Quarterly Report (10-q)

Date : 01/24/2020 @ 8:23PM
Source : Edgar (US Regulatory)
Stock : Moog Inc (MOG.B)
Quote : 83.63  0.39 (0.47%) @ 9:00PM

Quarterly Report (10-q)

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

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

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

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




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company
                
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes       No  

The number of shares outstanding of each class of common stock as of January 20, 2020 was:
Class A common stock, 31,332,013 shares
Class B common stock, 2,513,960 shares






Moog Inc.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MOOGIMAGE2A12.JPG
Consolidated Condensed Statements of Earnings
(Unaudited)
 
 
Three Months Ended
(dollars in thousands, except share and per share data)
 
December 28,
2019
 
December 29, 2018 (1)
Net sales
 
$
754,843

 
$
679,676

Cost of sales
 
543,586

 
480,174

Gross profit
 
211,257

 
199,502

Research and development
 
28,208

 
31,876

Selling, general and administrative
 
98,367

 
96,326

Interest
 
10,232

 
9,682

Other
 
7,546

 
5,135

Earnings before income taxes
 
66,904

 
56,483

Income taxes
 
16,877

 
13,714

Net earnings
 
$
50,027

 
$
42,769

 
 
 
 
 
Net earnings per share
 
 
 
 
Basic
 
$
1.45

 
$
1.23

Diluted
 
$
1.44

 
$
1.22

 
 
 
 
 
Dividends declared per share
 
$
0.25

 
$
0.25

 
 
 
 
 
Average common shares outstanding
 
 
 
 
Basic
 
34,510,851

 
34,815,255

Diluted
 
34,787,404

 
35,125,829

See accompanying Notes to Consolidated Condensed Financial Statements.
(1) As adjusted, see Note 1 - Basis of Presentation.



4


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Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
Three Months Ended
(dollars in thousands)
 
December 28,
2019
 
December 29, 2018 (1)
Net earnings
 
$
50,027

 
$
42,769

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustment
 
21,533

 
(9,387
)
Retirement liability adjustment
 
4,363

 
6,119

Change in accumulated income (loss) on derivatives
 
1,402

 
664

Other comprehensive income (loss), net of tax
 
27,298

 
(2,604
)
Comprehensive income (loss)
 
$
77,325

 
$
40,165

See accompanying Notes to Consolidated Condensed Financial Statements.
(1) As adjusted, see Note 1 - Basis of Presentation.



5


MOOGIMAGE2A12.JPG
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands)
 
December 28,
2019
 
September 28, 2019 (1)
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
124,226

 
$
89,702

Restricted cash
 
3,065

 
2,846

Receivables
 
989,214

 
957,287

Inventories, net
 
559,232

 
534,974

Prepaid expenses and other current assets
 
43,588

 
44,164

Total current assets
 
1,719,325

 
1,628,973

Property, plant and equipment, net
 
613,487

 
586,767

Operating lease right-of-use assets
 
62,669

 

Goodwill
 
812,602

 
784,240

Intangible assets, net
 
103,783

 
79,646

Deferred income taxes
 
20,069

 
19,992

Other assets
 
16,143

 
14,619

Total assets
 
$
3,348,078

 
$
3,114,237

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Current installments of long-term debt
 
$

 
$
249

Accounts payable
 
231,692

 
257,677

Accrued compensation
 
113,230

 
143,765

Contract advances
 
177,107

 
137,242

Accrued liabilities and other
 
211,290

 
188,725

Total current liabilities
 
733,319

 
727,658

Long-term debt, excluding current installments
 
977,573

 
832,984

Long-term pension and retirement obligations
 
163,286

 
160,034

Deferred income taxes
 
54,238

 
40,528

Other long-term liabilities
 
82,971

 
30,552

Total liabilities
 
2,011,387

 
1,791,756

Shareholders’ equity
 
 
 
 
Common stock - Class A
 
43,796

 
43,795

Common stock - Class B
 
7,484

 
7,485

Additional paid-in capital
 
518,822

 
510,546

Retained earnings
 
2,170,105

 
2,128,739

Treasury shares
 
(828,453
)
 
(769,569
)
Stock Employee Compensation Trust
 
(115,503
)
 
(111,492
)
Supplemental Retirement Plan Trust
 
(71,381
)
 
(71,546
)
Accumulated other comprehensive loss
 
(388,179
)
 
(415,477
)
Total shareholders’ equity
 
1,336,691

 
1,322,481

Total liabilities and shareholders’ equity
 
$
3,348,078

 
$
3,114,237

See accompanying Notes to Consolidated Condensed Financial Statements.
(1) As adjusted, see Note 1 - Basis of Presentation.
 
 
 
 

6


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Consolidated Condensed Statements of Shareholders' Equity
(Unaudited)
  
 
Three Months Ended
(dollars in thousands)
 
December 28, 2019 (1)
 
December 29, 2018 (1)
COMMON STOCK
 
 
 
 
Beginning and end of period
 
$
51,280

 
$
51,280

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
Beginning of period
 
510,546

 
502,257

Issuance of treasury shares
 
4,489

 
(2,201
)
Equity-based compensation expense
 
2,381

 
2,008

Adjustment to market - SECT, SERP and other
 
1,406

 
(14,780
)
End of period
 
518,822

 
487,284

RETAINED EARNINGS
 
 
 
 
Beginning of period
 
2,128,739

 
1,974,125

Net earnings
 
50,027

 
42,769

Dividends
 
(8,661
)
 
(8,703
)
Adoption of ASC 606
 

 
14,923

End of period
 
2,170,105

 
2,023,114

TREASURY SHARES AT COST
 
 
 
 
Beginning of period
 
(769,569
)
 
(738,494
)
Class A and B shares issued related to compensation
 
527

 
5,796

Class A and B shares purchased
 
(59,411
)
 
(10,541
)
End of period
 
(828,453
)
 
(743,239
)
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
Beginning of period
 
(111,492
)
 
(118,449
)
Issuance of shares
 

 
8,761

Purchase of shares
 
(2,440
)
 
(1,930
)
Adjustment to market
 
(1,571
)
 
9,436

End of period
 
(115,503
)
 
(102,182
)
SUPPLEMENTAL RETIREMENT PLAN (SERP) TRUST
 
 
 
 
Beginning of period
 
(71,546
)
 
(72,941
)
Adjustment to market
 
165

 
5,344

End of period
 
(71,381
)
 
(67,597
)
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
Beginning of period
 
(415,477
)
 
(372,792
)
Other comprehensive income (loss)
 
27,298

 
(2,604
)
End of period
 
(388,179
)
 
(375,396
)
TOTAL SHAREHOLDERS’ EQUITY
 
$
1,336,691

 
$
1,273,264

See accompanying Notes to Consolidated Condensed Financial Statements.
(1) As adjusted, see Note 1 - Basis of Presentation.
 
 
 
 

7


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Consolidated Condensed Statements of Shareholders’ Equity, Shares
(Unaudited)
  
 
Three Months Ended
(share data)
 
December 28, 2019
 
December 29, 2018
COMMON STOCK - CLASS A
 
 
 
 
Beginning of period
 
43,794,935

 
43,784,489

Conversion of Class B to Class A
 
1,400

 
946

End of period
 
43,796,335

 
43,785,435

COMMON STOCK - CLASS B
 
 
 
 
Beginning of period
 
7,484,778

 
7,495,224

Conversion of Class B to Class A
 
(1,400
)
 
(946
)
End of period
 
7,483,378

 
7,494,278

TREASURY SHARES - CLASS A COMMON STOCK
 
 
 
 
Beginning of period
 
(11,101,512
)
 
(10,872,575
)
Class A shares issued related to compensation
 
3,078

 
23,741

Class A shares purchased
 
(669,106
)
 
(48,573
)
End of period
 
(11,767,540
)
 
(10,897,407
)
TREASURY SHARES - CLASS B COMMON STOCK
 
 
 
 
Beginning of period
 
(3,345,489
)
 
(3,323,996
)
Class B shares issued related to compensation
 
94,567

 
58,793

Class B shares purchased
 
(9,680
)
 
(83,296
)
End of period
 
(3,260,602
)
 
(3,348,499
)
SECT - CLASS A COMMON STOCK
 
 
 
 
Beginning and end of period
 
(425,148
)
 
(425,148
)
SECT - CLASS B COMMON STOCK
 
 
 
 
Beginning of period
 
(886,300
)
 
(983,772
)
Issuance of shares
 

 
107,577

Purchase of shares
 
(28,596
)
 
(23,669
)
End of period
 
(914,896
)
 
(899,864
)
SERP - CLASS B COMMON STOCK
 
 
 
 
Beginning and end of period
 
(826,170
)
 
(876,170
)
See accompanying Notes to Consolidated Condensed Financial Statements.
 
 
 
 


8


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Consolidated Condensed Statements of Cash Flows
(Unaudited)

 
 
Three Months Ended
(dollars in thousands)
 
December 28,
2019
 
December 29, 2018 (1)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
50,027

 
$
42,769

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
 
Depreciation
 
18,386

 
17,848

Amortization
 
3,281

 
3,746

Deferred income taxes
 
3,205

 
92

Equity-based compensation expense
 
2,381

 
2,008

Other
 
(1,017
)
 
1,020

Changes in assets and liabilities providing (using) cash:
 
 
 
 
Receivables
 
(18,879
)
 
12,810

Inventories
 
(13,782
)
 
(24,399
)
Accounts payable
 
(29,153
)
 
(13,199
)
Contract advances
 
40,215

 
31,531

Accrued expenses
 
(26,998
)
 
(18,473
)
Accrued income taxes
 
4,709

 
511

Net pension and post retirement liabilities
 
8,327

 
8,368

Other assets and liabilities
 
1,404

 
(394
)
Net cash provided by operating activities
 
42,106

 
64,238

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Acquisitions of businesses, net of cash acquired
 
(53,906
)
 

Purchase of property, plant and equipment
 
(27,310
)
 
(24,375
)
Other investing transactions
 
(3,684
)
 
2,785

Net cash used by investing activities
 
(84,900
)
 
(21,590
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net short-term repayments
 

 
(1,490
)
Proceeds from revolving lines of credit
 
272,000

 
131,100

Payments on revolving lines of credit
 
(617,500
)
 
(175,200
)
Payments on long-term debt
 

 
(85
)
Proceeds from senior notes, net of issuance costs
 
492,750

 

Payments on finance lease obligations
 
(88
)
 

Payment of dividends
 
(8,661
)
 
(8,703
)
Purchase of outstanding shares for treasury
 
(57,776
)
 
(9,450
)
Proceeds from sale of stock held by SECT
 

 
6,636

Purchase of stock held by SECT
 
(2,440
)
 
(1,930
)
Other financing transactions
 
(1,895
)
 

Net cash provided (used) by financing activities
 
76,390

 
(59,122
)
Effect of exchange rate changes on cash
 
1,147

 
(473
)
Increase (decrease) in cash, cash equivalents and restricted cash
 
34,743

 
(16,947
)
Cash, cash equivalents and restricted cash at beginning of period
 
92,548

 
127,706

Cash, cash equivalents and restricted cash at end of period
 
$
127,291

 
$
110,759

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
Treasury shares issued as compensation
 
$
5,016

 
$
5,720

Equipment acquired through lease financing
 
568

 

See accompanying Notes to Consolidated Condensed Financial Statements.
(1) As adjusted, see Note 1 - Basis of Presentation.

9


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Notes to Consolidated Condensed Financial Statements
Three Months Ended December 28, 2019
(Unaudited)
(dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for the fair presentation of results for the interim period have been included. The results of operations for the three months ended December 28, 2019 are not necessarily indicative of the results expected for the full year. The accompanying unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the fiscal year ended September 28, 2019. All references to years in these financial statements are to fiscal years.
Certain prior year amounts have been reclassified to conform to current year's presentation. Management does not consider the amounts reclassified to be material.

Recent Accounting Pronouncements Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU no. 2016-02
Leases
(and all related ASUs)

 
The standard requires most lease arrangements to be recognized in the balance sheet as lease assets and lease liabilities. The standard also requires additional disclosures about the leasing arrangements. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted.
 
We adopted this standard using the modified retrospective method, without adjusting prior comparative periods. We recorded an initial right-of-use (ROU) assets of $68,126 and lease liabilities of $71,776, which included reclassifying deferred rent as a component of the ROU asset on the Consolidated Condensed Balance Sheets. There were no material changes to our Consolidated Condensed Statements of Earnings or Consolidated Condensed Statements of Cash Flows. We have completed the necessary changes to our financial statements and related disclosures, internal controls, financial policies and information systems. See Note 7 - Leases, for additional disclosure.
Date adopted:
Q1 2020
    

10


Recent Accounting Pronouncements Not Yet Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU no. 2018-15
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
 
The standard amends ASC 350 to include in its scope implementation costs of a Cloud Computing Arrangement (CCA) that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
 
We are currently evaluating the effect on our financial statements and related disclosures.
Planned date of adoption:
Q1 2021
ASU no. 2016-13 Measurement of Credit Losses on Financial Instruments
 
The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires a Company to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The provisions of the standard are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The amendment requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.
 
We are currently evaluating the effect on our financial statements and related disclosures.
Planned date of adoption:
Q1 2021


We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have an immaterial impact on our financial statements and related disclosures.


11


Impact of Change in Accounting Principle
Beginning in the first quarter of 2020, we changed our method of accounting for the determination of the market-related value of assets for a class of assets within the qualified U.S. defined benefit plan (the plan). This class of assets is currently comprised solely of the fixed income funds asset class held in the portfolio for the plan and provides a natural hedge (liability-hedging assets) against the changes in the recorded amount of net periodic pension cost. Refer to Note 13 - Employee Benefit Plans, in our Form 10-K for the fiscal year ended September 28, 2019, for our fair value disclosure by asset classification. Our previous method of accounting was to calculate the market-related value of assets for all the plan’s assets recognizing investment gains and losses ratably over a five-year period. We have elected to use the fair value of our liability-hedging assets, which represent approximately 80% of the plan’s assets, to determine the market-related value of the assets beginning in the first quarter of 2020. This change in accounting principle is preferable as the recognition of the gains and losses on this class of assets will affect net periodic pension cost in the period in which they occur. No change is being made to the accounting principle for the other classes of pension assets, which represent the remaining 20% of the pension asset portfolio for the plan. The gains and losses for these other plan assets will continue to be amortized into earnings over a five-year period.
The change in accounting principle requires retrospective application and prospective disclosure. The tables below represent the impact of this change on the Consolidated Condensed Statements of Earnings and the Consolidated Condensed Statements of Comprehensive Income (Loss) for the three months ended December 28, 2019, the Consolidated Condensed Balance Sheets for the period ended December 28, 2019, the Consolidated Condensed Statements of Earnings and the Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 29, 2018 and the Consolidated Condensed Balance Sheets for the periods ended December 29, 2018, September 28, 2019 and September 29, 2018, respectively. The change in accounting principle had no impact on the Consolidated Condensed Statements of Cash Flows for these periods.

The tables below represent the impact of the change in accounting principle on the Consolidated Condensed Statement of Earnings and the Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 28, 2019.
 
 
Three Months Ended

 
As Reported (With Change), December 28, 2019
 
Impact of Change
 
Without Change, December 28, 2019
Other
 
$
7,546

 
$
2,876

 
$
10,422

Earnings before income taxes
 
66,904

 
(2,876
)
 
64,028

Income taxes
 
16,877

 
(679
)
 
16,198

Net earnings
 
$
50,027

 
$
(2,197
)
 
$
47,830

 
 
 
 
 
 
 
Net earnings per share
 
 
 
 
 
 
Basic
 
$
1.45

 
$
(0.06
)
 
$
1.39

Diluted
 
$
1.44

 
$
(0.07
)
 
$
1.37

 
 
 
 
 
 
 
Retirement liability adjustment
 
$
4,363

 
$
2,197

 
$
6,560

Other comprehensive income (loss), net of tax
 
$
27,298

 
$
2,197

 
$
29,495

Comprehensive income (loss)
 
$
77,325

 
$

 
$
77,325


The table below represents the impact of the change in accounting principle on the Consolidated Condensed Balance Sheet as of December 28, 2019.
 
 
As Reported (With Change), December 28, 2019
 
Impact of Change
 
Without Change, December 28, 2019
Shareholders’ equity
 
 
 
 
 
 
Retained earnings
 
$
2,170,105

 
$
2,392

 
$
2,172,497

Accumulated other comprehensive loss
 
(388,179
)
 
(2,392
)
 
(390,571
)
Total shareholders’ equity
 
$
1,336,691

 
$

 
$
1,336,691



12


The tables below represent the impact of the change in accounting principle on the Consolidated Condensed Statement of Earnings and the Consolidated Condensed Statements of Comprehensive Income (Loss) for the three months ended December 29, 2018.
 
 
Three Months Ended

 
As Previously Reported, December 29, 2018
 
Impact of Change
 
As Reported, December 29, 2018
Other
 
$
3,434

 
$
1,701

 
$
5,135

Earnings before income taxes
 
58,184

 
(1,701
)
 
56,483

Income taxes
 
14,115

 
(401
)
 
13,714

Net earnings
 
$
44,069

 
$
(1,300
)
 
$
42,769

 
 
 
 
 
 
 
Net earnings per share
 
 
 
 
 
 
Basic
 
$
1.27

 
$
(0.04
)
 
$
1.23

Diluted
 
$
1.25

 
$
(0.03
)
 
$
1.22

 
 
 
 
 
 
 
Retirement liability adjustment
 
$
4,819

 
$
1,300

 
$
6,119

Other comprehensive income (loss), net of tax
 
$
(3,904
)
 
$
1,300

 
$
(2,604
)
Comprehensive income (loss)
 
$
40,165

 
$

 
$
40,165



The table below represents the impact of the change in accounting principle on the Consolidated Condensed Balance Sheet as of December 29, 2018.
 
 
As Previously Reported, December 29, 2018
 
Impact of Change
 
As Reported, December 29, 2018
Shareholders’ equity
 
 
 
 
 
 
Retained earnings
 
$
2,023,803

 
$
(689
)
 
$
2,023,114

Accumulated other comprehensive loss
 
(376,085
)
 
689

 
(375,396
)
Total shareholders’ equity
 
$
1,273,264

 
$

 
$
1,273,264



The table below represents the impact of the change in accounting principle on the Consolidated Condensed Balance Sheet as of September 28, 2019.

 
As Previously Reported, September 28, 2019
 
Impact of Change
 
As Reported, September 28, 2019
Shareholders’ equity
 
 
 
 
 
 
Retained earnings
 
$
2,133,328

 
$
(4,589
)
 
$
2,128,739

Accumulated other comprehensive loss
 
(420,066
)
 
4,589

 
(415,477
)
Total shareholders’ equity
 
$
1,322,481

 
$

 
$
1,322,481



The table below represents the impact of the change in accounting principle on the Consolidated Condensed Balance Sheet as of September 29, 2018.

 
As Previously Reported, September 29, 2018
 
Impact of Change
 
As Reported, September 29, 2018
Shareholders’ equity
 
 
 
 
 
 
Retained earnings
 
$
1,973,514

 
$
611

 
$
1,974,125

Accumulated other comprehensive loss
 
(372,181
)
 
(611
)
 
(372,792
)
Total shareholders’ equity
 
$
1,224,986

 
$

 
$
1,224,986



See Note 13 - Employee Benefit Plans and Note 16 - Accumulated Other Comprehensive Income (Loss) for adjusted reporting for prior periods.

13


Note 2 - Revenue from Contracts with Customers

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

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

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

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

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

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

Under ASC 606, revenue recognized over time using an input method that uses costs incurred to date to measure progress toward completion ("cost-to-cost") was 64% for the three months ended December 28, 2019. The over time method of revenue recognition is predominantly used in Aircraft Controls and Space and Defense Controls. We use this method for U.S. Government contracts and repair and overhaul arrangements as we are creating or enhancing assets that the customer controls as the assets are being created or enhanced. In addition, many of our large commercial contracts qualify for over-time accounting as our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed to date. Our over-time contracts are primarily firm fixed price.


14


Revenue is recognized on contracts using the cost-to-cost method of accounting as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. We believe that cumulative costs incurred to date as a percentage of estimated total contract costs at completion is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. Estimates are reviewed and updated quarterly for substantially all contracts. For the three months ended December 28, 2019 and December 29, 2018 we recognized revenues of $14,619 and $11,759, respectively for adjustments made to performance obligations satisfied (or partially satisfied) in previous periods.

Contract costs include only allocable, allowable and reasonable costs which are included in cost of sales when incurred. For applicable U.S. Government contracts, contract costs are determined in accordance with the Federal Acquisition Regulations and the related Cost Accounting Standards. The nature of these costs includes development engineering costs and product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded as a result of the revenue recognized less costs incurred in any reporting period. Variable consideration and contract modifications, such as performance incentives, penalties, contract claims or change orders are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Revenue recognized on contracts for unresolved claims or unapproved contract change orders was not material for the three months ended December 28, 2019.

As of December 28, 2019, we had contract reserves of $62,221. For contracts with anticipated losses at completion, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. Loss reserves are more common on firm fixed-price contracts that involve, to varying degrees, the design and development of new and unique controls or control systems to meet the customers’ specifications. 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 loss reserves are recorded for the additional work needed on completed and delivered products in order for them to meet contract specifications.

Revenue recognized at the point in time control was transferred to the customer was 36% for the three months ended December 28, 2019. This method of revenue recognition is used most frequently in Industrial Systems. We use this method for commercial contracts in which the asset being created has an alternative use. We determine the point in time control transfers to the customer by weighing the five indicators provided by ASC 606 - the entity has a present right to payment; the customer has legal title; the customer has physical possession; the customer has the significant risks and rewards of ownership; and the customer has accepted the asset. When control has transferred to the customer, profit is generated as cost of sales is recorded and as revenue is recognized. Inventory costs include all product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead cost allocations. Shipping and handling costs are considered costs to fulfill a contract and not considered performance obligations. They are included in cost of sales as incurred.
Contract Assets and Liabilities
Unbilled receivables (contract assets) primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. These are included as Receivables on the Consolidated Condensed Balance Sheets. Contract advances (contract liabilities) relate to payments received from customers in advance of the satisfaction of performance obligations for a contract. We do not consider contract advances to be significant financing components as the intent of these payments in advance are for reasons other than providing a significant financing benefit and are customary in our industry.

15


Total contract assets and contract liabilities are as follows:
 
 
December 28,
2019
 
September 28, 2019
Unbilled receivables
 
$
497,356

 
$
468,824

Contract advances
 
177,107

 
137,242

Net contract assets
 
$
320,249

 
$
331,582



The increase in contract assets reflects the net impact of additional unbilled revenues recorded in excess of revenue recognized during the period. The increase in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. For the three months ended December 28, 2019, we recognized $35,759 of revenue that was included in the contract liability balance at the beginning of the period.
Remaining Performance Obligations
As of December 28, 2019, the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied), also known as backlog, was approximately $2,430,000. We expect to recognize approximately 69% of that amount as sales over the next twelve months and the balance thereafter.

Disaggregation of Revenue
See Note 19, Segments, for disclosures related to disaggregation of revenue.
Note 3 - Acquisitions, Divestitures and Equity Method Investments
On November 28, 2019, we acquired Gesellschaft für Antriebstechnik mbH and GAT Inc. (GAT), headquartered in Geisenheim, Germany for a purchase price of $53,906, net of acquired cash. GAT designs and manufactures high-end fluid rotating unions and slip rings. This operation is included in our Industrial Systems segment. The purchase price allocation is subject to adjustments as we obtain additional information for our estimates during the measurement period.
In the first quarter of 2020, we sold a non-core business of our Industrial Systems segment for $1,775 in net consideration and recorded a gain in other income of $169.
In the first quarter of 2019, we sold a non-core business of our Industrial Systems segment for $4,191 in cash and recorded a gain in other income of $2,641.
Note 4 - Receivables
Receivables consist of:
 
 
December 28,
2019
 
September 28,
2019
Accounts receivable
 
$
243,988

 
$
255,079

Over-time contract receivables:
 
 
 
 
Billed receivables
 
241,740

 
222,075

Unbilled receivables
 
497,356

 
468,824

Total over-time contract receivables
 
739,096

 
690,899

Other
 
11,041

 
16,711

Less allowance for doubtful accounts
 
(4,911
)
 
(5,402
)
Receivables
 
$
989,214

 
$
957,287


We securitize certain trade receivables in transactions that are accounted for as secured borrowings (Securitization Program). We maintain a subordinated interest in a portion of the pool of trade receivables that are securitized. The retained interest, which is included in Receivables in the consolidated condensed balance sheets, is recorded at fair value, which approximates the total amount of the designated pool of accounts receivable. Refer to Note 9, Indebtedness, for additional disclosures related to the Securitization Program.

16



Note 5 - Inventories
Inventories, net of reserves, consist of:
 
 
December 28,
2019
 
September 28,
2019
Raw materials and purchased parts
 
$
189,051

 
$
189,875

Work in progress
 
288,633

 
276,538

Finished goods
 
81,548

 
68,561

Inventories
 
$
559,232

 
$
534,974


There are no material inventoried costs relating to over-time contracts where revenue is accounted for using the cost-to-cost method of accounting as of December 28, 2019 and September 28, 2019.
Note 6 - Property, Plant and Equipment
Property, plant and equipment consists of:
 
 
December 28,
2019
 
September 28,
2019
Land
 
$
36,584

 
$
33,111

Buildings and improvements
 
483,370

 
469,867

Machinery and equipment
 
803,236

 
775,378

Computer equipment and software
 
139,495

 
137,221

Property, plant and equipment, at cost
 
1,462,685

 
1,415,577

Less accumulated depreciation and amortization
 
(849,198
)
 
(828,810
)
Property, plant and equipment, net
 
$
613,487

 
$
586,767


Note 7 - Leases

On September 29, 2019, we adopted ASC 842: Leases, and the related amendments (ASC 842), using the modified retrospective method, as described in Note 1, Basis of Presentation, without adjusting prior comparative periods.

We lease certain manufacturing facilities, office space and machinery and equipment globally. At inception we evaluate whether a contractual arrangement contains a lease. Specifically, we consider whether we control the underlying asset and have the right to obtain substantially all the economic benefits or outputs from the asset. If the contractual arrangement contains a lease, we then determine the classification of the lease, operating or finance, using the classification criteria described in ASC 842. We then determine the term of the lease based on terms and conditions of the contractual arrangement, including whether the options to extend or terminate the lease are reasonably certain to be exercised. We have elected to not separate lease components from non-lease components, such as common area maintenance charges and instead, account for the lease and non-lease components as a single component.

Our lease ROU assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments. Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Accrued liabilities and other and Other long-term liabilities on the Consolidated Condensed Balance Sheets. Finance lease ROU assets are included in Property, plant and equipment and finance lease liabilities are included in Accrued liabilities and other and Other long-term liabilities on the Consolidated Condensed Balance Sheets. Operating lease cost is included in Cost of sales and Selling, general and administrative on the Consolidated Condensed Statements of Earnings. Finance lease cost is included in Cost of sales, Selling, general and administrative and Interest on the Consolidated Condensed Statements of Earnings.


17



The ROU assets and lease liabilities for both operating and finance leases are recognized as of the commencement date at the net present value of the fixed minimum lease payments over the term of the lease, using the discount rate described below. Variable lease payments are recorded in the period in which the obligation for the payment is incurred. Variable lease payments based on an index or rate are initially measured using the index or rate as of the commencement date of the lease and included in the fixed minimum lease payments. For short-term leases that have a term of 12 months or less as of the commencement date, we do not recognize a ROU asset or lease liability on our balance sheet; we recognize expense as the lease payments are made over the lease term.

The discount rate used to calculate the present value of our leases is the rate implicit in lease. If the information necessary to determine the rate implicit in the lease is not available, we use our incremental borrowing rate for collateralized debt, which is determined using our credit rating and other information available as of the lease commencement date.
The components of lease expense were as follows:
 
 
Three Months Ended December 28, 2019
 
 
Operating lease cost
$
6,160

 
 
 
 
Finance lease cost:
 
 
Amortization of right-of-use assets
$
76

 
Interest on lease liabilities
48

 
Total finance lease cost
$
124


Supplemental cash flow information related to leases was as follows:
 
 
Three Months Ended December 28, 2019
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flow for operating leases
$
6,027

 
Operating cash flow for finance leases
48

 
Financing cash flow for finance leases
88

 
Assets obtained in exchange for lease obligations:
 
 
Operating leases
568

 
Finance leases



18



Supplemental balance sheet information related to leases was as follows:
 
December 28, 2019
Operating Leases
 
Operating lease right-of-use assets
$
62,669

 
 
Accrued liabilities and other
$
13,737

Other long-term liabilities
52,581

Total operating lease liabilities
$
66,318

 
 
Finance Leases
 
Property, plant, and equipment, at cost
$
3,818

Accumulated depreciation
(415
)
Property, plant, and equipment, net
$
3,403

 
 
Accrued liabilities and other
$
228

Other long-term liabilities
3,198

Total finance lease liabilities
$
3,426

 
 
Weighted average remaining lease term in years
 
Operating leases
8.2

Finance leases
31.2

 
 
Weighted average discount rate
 
Operating leases
4.7
%
Finance leases
5.8
%

Maturities of lease liabilities were as follows:
 
 
December 28, 2019
 
 
Operating Leases
 
Finance Leases
2020
 
$
12,485

 
$
308

2021
 
15,147

 
406

2022
 
12,568

 
319

2023
 
8,775

 
234

2024
 
5,549

 
176

Thereafter
 
27,238

 
6,630

Total lease payments
 
81,762

 
8,073

Less: imputed interest
 
(15,444
)
 
(4,647
)
Total
 
$
66,318

 
$
3,426



19


Note 8 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
 
Aircraft
Controls
Space and
Defense
Controls
Industrial
Systems
Total
Balance at September 28, 2019
$
176,939

$
261,684

$
345,617

$
784,240

Acquisitions


20,828

20,828

Divestitures


(635
)
(635
)
Foreign currency translation
3,145

51

4,973

8,169

Balance at December 28, 2019
$
180,084

$
261,735

$
370,783

$
812,602


Goodwill in our Space and Defense Controls segment is net of a $4,800 accumulated impairment loss at December 28, 2019.
Goodwill in our Medical Devices reporting unit, included in our Industrial Systems segment, is net of a $38,200 accumulated impairment loss at December 28, 2019.
The components of intangible assets are as follows:
 
 
 
 
December 28, 2019
 
September 28, 2019
  
 
Weighted-
Average
Life (years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer-related
 
11
 
$
132,778

 
$
(99,640
)
 
$
132,697

 
$
(100,091
)
Technology-related
 
9
 
78,119

 
(51,428
)
 
62,015

 
(35,680
)
Program-related
 
19
 
65,165

 
(38,621
)
 
69,220

 
(52,192
)
Marketing-related
 
9
 
37,355

 
(20,334
)
 
23,139

 
(19,899
)
Other
 
10
 
4,153

 
(3,764
)
 
4,061

 
(3,624
)
Intangible assets
 
12
 
$
317,570

 
$
(213,787
)
 
$
291,132

 
$
(211,486
)


Substantially all acquired intangible assets other than goodwill are being amortized. Customer-related intangible assets primarily consist of customer relationships. Technology-related intangible assets primarily consist of technology, patents, intellectual property and software. Program-related intangible assets consist of long-term programs represented by current contracts and probable follow on work. Marketing-related intangible assets primarily consist of trademarks, trade names and non-compete agreements.
Amortization of acquired intangible assets is as follows:
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
Acquired intangible asset amortization
$
3,223

 
$
3,683


Based on acquired intangible assets recorded at December 28, 2019, amortization is estimated to be approximately:
 
2020
2021
2022
2023
2024
Estimated future amortization of acquired intangible assets
$
14,300

$
11,800

$
10,200

$
9,300

$
8,800

        

20


Note 9 - Indebtedness
We maintain short-term line of credit facilities with banks throughout the world that are principally demand lines subject to revision by the banks.
Long-term debt consists of:
 
 
December 28,
2019
 
September 28,
2019
U.S. revolving credit facility
 
$
50,387

 
$
395,712

SECT revolving credit facility
 
7,000

 
7,000

Senior notes 4.25%
 
500,000

 

Senior notes 5.25%
 
300,000

 
300,000

Securitization program
 
130,000

 
130,000

Obligations under capital leases
 

 
679

Senior debt
 
987,387

 
833,391

Less deferred debt issuance cost
 
(9,814
)
 
(158
)
Less current installments
 

 
(249
)
Long-term debt
 
$
977,573

 
$
832,984


On October 15, 2019, we amended and restated our U.S. revolving credit facility, which matures on October 15, 2024. Our U.S. revolving credit facility has a capacity of $1,100,000 and provides an expansion option, which permits us to request an increase of up to $400,000 to the credit facility upon satisfaction of certain conditions. The credit facility is secured by substantially all of our U.S. assets. The loan agreement contains various covenants which, among others, specify interest coverage and maximum leverage. We are in compliance with all covenants.
The SECT has a revolving credit facility with a borrowing capacity of $35,000, maturing on July 26, 2022. Interest is based on LIBOR plus an applicable margin. A commitment fee is also charged based on a percentage of the unused amounts available and is not material.
On December 13, 2019, we completed the sale of $500,000 aggregate principal amount of 4.25% senior notes due December 15, 2027 with interest paid semiannually on June 15 and December 15 of each year, which will commence on June 15, 2020. 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 aggregate net proceeds of $492,750 were used to repay indebtedness under our U.S. revolving credit facility, thereby increasing the unused portion of our U.S. revolving credit facility.
On December 13, 2019, we issued a notice of redemption to the holders of our 5.25% senior notes due on December 1, 2022, to redeem and retire all of the outstanding notes. The notes were redeemed on January 13, 2020 at 101.313% pursuant to an early redemption right. We redeemed the aggregate principal amount of $300,000 using proceeds drawn from our U.S. revolving credit facility. The associated loss on the redemption includes $3,939 of call premium paid to external bondholders.
The Securitization Program was extended on October 16, 2019 and matures on October 29, 2021 and effectively increases our borrowing capacity by up to $130,000. Under the Securitization Program, we sell certain trade receivables and related rights to an affiliate, which in turn sells an undivided variable percentage ownership interest in the trade receivables to a financial institution, while maintaining a subordinated interest in a portion of the pool of trade receivables. Interest for the Securitization Program is based on 30-day LIBOR plus an applicable margin. A commitment fee is also charged based on a percentage of the unused amounts available and is not material. The agreement governing the Securitization Program contains restrictions and covenants which include limitations on the making of certain restricted payments, creation of certain liens, and certain corporate acts such as mergers, consolidations and sale of substantially all assets. The Securitization Program has a minimum borrowing requirement equal to the lesser of either 80% of our borrowing capacity or 100% of our borrowing base, which is a subset of the trade receivables sold under this agreement. As of December 28, 2019, our minimum borrowing requirement was $104,000.

21


Note 10 - Other Accrued Liabilities

Other accrued liabilities consists of:
 
 
December 28, 2019
 
September 28, 2019
Contract reserves
 
$
62,221

 
$
60,914

Employee benefits
 
42,540

 
37,040

Warranty accrual
 
29,369

 
28,061

Accrued income taxes
 
29,912

 
26,532

Other
 
47,248

 
36,178

Other accrued liabilities
 
$
211,290

 
$
188,725


In the ordinary course of business, we warrant our products against defects in design, materials and workmanship typically over periods ranging from twelve to sixty months. We determine warranty reserves needed by product line based on historical experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:
 
 
Three Months Ended
 
 
December 28,
2019
 
December 29,
2018
Warranty accrual at beginning of period
 
$
28,061

 
$
25,537

Additions from acquisitions
 
542

 

Warranties issued during current period
 
3,843

 
3,365

Adjustments to pre-existing warranties
 
(181
)
 
(91
)
Reductions for settling warranties
 
(3,172
)
 
(4,371
)
Foreign currency translation
 
276

 
(183
)
Warranty accrual at end of period
 
$
29,369

 
$
24,257


Note 11 - Derivative Financial Instruments
We principally use derivative financial instruments to manage interest rate risk associated with long-term debt and foreign exchange risk related to foreign operations and foreign currency transactions. We enter into derivative financial instruments with a number of major financial institutions to minimize counterparty credit risk.
Derivatives designated as hedging instruments
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swaps are designated as hedges of the amount of future cash flows related to interest payments on variable-rate debt that, in combination with the interest payments on the debt, convert a portion of the variable-rate debt to fixed-rate debt. At December 28, 2019, we had interest rate swaps with notional amounts totaling $45,000. The interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at 3.18%, including the applicable margin of 1.50% as of December 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.
We use foreign currency contracts as cash flow hedges to effectively fix the exchange rates on future payments and revenue. To mitigate exposure in movements between various currencies, including the Philippine peso, the British pound and the Czech koruna, we had outstanding foreign currency forwards with notional amounts of $44,475 at December 28, 2019. These contracts mature at various times through May 28, 2021.
We use forward currency contracts to hedge our net investment in certain foreign subsidiaries. As of December 28, 2019, we had no outstanding net investment hedges.

22


These interest rate swaps, foreign currency contracts and net investment hedges are recorded in the Consolidated Condensed Balance Sheets at fair value and the related gains or losses are deferred in Shareholders’ Equity as a component of Accumulated Other Comprehensive Income (Loss) (AOCIL). These deferred gains and losses are reclassified into the Consolidated Condensed Statements of Earnings, as necessary, during the periods in which the related payments or receipts affect earnings. However, to the extent the interest rate swaps and foreign currency contracts are not perfectly effective in offsetting the change in the value of the payments and revenue being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was not material in the first three months of 2020 or 2019.
Derivatives not designated as hedging instruments
We also have foreign currency exposure on balances, primarily intercompany, that are denominated in foreign currencies and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the Consolidated Condensed Statements of Earnings. To minimize foreign currency exposure, we had foreign currency contracts with notional amounts of $85,957 at December 28, 2019. The foreign currency contracts are recorded in the Consolidated Condensed Balance Sheets at fair value and resulting gains or losses are recorded in the Consolidated Condensed Statements of Earnings. We recorded the following gains or losses on foreign currency contracts which are included in other income or expense and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other income or expense:
 
 
 
Three Months Ended
Statements of Earnings location
 
December 28,
2019
 
December 29,
2018
Net gain (loss)
 
 
 
 
 
Foreign currency contracts
Other
 
$
1,571

 
$
(1,650
)

Summary of derivatives
The fair value and classification of derivatives is summarized as follows:
 
Balance Sheets location
 
December 28,
2019
 
September 28,
2019
Derivatives designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
Other current assets
 
$
1,633

 
$
1,060

Foreign currency contracts
Other assets
 
246

 
261

Interest rate swaps
Other current assets
 
4

 
57

 
Total asset derivatives
 
$
1,883

 
$
1,378

Foreign currency contracts
Accrued liabilities and other
 
$
62

 
$
736

Foreign currency contracts
Other long-term liabilities
 

 
152

 
Total liability derivatives
 
$
62

 
$
888

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
Other current assets
 
$
280

 
$
93

Foreign currency contracts
Accrued liabilities and other
 
$
256

 
$
359



23


Note 12 - Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. The definition of the fair value hierarchy is as follows:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3 – Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.
Our derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market data, such as interest rate yield curves and currency rates, and are classified as Level 2 within the valuation hierarchy.
The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis, all of which are classified as Level 2.
 
 
Balance Sheets location
 
December 28,
2019
 
September 28,
2019
Foreign currency contracts
 
Other current assets
 
$
1,913

 
$
1,153

Foreign currency contracts
 
Other assets
 
246

 
261

Interest rate swaps
 
Other current assets
 
4

 
57

 
 
Total assets
 
$
2,163

 
$
1,471

Foreign currency contracts
 
Accrued liabilities and other
 
$
318

 
$
1,095

Foreign currency contracts
 
Other long-term liabilities
 

 
152

 
 
Total liabilities
 
$
318

 
$
1,247


Our only financial instrument for which the carrying value differs from its fair value is long-term debt. At December 28, 2019, the fair value of long-term debt was $998,099 compared to its carrying value of $987,387. The fair value of long-term debt is classified as Level 2 within the fair value hierarchy and was estimated based on quoted market prices.

24


Note 13 - Employee Benefit Plans
Net periodic benefit costs for our defined benefit pension plans are as follows:
 
 
Three Months Ended
 
 
December 28,
2019
 
December 29,
2018
U.S. Plans
 
 
 
 
Service cost
 
$
5,759

 
$
5,251

Interest cost
 
7,649

 
9,231

Expected return on plan assets
 
(11,021
)
 
(11,264
)
Amortization of prior service cost (credit)
 
33

 
46

Amortization of actuarial loss
 
6,329

 
6,660

Pension expense for U.S. defined benefit plans
 
$
8,749

 
$
9,924

Non-U.S. Plans
 
 
 
 
Service cost
 
$
1,671

 
$
1,246

Interest cost
 
697

 
1,101

Expected return on plan assets
 
(1,139
)
 
(1,298
)
Amortization of prior service cost (credit)
 

 
(5
)
Amortization of actuarial loss
 
1,216

 
640

Pension expense for non-U.S. defined benefit plans
 
$
2,445

 
$
1,684


Pension expense for our defined contribution plans consists of:
 
 
Three Months Ended
 
 
December 28,
2019
 
December 29,
2018
U.S. defined contribution plans
 
$
5,398

 
$
4,614

Non-U.S. defined contribution plans
 
1,402

 
1,196

Total pension expense for defined contribution plans
 
$
6,800

 
$
5,810


Note 14 - Restructuring
Restructuring activity for severance and other costs is as follows:
 
Space and Defense Controls
Industrial Systems
Total
Balance at September 28, 2019
$
27

$
4,096

$
4,123

Adjustments to provision
(2
)
(643
)
(645
)
Cash payments - 2018 plan
(26
)
(244
)
(269
)
Foreign currency translation

79

79

Balance at December 28, 2019
$

$
3,288

$
3,288


As of December 28, 2019, the restructuring accrual consists of $3,288 for the 2018 plan. Restructuring is expected to be paid within a year, except for the non-current portion of the facility closure accrual, which is classified as a long-term liability.
Note 15 - Income Taxes
The effective tax rate for the three months ended December 28, 2019 and December 29, 2018 was 25.2% and 24.3% respectively. The effective tax rate for this period is higher than would be expected by applying the U.S. federal statutory tax rate of 21% to earnings before income taxes primarily due to tax on earnings generated outside of the U.S. The effective tax rate for the three months ended December 28, 2019 includes the impact of the Global Intangible Low-Taxed Income ("GILTI"), which imposes U.S. tax on certain foreign subsidiary income in the year it is earned, and Foreign-Derived Intangible Income ("FDII") deduction. Our accounting policy is to treat tax on GILTI as a current period cost included in tax expense in the year incurred.

25


Note 16 - Accumulated Other Comprehensive Income (Loss)
The changes in AOCIL, net of tax, by component for the three months ended December 28, 2019 are as follows:
 
 
Accumulated foreign currency translation (1)
 
Accumulated retirement liability
 
Accumulated gain (loss) on derivatives
 
Total
AOCIL at September 28, 2019
 
$
(129,399
)
 
$
(285,734
)
 
$
(344
)
 
$
(415,477
)
Other comprehensive income (loss) before reclassifications
 
22,026

 
(1,237
)
 
1,401

 
22,190

Amounts reclassified from AOCIL
 
(493
)
 
5,600

 
1

 
5,108

Other comprehensive income (loss)
 
21,533

 
4,363

 
1,402

 
27,298

AOCIL at December 28, 2019
 
$
(107,866
)
 
$
(281,371
)
 
$
1,058

 
$
(388,179
)

(1) 
Net gains and losses on net investment hedges are recorded as cumulative translation adjustments in AOCIL to the extent that the instruments are effective in hedging the designated risk.
The amounts reclassified from AOCIL into earnings are as follows:
 
 
 
 
Three Months Ended
 
 
Statements of Earnings location
 
December 28,
2019
 
December 29,
2018
Retirement liability:
 
 
 
 
 
 
Prior service cost (credit)
 
 
 
$
(32
)
 
$
(76
)
Actuarial losses
 
 
 
7,394

 
7,629

Reclassification from AOCIL into earnings (2)
 
7,362

 
7,553

Tax effect
 
 
 
(1,762
)
 
(1,848
)
Net reclassification from AOCIL into earnings
 
$
5,600

 
$
5,705

Derivatives:
 
 
 
 
 
 
Foreign currency contracts
 
Sales
 
$
2

 
$
(33
)
Foreign currency contracts
 
Cost of sales
 
40

 
660

Interest rate swaps
 
Interest
 
(41
)
 
(400
)
Reclassification from AOCIL into earnings
 
1

 
227

Tax effect
 
 
 

 
(57
)
Net reclassification from AOCIL into earnings
 
$
1

 
$
170


(2) 
The reclassifications are included in the computation of non-service pension expense, which is included in Other on the Consolidated Condensed Statement of Earnings.
The amounts deferred in AOCIL are as follows:
 
 
Net deferral in AOCIL - effective portion
 
 
Three Months Ended
 
 
December 28,
2019
 
December 29,
2018
Foreign currency contracts
 
$
1,794

 
$
899