5.11

 
$
2.68

 
$
3.90

 
$
2.43

 
91
%
 
$
(1.22
)
 
(31
%)
Total backlog
$
2,233

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

Twelve-month backlog
$
1,502

 
$
1,481

 
$
1,212

 
$
21

 
1
%
 
$
269

 
18
%
Net sales increased in 2019 compared to 2018 within Aircraft Controls and Space and Defense Controls, while sales declined in Industrial Systems. Weaker foreign currencies relative to the U.S. dollar, in particular the Euro and the British Pound, decreased sales $23 million.
Net sales increased across all of our segments in 2018 compared to 2017. Our acquisitions in Industrial Systems and Space and Defense Controls contributed an incremental $32 million and $7 million of sales, respectively. Additionally in 2018, stronger foreign currencies relative to the U.S. dollar, in particular the Euro, increased sales $27 million. Also in 2018, Space and Defense Controls was impacted by the absence of $18 million of lost sales associated with the 2017 divested operations.
Gross margin decreased in 2019 compared to 2018. Gross margins declined in Aircraft Controls due to higher operating costs and due to a $10 million charge related to a supplier quality issue in the second quarter of 2019. Partially offsetting the decline was improved sales volume in Space and Defense Controls, as well as the absence of last year's $12 million inventory write-down in Industrial Systems due to the decision to exit the wind pitch controls business.
Gross margin decreased in 2018 compared to 2017 due primarily to the $12 million inventory write-down associated with our exit of the wind pitch controls business. Gross margin excluding the inventory write-down decreased slightly. A negative sales mix in Aircraft Controls was mostly offset by incremental profit from higher sales in Industrial Systems and Space and Defense Controls.
Research and development expenses declined in 2019 compared to 2018. Lower activity across our major commercial OEM programs in Aircraft Controls reduced expenses $9 million, while increased activity in our other segments partially offset the decline. Research and development expenses in 2018 decreased compared to 2017. Within Aircraft Controls, research and development expenses decreased $19 million, as we had lower activity across all of our major commercial development programs. The reduced spend was partially offset by increases in research and development activities across our other two segments.
Selling, general and administrative expenses as a percentage of sales decreased in 2019 compared to 2018. The decrease primarily relates to higher sales in Space and Defense Controls, as well as the absence of the prior year's expenses. Selling, general and administrative expenses as a percentage of sales increased in 2018 compared to 2017. The increase is due to higher selling expense in select growth markets, primarily in Industrial Systems, acquisition-related expenses and higher healthcare costs.


24


Interest expense increased in 2019 compared to 2018 due to higher interest rates on outstanding debt. Interest expense in 2018 increased compared to 2017. Higher interest rates increased expense $5 million; however, lower debt levels mostly offset the increase.
In 2018, we decided to phase out our participation in the wind pitch controls business, during which we incurred $39 million of restructuring expense in Industrial Systems specific to this decision. Of the related restructuring expense, there was $30 million for non-cash charges, $6 million for severance and $3 million for other costs.
Other expense includes $13 million for non-service pension expense in 2019, $7 million in non-service pension expense in 2018 and $13 million for non-service pension expense in 2017. The increase in 2019 compared to 2018 is due to lower expected return on assets related to a lower risk investment strategy. The decrease in 2018 compared to 2017 is due to lower amounts of amortized actuarial loss, driven by higher discount rates. In addition, other expense in 2017 includes $13 million of losses associated with the sale of non-core businesses in Space and Defense Controls.
Our effective tax rate in 2019 differs from the U.S. statutory tax rate primarily as a result of tax impacts associated with earnings generated offshore. The effective tax rate in 2018 was significantly impacted by the enactment of the Tax Cuts and Jobs Act of 2017, as well as limited tax benefits associated with the restructuring charges taken in foreign jurisdictions of our Industrial Systems segment. Excluding the one-time special impacts due to the Act and the restructuring charges, the effective tax rate for 2018 was 25.1%. Our effective tax rate in 2017 includes the benefits associated with divesting non-core businesses in Space and Defense Controls and the recognition and timing of U.S. tax incentives.
Other comprehensive loss in 2019 includes $30 million of foreign currency translation loss, whereas other comprehensive income in 2018 includes $16 million of negative foreign currency translation adjustments. The change in foreign currency translation in 2019 compared to 2018 was primarily attributable to the appreciation of the Euro and the British Pound relative to the U.S. Dollar. Other comprehensive income in 2017 includes $27 million of positive foreign currency translation adjustments. In 2018 compared to 2017, the change in foreign currency translation adjustments was primarily driven by negative changes in the British pound, the Euro and the Canadian dollar relative to the U.S. Dollar.
Other comprehensive loss in 2019 also includes $18 million of negative retirement liability adjustments. Other comprehensive income in 2018 and 2017 includes $27 million and $69 million, respectively, of positive retirement liability adjustments. The change in retirement liability adjustments in 2019 compared to 2018 was primarily due to a lower expected return on assets. In 2018 compared to 2017, the change in retirement liability was primarily due to differences in actual versus expected return on assets, partially offset by changes in discount rates.
The twelve-month backlog at September 28, 2019 compared to September 29, 2018 increased in our aerospace and defense business. Within Space and Defense Controls, backlog increased supporting the expected incremental sales for launch vehicles, defense components and missiles. Within Aircraft Controls, backlog increased for development programs. Offsetting most of these increases was a decline in backlog for commercial OEM programs due to the timing of orders. The twelve-month backlog for our industrial business increased slightly. We had higher orders for our medical products and industrial components. However, these were partially offset by lower orders in our industrial automation market, driven by the slowdown in global capital investments.
The twelve-month backlog at September 29, 2018 compared to September 30, 2017 increased in our aerospace and defense as well as in our industrial businesses. Within Aircraft Controls, twelve-month backlog increased due to the timing and volume of military orders, especially for the F-35 program. Within Space and Defense Controls twelve-month backlog increased due to higher orders for our defense programs. The increased level of twelve-month backlog in Industrial Systems is due to higher orders from our acquisitions within our industrial automation market and for our industrial components products.

25


SEGMENT RESULTS OF OPERATIONS
Operating profit, as presented below, is net sales less cost of sales and other operating expenses, excluding interest expense, equity-based compensation expense, non-service pension expense and other corporate expenses. Cost of sales and other operating expenses are directly identifiable to the respective segment or allocated on the basis of sales, manpower or profit. Operating profit is reconciled to earnings before income taxes in Note 20, Segments, of Item 8, Financial Statements and Supplementary Data of this report.
 Aircraft Controls
 
  
 
  
 
  
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in millions)
2019
 
2018
 
2017
 
$  Variance
 
%  Variance  
 
$  Variance
 
%  Variance  
Net sales - military aircraft
$
622

 
$
572

 
$
522

 
$
50

 
9
%
 
$
50

 
10
%
Net sales - commercial aircraft
681

 
622

 
603

 
59

 
10
%
 
19

 
3
%

$
1,303

 
$
1,194

 
$
1,125

 
$
109

 
9
%
 
$
69

 
6
%
Operating profit
$
123

 
$
130

 
$
117

 
$
(7
)
 
(5
%)
 
$
13

 
11
%
Operating margin
9.4
%
 
10.9
%
 
10.4
%
 


 

 

 

The increase in Aircraft Controls' net sales in 2019 was driven by increases in commercial OEM, military OEM and military aftermarket programs compared to 2018. Aircraft Controls' net sales growth in 2018 compared to 2017 was driven by military OEM programs and by commercial aftermarket programs.
In 2019 compared to 2018, commercial OEM sales increased $70 million, but was partially offset by a $10 million decline in commercial aftermarket sales. Within commercial OEM programs, sales to Boeing increased $26 million and sales to Airbus increased $21 million, as higher volumes on the Boeing 787 and accelerated shipments on the Airbus A350 offset declines in both customers' legacy programs. Also sales for business jets increased $18 million due to higher Gulfstream volumes. The decline in commercial aftermarket sales was driven by the timing of initial provisioning orders for the Airbus A350, reducing sales $8 million. Also in 2019 compared to 2018, military OEM sales increased $33 million and military aftermarket sales increased $17 million. Within military OEM sales, higher production rates increased sales $14 million for the F-35 program, sales for foreign military programs increased $11 million and sales for the V-22 increased $8 million. The increase in military aftermarket sales was driven by higher V-22 and F-35 spares sales.
In 2018 compared to 2017, military OEM sales increased $43 million and military aftermarket sales increased $7 million. Within OEM programs, higher production levels on the F-35 and the KC-46 Tanker increased sales $22 million and $6 million, respectively. In addition, contract awards for navigational aides products increased sales $6 million and higher orders for foreign military programs increased sales $5 million. Within aftermarket programs, higher spare purchases for multiple programs offset the lower amount of prior year's activity associated with the B-2 program. Also in 2018, commercial aftermarket sales increased $33 million driven by higher initial provisioning orders for the Airbus A350 program and recapture activities on legacy Boeing programs. Partially offsetting these increases was a $14 million decline in commercial OEM sales, as declining volumes on legacy Boeing and Airbus programs surpassed volume increases on newer programs.
Operating margin declined in 2019 compared to 2018. We had higher internal and external costs as production volumes have increased in both commercial and military programs. Additionally, operating margin in 2019 included a $10 million charge related to a supplier quality issue. Partially offsetting these higher expenses was the incremental margin from higher amounts of foreign military sales and $9 million of lower research and development expenses across our major programs.
Operating margin in 2018 increased compared to the operating margin in 2017. Research and development expenses decreased $19 million due to lower activity on our major commercial development programs. However, we had an unfavorable mix due to lower amounts of mature commercial OEM sales as well as increased costs on a new commercial OEM program, partially offset by higher amounts of commercial aftermarket sales. Also, higher operating expenses, including new business capture activities, reduced operating profit.

26


Space and Defense Controls
  
 
 
  
 
  
 
2019 vs. 2018
2018 vs. 2017
(dollars in millions)
2019
 
2018
 
2017
 
$  Variance
 
%  Variance
 
$  Variance
 
%  Variance
Net sales
$
683

 
$
581

 
$
529

 
$
103

 
18
%
 
$
52

 
10
%
Operating profit
$
89

 
$
68

 
$
50

 
$
21

 
32
%
 
$
18

 
35
%
Operating margin
13.0
%
 
11.6
%
 
9.4
%
 

 

 


 

Space and Defense Controls' net sales growth was driven by both of our space and our defense markets in 2019 compared to 2018, and in 2018 compared to 2017.
In 2019 compared to 2018, sales in our defense market increased $99 million across all of our of our major programs. Defense controls sales increased $29 million as our new turret system product ramp increased sales $20 million and sales for slip ring components increased $15 million. Also, sales for missile applications increased $34 million due to higher volumes on both legacy and funded development programs. Additionally, we had $21 million of higher defense component sales driven by the overall growth in defense spending. In 2019 compared to 2018, sales increased $4 million in our space market. Sales for launch vehicles increased $11 million. The level of work increased for both NASA's Orion spacecraft and for funded hypersonic application development activities, but were partially offset by lower work on NASA's Space Launch System launch vehicle. However, an $8 million decline in space avionics sales due to contract delays reduced the overall sales growth in our space market.
In 2018 compared to 2017, sales increased $28 million in our space market. New satellite avionics orders and higher launch vehicle development work more than offset $18 million of lost sales associated with the 2017 divested operations. Also in 2018, sales increased $24 million in our defense market. Higher orders for security programs and defense components increased sales $15 million and $10 million, respectively. Half of the increase for security programs is due to our acquisition during the year. Higher development work for missiles also increased sales $9 million. These increases were partially offset by $10 million of lower defense controls sales, due to timing of production programs.
Operating margin increased in 2019 compared to 2018 due primarily to higher sales volumes for our defense products. Also, the sales growth contributed to incremental margins beyond our selling and administrative expenses.
Operating margin increased in 2018 compared to 2017 due to the absence of 2017's losses associated with selling our non-core businesses. Operating margin excluding the losses would have been 11.9% in 2017. The slight decline in 2018 operating margin compared to an adjusted 2017 operating margin was driven by higher research and development expenses.


27


Industrial Systems
  
 
 
  
 
  
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in millions)
2019
 
2018
 
2017
 
$  Variance
 
%  Variance
 
$  Variance
 
%  Variance
Net sales
$
918

 
$
935

 
$
843

 
$
(17
)
 
(2
%)
 
$
92

 
11
%
Operating profit
$
109

 
$
65

 
$
92

 
$
44

 
68
%
 
$
(27
)
 
(29
%)
Operating margin
11.9
%
 
6.9
%
 
10.9
%
 

 

 

 

The decline in Industrial Systems' net sales in 2019 compared to 2018 was due to weaker foreign currencies, as acquired sales offset the lost sales of the exited business. In 2018 compared to 2017, approximately half of Industrial Systems' net sales growth was driven by organic growth within all our markets, and the remaining growth was split between the impacts of acquisitions and foreign currencies.
In 2019, weaker foreign currencies, in particular the Euro and the British Pound, relative to the U.S. Dollar decreased sales $16 million as compared to 2018. Additionally, sales decreased $43 million in our energy market, due largely to our decision to exit the wind pitch controls business in 2018. Also, energy generation sales declined $12 million due to lower demand in Japan for large turbines. Offsetting the sales decline was a sales increase in our industrial automation market. The acquisition of Vues Brno s.r.o increased sales $20 million, and we had higher sales for industrial components. Sales also increased $14 million in our medical market due to higher enteral pump and sets sales.
Excluding the currency effects on sales in 2018 compared to 2017, sales increased $41 million in our industrial automation market. The increases were primarily driven by our acquisitions, as well as stronger macro economic growth. Sales also increased $17 million in our medical market driven by higher orders for our components and devices. In addition, sales increased $14 million in our energy market driven by increased shipments for energy generation and exploration products. In total in 2018 compared to 2017, the acquisitions of Vues Brno s.r.o and Rotary Transfer Systems increased sales, primarily in our industrial automation market, $32 million, and stronger foreign currencies, primarily the Euro relative to the U.S. dollar, increased sales $19 million.
In 2018, we decided to phase out our participation in the wind pitch controls business, during which we incurred $39 million of restructuring expense as described in the Consolidated Results of Operations.
Operating margin increased in 2019 compared to 2018 due to the absence of the 2018 restructuring expense. Excluding the effect of this expense in 2018, operating margin would have been 10.9%. The resulting increase from an adjusted 2018 operating margin was driven by the lack of the low-margin wind pitch controls business. Additionally, higher sales drove incremental margins in our medical and in our marine businesses, and we benefited $3 million due to a gain on the sale of a small non-core business. Partly offsetting the increase was higher selling, general and administrative expenses as a percentage of sales.
Operating margin decreased in 2018 compared to 2017 due to charges associated with exiting the wind pitch controls business. Excluding the effect of this expense, operating margin would have been 10.9% in 2018.


28


SEGMENT OUTLOOK
 
  
 
  
 
2020 vs. 2019
(dollars in millions)
2020
 
2019
 
$  Variance
 
%  Variance  
Net sales:
 
 
 
 
 
 
 
Aircraft Controls
$
1,325

 
$
1,303

 
$
22

 
2
%
Space and Defense Controls
770

 
683

 
87

 
13
%
Industrial Systems
915

 
918

 
(3
)
 
%
 
$
3,010

 
$
2,905

 
$
105

 
4
%
Operating profit:
 
 
 
 
 
 
 
Aircraft Controls
$
139

 
$
123

 
$
17

 
14
%
Space and Defense Controls
100

 
89

 
11

 
12
%
Industrial Systems
106

 
109

 
(4
)
 
(4
%)
 
$
345

 
$
321

 
$
24

 
7
%
Operating margin:
 
 
 
 
 
 
 
Aircraft Controls
10.5
%
 
9.4
%
 


 


Space and Defense Controls
13.0
%
 
13.0
%
 


 


Industrial Systems
11.5
%
 
11.9
%
 


 


 
11.5
%
 
11.1
%
 


 


 
 
 
 
 
 
 
 
Net earnings
$
195

 
$
180

 
 
 
 
Diluted earnings per share
$5.35 - $5.75

 
$
5.11

 
 
 
 
2020 Outlook We expect higher defense sales in both Space and Defense Controls and in Aircraft Controls to drive the increased 2020 sales. We also expect higher space sales due mostly to higher amounts of launch vehicle program activity. In addition, we expect Industrial Systems sales to decline slightly, driven by the slowing of global economies. Within commercial aircraft programs, we expect lower sales. We expect operating margin will increase due to expected operational improvements within Aircraft Controls. Net earnings in 2020 will benefit from the incremental operating margin, as lower non-operating expenses are offset by a higher effective tax rate. We expect diluted earnings per share will range between $5.35 and $5.75, with a midpoint of $5.55.
2020 Outlook for Aircraft Controls We expect 2020 sales in Aircraft Controls will increase due to higher amounts of military aircraft sales for both OEM and aftermarket programs, primarily related to the F-35 program. Within commercial aircraft programs, we expect that the wind down of the legacy Boeing 777 program, as well as the absence of 2019's accelerated shipments for the Airbus A350, will moderate the military sales growth. We expect operating margin will increase in 2020 due to operational improvements and due to the absence of the 2019 supplier quality charge.
2020 Outlook for Space and Defense Controls – We expect 2020 sales in Space and Defense Controls will increase in both of our markets. Within our defense market, we expect higher sales across all of our programs, driven by higher volumes for our existing and new product offerings. We expect sales in our space market to increase as well, driven by higher amounts of NASA and hypersonic work, as well as increased bookings for avionics products. We expect operating margin will remain level with 2019 as the incremental margin from the higher sales volume is offset by higher amounts of lower-margin development work.
2020 Outlook for Industrial Systems – We expect 2020 sales in Industrial Systems will decline slightly as the slowing global capital investments reduce our industrial automation sales. Mostly offsetting this decline is expected sales increases in our medical applications and our flight simulation systems. We expect operating margin will decline due to an unfavorable sales mix.

29


FINANCIAL CONDITION AND LIQUIDITY
  
 
 
  
 
  
 
2019 vs. 2018
 
2018 vs. 2017
(dollars in millions)
2019
 
2018
 
2017
 
$ Variance
 
% Variance
 
$ Variance
 
% Variance
Net cash provided (used) by:

 

 

 

 

 

 

Operating activities
$
181

 
$
102

 
$
218

 
$
79

 
77
%
 
$
(115
)
 
(53
%)
Investing activities
(116
)
 
(142
)
 
(110
)
 
26

 
(18
%)
 
(32
)
 
29
%
Financing activities
(99
)
 
(222
)
 
(76
)
 
123

 
(55
%)
 
(146
)
 
193
%
Our available borrowing capacity and our cash flow from operations provide us with the financial resources needed to run our operations, reinvest in our business and make strategic acquisitions.
At September 28, 2019, our cash, cash equivalents and restricted cash balance was $93 million which is primarily held outside of the U.S. Cash flow from our U.S. operations, together with borrowings on our credit facility, fund on-going activities, debt service requirements and future growth investments.
Operating activities
Net cash provided by operating activities increased in 2019 compared to 2018. In 2019, pension contributions decreased $151 million. This was partially offset by higher inventory levels, primarily in Aircraft Controls, which used $64 million more cash in 2019 compared to 2018. Additionally, higher accounts receivable balances used $15 million more cash, driven primarily by Aircraft Controls.

Net cash provided by operating activities decreased in 2018 compared to 2017. Cash used by pension and retirement liabilities increased $94 million due to incremental pension contributions in 2018. Also, cash used by inventory increased $26 million, as higher volumes on new programs in Aircraft Controls and delays on shipments in Space and Defense Controls resulted in more inventory.
Investing activities
Net cash used by investing activities in 2019 included $118 million for capital expenditures.
Net cash used by investing activities in 2018 included $95 million for capital expenditures and $48 million for the acquisitions in our Industrial Systems and Space and Defense segments.
Net cash used by investing activities in 2017 included $76 million for capital expenditures and $41 million for the acquisition in Industrial Systems.
We expect our 2020 capital expenditures to be $120 million, due to facilities investments supporting the increased production, as well as machinery and test equipment to improve our operational efficiencies.
Financing activities
Net cash used by financing activities in 2019 includes $31 million of net payments on our credit facilities and $35 million of cash dividends. Net cash used by financing activities in 2019 also includes $23 million related to repurchasing approximately 302,000 shares.
Net cash used by financing activities in 2018 includes $100 million of net payments on our credit facilities. Net cash used by financing activities in 2018 also includes $76 million related to repurchasing approximately 1 million shares, at $75.74 per share, from the defined benefit pension plan. Additionally, we paid $21 million to extinguish the debt of our Industrial Systems' acquisition, and we paid $18 million of cash dividends in 2018.
Net cash used by financing activities in 2017 included net payments on our credit facility.


30


CAPITAL STRUCTURE AND RESOURCES
We maintain bank credit facilities to fund our short and long-term capital requirements, including acquisitions. From time to time, we also sell debt and equity securities to fund acquisitions or take advantage of favorable market conditions.
On October 15, 2019, we amended and restated our U.S. revolving credit facility, which now matures on October 15, 2024. Previously, the revolving credit facility was to mature on June 28, 2021. Our amended and extended U.S. revolving credit facility has a capacity of $1.1 billion and also provides an expansion option, which permits us to request an increase of up to $400 million to the credit facility upon satisfaction of certain conditions. The U.S. revolving credit facility had an outstanding balance of $396 million at September 28, 2019. The weighted-average interest rate on the majority of the outstanding credit facility borrowings is 3.68% and is based on LIBOR plus the applicable margin, which was 1.63% at September 28, 2019. The credit facility is secured by substantially all of our U.S. assets.
The U.S. revolving credit facility contains various covenants. The covenant for minimum interest coverage ratio, defined as the ratio of EBITDA to interest expense for the most recent four quarters, is 3.0. The covenant for the maximum leverage ratio, defined as the ratio of net debt to EBITDA for the most recent four quarters, is 4.0. We are in compliance with all covenants. EBITDA is defined in the loan agreement as (i) the sum of net income, interest expense, income taxes, depreciation expense, amortization expense, other non-cash items reducing consolidated net income and non-cash equity-based compensation expenses minus (ii) other non-cash items increasing consolidated net income.
We are generally not required to obtain the consent of lenders of the U.S. revolving credit facility before raising significant additional debt financing; however, certain limitations and conditions may apply that would require consent to be obtained. In recent years, we have demonstrated our ability to secure consents to access debt markets. We have also been successful in accessing equity markets from time to time. We believe that we will be able to obtain additional debt or equity financing as needed.
The SECT has a revolving credit facility with a borrowing capacity of $35 million, maturing on July 26, 2022. Interest for the revolving credit facility is based on LIBOR plus a margin of 2.13%. As of September 28, 2019, there were $7 million of outstanding borrowings.
We have $300 million 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 effective interest rate for these notes after considering the amortization of deferred debt issuance costs is 5.73%.
We have a trade receivables securitization facility (the "Securitization Program"), which was extended on October 16, 2019 and matures on October 29, 2021. Previously, the Securitization Program was to mature on October 30, 2020. The Securitization Program provides up to $130 million of borrowing capacity and lowers our cost to borrow funds as compared to the U.S. revolving credit facility. 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. We had an outstanding balance of $130 million at September 28, 2019. The Securitization Program has a minimum borrowing requirement, which was $104 million at September 28, 2019. Interest on the secured borrowings under the Securitization Program was 2.86% at September 28, 2019 and is based on 30-day LIBOR plus an applicable margin.
At September 28, 2019, we had $709 million of unused capacity, including $670 million from the U.S. revolving credit facility after considering standby letters of credit.
Net debt to capitalization was 36% at September 28, 2019 and 38% at September 29, 2018. The decrease in net debt to capitalization is primarily due to our net earnings.
We believe that our cash on hand, cash flows from operations and available borrowings under short and long-term arrangements will continue to be sufficient to meet our operating needs.
We declared and paid cash dividends of $0.25 per share on our Class A and Class B common stock in each of the four quarters of 2019.

31


The Board of Directors authorized a share repurchase program. This program has been amended from time to time to authorize additional repurchases that includes both Class A and Class B common stock, and allows us to buy up to an aggregate 13 million common shares. Under this program, we have purchased approximately 10 million shares for $673 million as of September 28, 2019.
Off Balance Sheet Arrangements
We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, results of operations or cash flows.
Contractual Obligations and Commercial Commitments
Our significant contractual obligations and commercial commitments at September 28, 2019 are as follows:  
(dollars in millions)
 
Payments due by period
Contractual Obligations
 
Total
 
2020
 
2021-
2022
 
2023-
2024
 
After
2024
Long-term debt
 
$
833

 
$

 
$
137

 
$
300

 
$
396

Interest on long-term debt
 
55

 
16

 
32

 
8

 

Operating leases
 
116

 
21

 
35

 
18

 
42

Purchase obligations
 
1,033

 
769

 
225

 
13

 
27

Total contractual obligations
 
$
2,037

 
$
805

 
$
428

 
$
339

 
$
464

The obligations in the table above exclude unrecognized tax benefits, which are not material. We are unable to determine if and when any of those amounts will be settled, nor can we estimate any potential changes to the unrecognized tax benefits.
The table above excludes interest on variable-rate debt from our U.S. revolving credit facility, other revolving credit facilities and the Securitization Program, as we are unable to determine the rate and average balance outstanding for the periods presented in the above table. Interest on variable-rate long-term debt, assuming the rate and outstanding balances do not change from those at September 28, 2019, would be approximately $20 million annually.
Total contractual obligations exclude pension obligations. In 2020, we have no minimum funding requirements. However, we anticipate making contributions to defined benefit pension plans of $12 million, of which approximately $5 million is for a non-qualified U.S. plan. We are unable to determine minimum funding requirements beyond 2020.
In 2018, we made discretionary incremental contributions to our defined benefit plans in excess of minimum funding requirements. These additional contributions were primarily made to fully fund our qualified U.S. defined benefit pension plan. We do not plan to make additional contributions to this plan for the foreseeable future.
(dollars in millions)
 
Commitments expiring by period
Other Commercial Commitments
 
Total
 
2020
 
2021-
2022
 
2023-
2024
 
After
2024
Standby letters of credit
 
$
34

 
$
12

 
$
22

 
$

 
$




32


ECONOMIC CONDITIONS AND MARKET TRENDS
We operate within the aerospace and defense and industrial markets. Our aerospace and defense markets are affected by market conditions and program funding levels, while our industrial markets are influenced by general capital investment trends and economic conditions. A common factor throughout our markets is the continuing demand for technologically advanced products.
Aerospace and Defense
Approximately two-thirds of our 2019 sales were generated in aerospace and defense markets. Within aerospace and defense, we serve three end markets: defense, commercial aircraft and space.
The defense market is dependent on military spending for development and production programs. We have a growing development program order book for future generation aircraft and hypersonic missiles, which we hope to embed our technologies within these high-performance military programs of the future. Aircraft production programs are typically long-term in nature, offering predictability as to capacity needs and future revenues. We maintain positions on numerous high priority programs, including the Lockheed Martin F-35 Joint Strike Fighter, FA-18E/F Super Hornet and V-22 Osprey. The large installed base of our products leads to attractive aftermarket sales and service opportunities. The tactical and strategic missile, missile defense and defense controls markets are dependent on many of the same market conditions as military aircraft, including overall military spending and program funding levels. At times when there are perceived threats to national security, U.S. Defense spending can increase; at other times, defense spending can decrease. Future levels of defense spending beyond 2019 are uncertain and subject to congressional debate. Our security and surveillance product line is dependent on government funding at federal and local levels, as well as private sector demand.
The commercial aircraft market is dependent on a number of factors, including global demand for air travel, which generally follows underlying economic growth. As such, the commercial aircraft market has historically exhibited cyclical swings which tend to track the overall economy. In recent years, the development of new, more fuel-efficient commercial air transports has helped drive increased demand in the commercial aircraft market, as airlines replace older, less fuel-efficient aircraft with newer models in an effort to reduce operating costs. The aftermarket is driven by usage of the existing aircraft fleet and the age of the installed fleet, and is impacted by fleet re-sizing programs for passenger and cargo aircraft. Changes in aircraft utilization rates affect the need for maintenance and spare parts impacting aftermarket sales. Boeing and Airbus have historically adjusted production in line with air traffic volume. Demand for our commercial aircraft products is in large part dependent on new aircraft production, which is increasing as Boeing and Airbus work to fulfill large backlogs of unfilled orders.
The space market is comprised of four customer markets: the civil market, namely NASA, the department of defense market, the commercial space market and the new space market. The civil market is driven by investment for commercial and exploration activities, including NASA's return to the moon. The department of defense market is driven by governmental-authorized levels of funding for satellite communications, as well as funding for hypersonic defense technologies. The commercial space market is comprised of large satellite customers, which traditionally are communications companies. Trends for this market, as well as for commercial launch vehicles, follow demand for increased capacity. This, in turn tends to track with underlying demand for increased consumption of telecommunication services, satellite replacements and global navigation needs. The new space market is driven by investments to increase the speed and access to space through smaller satellites, at reduced cost.





33


Industrial
Approximately one-third of our 2019 sales were generated in industrial markets. Within industrial, we serve two end markets: industrial automation and medical.
The industrial automation market we serve is influenced by several factors including capital investment, product innovation, economic growth, cost-reduction efforts and technology upgrades. We experience challenges from the need to react to the demands of our customers, who are in large part sensitive to international and domestic economic conditions. Our simulation and test products operate in a market that is largely affected by these same factors and challenges. Our energy generation and exploration products operates in an energy market that is affected by changing oil and natural gas prices, global urbanization and the resulting change in supply and demand for global energy. Historically, drivers for global growth includes investments in power generation infrastructure and exploration of new oil and gas resources.
The medical market we serve is influenced by economic conditions, regulatory environments, hospital and outpatient clinic spending on equipment, population demographics, medical advances, patient demands and the need for precision control components and systems. Advances in medical technology and medical treatments have had the effect of extending average life spans, in turn resulting in greater need for medical services. These same technology and treatment advances also drive increased demand from the general population as a means to improve quality of life. Access to medical insurance, whether through government funded health care plans or private insurance, also affects the demand for medical services.
Foreign Currencies
We are affected by the movement of foreign currencies compared to the U.S. dollar, particularly in Aircraft Controls and Industrial Systems. About one-fifth of our 2019 sales were denominated in foreign currencies. During 2019, average foreign currency rates generally weakened against the U.S. dollar compared to 2018. The translation of the results of our foreign subsidiaries into U.S. dollars decreased sales by $23 million compared to one year ago. During 2018, average foreign currency rates generally strengthened against the U.S. dollar compared to 2017. The translation of the results of our foreign subsidiaries into U.S. dollars increased 2018 sales by $27 million compared to 2017.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1, Summary of Significant Accounting Policies, included in Item 8, Financial Statements and Supplementary Data of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates ("ASU").


34


Item 7A.
 
    Quantitative and Qualitative Disclosures about Market Risk.
In the normal course of business, we are exposed to interest rate risk from our long-term debt and foreign exchange rate risk related to our foreign operations and foreign currency transactions. To manage these risks, we may enter into derivative instruments such as interest rate swaps and foreign currency contracts. We do not hold or issue financial instruments for trading purposes. In 2019, our derivative instruments consisted of interest rate swaps designated as cash flow hedges and foreign currency contracts.
At September 28, 2019, we had $533 million of borrowings subject to variable interest rates. At September 28, 2019, we had interest rate swaps with notional amounts totaling $75 million. The interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at 3.25%, including the applicable margin of 1.63% as of September 28, 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. During 2019, our average borrowings subject to variable interest rates, after adjusting for interest rate swaps, were $444 million and, therefore, if interest rates had been one percentage point higher during 2019, our interest expense would have been $4 million higher.
We also enter into forward contracts to reduce fluctuations in foreign currency cash flows related to third party purchases, intercompany product shipments and to reduce exposure on intercompany balances that are denominated in foreign currencies. We have foreign currency contracts with notional amounts of $155 million outstanding at September 28, 2019 that mature at various times through May 28, 2021. These include notional amounts of $133 million outstanding where the U.S. dollar is one side of the trade. The net fair value of all of our foreign currency contracts involving the U.S. dollar was less than a $1 million net asset at September 28, 2019. A hypothetical 10 percent increase in the value of the U.S. dollar against all currencies would decrease the fair value of our foreign currency contracts at September 28, 2019 by approximately $10 million, while a hypothetical 10 percent decrease in the value of the U.S. dollar against all currencies would increase the fair value of our foreign currency contracts at September 28, 2019 by approximately $13 million. It is important to note that gains and losses indicated in the sensitivity analysis would often be offset by gains and losses on the underlying receivables and payables.
Although the majority of our sales, expenses and cash flows are transacted in U.S. dollars, we have exposure to changes in foreign currency exchange rates such as the Euro, British pound and Japanese yen. If average annual foreign exchange rates collectively weakened or strengthened against the U.S. dollar by 10%, our net earnings in 2019 would have decreased or increased by $9 million from foreign currency translation. This sensitivity analysis assumed that each exchange rate would change in the same direction relative to the U.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on actual transactions.

35



    
Item 8.
 
 Financial Statements and Supplementary Data.
MOOGIMAGE2A11.JPG
Consolidated Statements of Earnings
  
 
Fiscal Years Ended
(dollars in thousands, except share and per share data)
 
September 28, 2019
 
September 29, 2018
 
September 30, 2017
Net sales
 
$
2,904,663

 
$
2,709,468

 
$
2,497,524

Cost of sales
 
2,088,831

 
1,923,179

 
1,763,758

Inventory write-down - restructuring
 

 
12,198

 

Gross profit
 
815,832

 
774,091

 
733,766

Research and development
 
126,453

 
129,838

 
144,157

Selling, general and administrative
 
404,653

 
388,434

 
346,281

Interest
 
39,269

 
36,238

 
34,551

Restructuring
 

 
28,794

 

Other
 
11,699

 
6,950

 
27,066

Earnings before income taxes
 
233,758

 
183,837

 
181,711

Income taxes
 
54,010

 
87,209

 
41,301

Net earnings attributable to Moog and noncontrolling interest
 
$
179,748

 
$
96,628

 
$
140,410

 
 
 
 
 
 
 
Net earnings (loss) attributable to noncontrolling interest
 

 
121

 
(870
)
 
 
 
 
 
 
 
Net earnings attributable to Moog
 
$
179,748

 
$
96,507

 
$
141,280

 
 
 
 
 
 
 
Net earnings per share attributable to Moog
 
 
 
 
 
 
Basic
 
$
5.16

 
$
2.71

 
$
3.94

Diluted
 
$
5.11

 
$
2.68

 
$
3.90

 
 
 
 
 
 
 
Dividends declared per share
 
$
1.00

 
$
0.50

 
$

 
 
 
 
 
 
 
Average common shares outstanding
 
 
 
 
 
 
Basic
 
34,854,614

 
35,661,638

 
35,852,448

Diluted
 
35,178,968

 
36,052,307

 
36,230,043

See accompanying Notes to Consolidated Financial Statements.


















36


MOOGIMAGE2A11.JPG
Consolidated Statements of Comprehensive Income (Loss)
 
 
Fiscal Years Ended
(dollars in thousands)
 
September 28,
2019
 
September 29,
2018
 
September 30,
2017
Net earnings attributable to Moog and noncontrolling interest
 
$
179,748

 
$
96,628

 
$
140,410

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(29,984
)
 
(16,279
)
 
27,460

Retirement liability adjustment
 
(18,006
)
 
26,757

 
69,229

Change in accumulated income (loss) on derivatives
 
105

 
(121
)
 
2,881

Other comprehensive income (loss), net of tax
 
(47,885
)
 
10,357

 
99,570

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

 
(47,077
)
 

Comprehensive income (loss)
 
131,863

 
59,908

 
239,980

Comprehensive income (loss) attributable to noncontrolling interest
 

 
91

 
(870
)
Comprehensive income (loss) attributable to Moog
 
$
131,863

 
$
59,817

 
$
240,850

See accompanying Notes to Consolidated Financial Statements.



37


MOOGIMAGE2A11.JPG
Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
September 28, 2019
 
September 29, 2018
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
89,702

 
$
125,584

Restricted cash
 
2,846

 
2,122

Receivables
 
957,287

 
793,911

Inventories
 
534,974

 
512,522

Prepaid expenses and other current assets
 
44,164

 
44,404

Total current assets
 
1,628,973

 
1,478,543

Property, plant and equipment, net of accumulated depreciation of $828,810 and $816,837, respectively
 
586,767

 
552,865

Goodwill
 
784,240

 
797,217

Intangible assets, net
 
79,646

 
95,537

Deferred income taxes
 
19,992

 
17,328

Other assets
 
14,619

 
22,558

Total assets
 
$
3,114,237

 
$
2,964,048

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

 
$
3,623

Current installments of long-term debt
 
249

 
365

Accounts payable
 
257,677

 
207,422

Accrued compensation
 
143,765

 
147,765

Contract advances
 
137,242

 
151,687

Other accrued liabilities
 
188,725

 
169,762

Total current liabilities
 
727,658

 
680,624

Long-term debt, excluding current installments
 
832,984

 
858,836

Long-term pension and retirement obligations
 
160,034

 
117,471

Deferred income taxes
 
40,528

 
46,477

Other long-term liabilities
 
30,552

 
35,654

Total liabilities
 
1,791,756

 
1,739,062

Shareholders’ equity
 
 
 
 
Common stock - par value $1.00
 
 
 
 
  Class A - Authorized 100,000,000 shares
 
43,795

 
43,785

Issued 43,794,935 and outstanding 32,268,275 shares at September 28, 2019
 
 
 
 
Issued 43,784,489 and outstanding 32,486,766 shares at September 29, 2018
 
 
 
 
  Class B - Authorized 20,000,000 shares. Convertible to Class A on a one-for-one basis
 
7,485

 
7,495

Issued 7,484,778 and outstanding 2,426,819 shares at September 28, 2019
 
 
 
 
Issued 7,495,224 and outstanding 2,311,286 shares at September 29, 2018
 
 
 
 
Additional paid-in capital
 
510,546

 
502,257

Retained earnings
 
2,133,328

 
1,973,514

Treasury shares
 
(769,569
)
 
(738,494
)
Stock Employee Compensation Trust
 
(111,492
)
 
(118,449
)
Supplemental Retirement Plan Trust
 
(71,546
)
 
(72,941
)
Accumulated other comprehensive loss
 
(420,066
)
 
(372,181
)
Total shareholders’ equity
 
1,322,481

 
1,224,986

Total liabilities and shareholders’ equity
 
$
3,114,237

 
$
2,964,048

See accompanying Notes to Consolidated Financial Statements.

38


MOOGIMAGE2A11.JPG
Consolidated Statements of Shareholders’ Equity
<
  
 
Fiscal Years Ended
(dollars in thousands)
 
September 28, 2019
 
September 29, 2018
 
September 30, 2017
COMMON STOCK
 
 
 
 
 
 
Beginning and end of year
 
$
51,280

 
$
51,280

 
$
51,280

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
Beginning of year
 
502,257

 
492,246

 
465,762

Issuance of treasury shares
 
(1,018
)
 
(4,321
)
 
(7,390
)
Equity-based compensation expense
 
6,464

 
5,804

 
4,582

Redemption of noncontrolling interest
 

 
175

 
3,125

Adjustment to market - SECT, SERP and other
 
2,843

 
8,353

 
26,167

End of year
 
510,546

 
502,257

 
492,246

RETAINED EARNINGS
 
 
 
 
 
 
Beginning of year
 
1,973,514

 
1,847,819

 
1,706,539

Net earnings attributable to Moog
 
179,748

 
96,507

 
141,280

Dividends
 
(34,857
)
 
(17,889
)
 

Adoption of ASC 606
 
14,923

 

 

Tax Cuts and Jobs Act, reclassification from AOCIL
 

 
47,077

 

End of year
 
2,133,328

 
1,973,514

 
1,847,819

TREASURY SHARES AT COST
 
 
 
 
 
 
Beginning of year
 
(738,494
)
 
(739,157
)
 
(741,700
)
Class A and B shares issued related to compensation
 
9,880

 
8,881

 
11,186

Class A and B shares purchased
 
(40,955
)
 
(8,218
)
 
(8,643
)
End of year
 
(769,569
)
 
(738,494
)
 
(739,157
)
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
 
 
Beginning of year
 
(118,449
)
 
(89,919
)
 
(49,463
)
Issuance of shares
 
22,190

 
4,714

 
867

Purchase of shares
 
(15,288
)
 
(30,358
)
 
(18,685
)
Adjustment to market
 
55

 
(2,886
)
 
(22,638
)
End of year
 
(111,492
)
 
(118,449
)