UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
___________________________________________
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2017
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
_________________________________________
INC.(Exact name of registrant as specified in its charter)
__________________________________________
New York State | 16-0757636 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
East Aurora, New York | 14052-0018 |
(Address of principal executive offices) | (Zip Code) |
(716) 652-2000 | |
(Telephone number including area code) | |
__________________________________________________________
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
The number of shares outstanding of each class of common stock as of January 23, 2018 was:
Class A common stock, $1.00 par value, 32,397,457 shares
Class B common stock, $1.00 par value, 3,380,636 shares
Moog Inc.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE | ||||||
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Moog Inc.
Consolidated Condensed Statements of Earnings
(Unaudited)
Three Months Ended | ||||||||
(dollars in thousands, except per share data) | December 30, 2017 | December 31, 2016 | ||||||
Net sales | $ | 627,535 | $ | 589,670 | ||||
Cost of sales | 443,426 | 417,164 | ||||||
Gross profit | 184,109 | 172,506 | ||||||
Research and development | 32,420 | 34,564 | ||||||
Selling, general and administrative | 95,950 | 85,063 | ||||||
Interest | 8,646 | 8,486 | ||||||
Other | (741 | ) | 7,905 | |||||
Earnings before income taxes | 47,834 | 36,488 | ||||||
Income taxes | 46,535 | 6,430 | ||||||
Net earnings attributable to Moog and noncontrolling interest | 1,299 | 30,058 | ||||||
Net earnings (loss) attributable to noncontrolling interest | — | (506 | ) | |||||
Net earnings attributable to Moog | $ | 1,299 | $ | 30,564 | ||||
Net earnings per share attributable to Moog | ||||||||
Basic | $ | 0.04 | $ | 0.85 | ||||
Diluted | $ | 0.04 | $ | 0.84 | ||||
Average common shares outstanding | ||||||||
Basic | 35,772,406 | 35,869,052 | ||||||
Diluted | 36,201,054 | 36,272,767 | ||||||
See accompanying Notes to Consolidated Condensed Financial Statements. | ||||||||
3
Moog Inc.
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended | ||||||||
(dollars in thousands) | December 30, 2017 | December 31, 2016 | ||||||
Net earnings attributable to Moog and noncontrolling interest | $ | 1,299 | $ | 30,058 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Foreign currency translation adjustment | 10,364 | (41,509 | ) | |||||
Retirement liability adjustment | 4,256 | 8,572 | ||||||
Change in accumulated income (loss) on derivatives | 1,234 | 574 | ||||||
Other comprehensive income (loss), net of tax | 15,854 | (32,363 | ) | |||||
Comprehensive income (loss) | 17,153 | (2,305 | ) | |||||
Comprehensive income (loss) attributable to noncontrolling interest | — | (506 | ) | |||||
Comprehensive income (loss) attributable to Moog | $ | 17,153 | $ | (1,799 | ) | |||
See accompanying Notes to Consolidated Condensed Financial Statements. | ||||||||
4
Moog Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands) | December 30, 2017 | September 30, 2017 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 394,980 | $ | 368,073 | ||||
Receivables | 739,731 | 727,740 | ||||||
Inventories | 511,653 | 489,127 | ||||||
Prepaid expenses and other current assets | 38,800 | 41,499 | ||||||
Total current assets | 1,685,164 | 1,626,439 | ||||||
Property, plant and equipment, net of accumulated depreciation of $791,388 and $771,160, respectively | 527,356 | 522,991 | ||||||
Goodwill | 776,156 | 774,268 | ||||||
Intangible assets, net | 104,914 | 108,818 | ||||||
Deferred income taxes | 11,395 | 26,558 | ||||||
Other assets | 33,510 | 31,518 | ||||||
Total assets | $ | 3,138,495 | $ | 3,090,592 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Short-term borrowings | $ | 89 | $ | 89 | ||||
Current installments of long-term debt | 259 | 295 | ||||||
Accounts payable | 156,967 | 170,878 | ||||||
Accrued compensation | 122,763 | 148,406 | ||||||
Customer advances | 179,598 | 159,274 | ||||||
Contract loss reserves | 41,786 | 43,214 | ||||||
Other accrued liabilities | 112,072 | 107,278 | ||||||
Total current liabilities | 613,534 | 629,434 | ||||||
Long-term debt, excluding current installments | 962,006 | 956,653 | ||||||
Long-term pension and retirement obligations | 260,741 | 271,272 | ||||||
Deferred income taxes | 40,782 | 13,320 | ||||||
Other long-term liabilities | 33,483 | 5,609 | ||||||
Total liabilities | 1,910,546 | 1,876,288 | ||||||
Commitments and contingencies (Note 18) | — | — | ||||||
Shareholders’ equity | ||||||||
Common stock - Class A | 43,716 | 43,704 | ||||||
Common stock - Class B | 7,564 | 7,576 | ||||||
Additional paid-in capital | 498,699 | 492,246 | ||||||
Retained earnings | 1,849,118 | 1,847,819 | ||||||
Treasury shares | (739,210 | ) | (739,157 | ) | ||||
Stock Employee Compensation Trust | (98,990 | ) | (89,919 | ) | ||||
Supplemental Retirement Plan Trust | (13,311 | ) | (12,474 | ) | ||||
Accumulated other comprehensive loss | (319,637 | ) | (335,491 | ) | ||||
Total Moog shareholders’ equity | 1,227,949 | 1,214,304 | ||||||
Total liabilities and shareholders’ equity | $ | 3,138,495 | $ | 3,090,592 | ||||
See accompanying Notes to Consolidated Condensed Financial Statements. | ||||||||
5
Moog Inc.
Consolidated Condensed Statements of Shareholders' Equity
(Unaudited)
Number of Shares | ||||||||||
(dollars in thousands, except per share data) | Amount | Class A Common Stock | Class B Common Stock | |||||||
COMMON STOCK | ||||||||||
Beginning of period | $ | 51,280 | 43,704,286 | 7,575,427 | ||||||
Conversion of Class B to Class A | — | 11,300 | (11,300 | ) | ||||||
End of period | 51,280 | 43,715,586 | 7,564,127 | |||||||
ADDITIONAL PAID-IN CAPITAL | ||||||||||
Beginning of period | 492,246 | |||||||||
Issuance of treasury shares | (1,633 | ) | ||||||||
Equity-based compensation expense | 2,001 | |||||||||
Adjustment to market - SECT, SERP and other | 6,085 | |||||||||
End of period | 498,699 | |||||||||
RETAINED EARNINGS | ||||||||||
Beginning of period | 1,847,819 | |||||||||
Net earnings attributable to Moog | 1,299 | |||||||||
End of period | 1,849,118 | |||||||||
TREASURY SHARES AT COST | ||||||||||
Beginning of period | (739,157 | ) | (10,933,003 | ) | (3,333,927 | ) | ||||
Class A and B shares issued related to equity awards | 2,681 | 64,486 | 5,878 | |||||||
Class A and B shares purchased | (2,734 | ) | (33,020 | ) | (15 | ) | ||||
End of period | (739,210 | ) | (10,901,537 | ) | (3,328,064 | ) | ||||
STOCK EMPLOYEE COMPENSATION TRUST (SECT) | ||||||||||
Beginning of period | (89,919 | ) | (425,148 | ) | (654,753 | ) | ||||
Purchase of shares | (3,823 | ) | — | (44,662 | ) | |||||
Adjustment to market | (5,248 | ) | — | — | ||||||
End of period | (98,990 | ) | (425,148 | ) | (699,415 | ) | ||||
SUPPLEMENTAL RETIREMENT PLAN (SERP) TRUST | ||||||||||
Beginning of period | (12,474 | ) | (150,000 | ) | ||||||
Adjustment to market | (837 | ) | — | |||||||
End of period | (13,311 | ) | (150,000 | ) | ||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||
Beginning of period | (335,491 | ) | ||||||||
Other comprehensive income (loss) | 15,854 | |||||||||
End of period | (319,637 | ) | ||||||||
TOTAL MOOG SHAREHOLDERS’ EQUITY | $ | 1,227,949 | 32,388,901 | 3,386,648 | ||||||
6
Moog Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended | ||||||||
(dollars in thousands) | December 30, 2017 | December 31, 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings attributable to Moog and noncontrolling interest | $ | 1,299 | $ | 30,058 | ||||
Adjustments to reconcile net earnings to net cash provided (used) by operating activities: | ||||||||
Depreciation | 17,487 | 17,918 | ||||||
Amortization | 4,674 | 4,541 | ||||||
Deferred income taxes | 37,617 | 1,371 | ||||||
Equity-based compensation expense | 2,001 | 2,168 | ||||||
Other | 1,563 | 9,868 | ||||||
Changes in assets and liabilities providing (using) cash: | ||||||||
Receivables | (10,350 | ) | (11,012 | ) | ||||
Inventories | (22,236 | ) | 6,996 | |||||
Accounts payable | (14,393 | ) | 6,737 | |||||
Customer advances | 19,888 | 8,287 | ||||||
Accrued expenses | (27,233 | ) | (17,479 | ) | ||||
Accrued income taxes | 6,965 | (8,885 | ) | |||||
Net pension and post retirement liabilities | (4,562 | ) | (1,295 | ) | ||||
Other assets and liabilities | 31,450 | 1,309 | ||||||
Net cash provided by operating activities | 44,170 | 50,582 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of property, plant and equipment | (21,084 | ) | (14,849 | ) | ||||
Other investing transactions | (537 | ) | (976 | ) | ||||
Net cash (used) by investing activities | (21,621 | ) | (15,825 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from revolving lines of credit | 103,500 | 62,400 | ||||||
Payments on revolving lines of credit | (108,610 | ) | (67,400 | ) | ||||
Proceeds from long-term debt | 10,000 | — | ||||||
Payments on long-term debt | (44 | ) | (50 | ) | ||||
Proceeds from sale of treasury stock | 1,048 | 2,135 | ||||||
Purchase of outstanding shares for treasury | (2,734 | ) | (5,211 | ) | ||||
Proceeds from sale of stock held by SECT | — | 867 | ||||||
Purchase of stock held by SECT | (3,823 | ) | (5,709 | ) | ||||
Net cash (used) by financing activities | (663 | ) | (12,968 | ) | ||||
Effect of exchange rate changes on cash | 5,021 | (15,253 | ) | |||||
Increase in cash and cash equivalents | 26,907 | 6,536 | ||||||
Cash and cash equivalents at beginning of period | 368,073 | 325,128 | ||||||
Cash and cash equivalents at end of period | $ | 394,980 | $ | 331,664 | ||||
See accompanying Notes to Consolidated Condensed Financial Statements. | ||||||||
7
Moog Inc.
Notes to Consolidated Condensed Financial Statements
Three Months Ended December 30, 2017
(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 30, 2017 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 30, 2017. 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. During 2018, we made a change to our segment reporting structure and merged our former Components segment into Space and Defense Controls and Industrial Systems. The Goodwill and Segment footnotes have been restated to reflect these changes.
8
Recent Accounting Pronouncements Not Yet Adopted
Standard | Description | Financial Statement Effect or Other Significant Matters | ||
ASU no. 2014-09 Revenue from Contracts with Customers (And All Related ASUs) | The standard requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The provisions of the standard, as well as all subsequently issued clarifications to the standard, are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard can be adopted using either a full retrospective or modified retrospective approach. | We plan to adopt the standard using the modified retrospective method, under which prior years' results are not restated, but supplemental information will be provided in our disclosures that will present fiscal 2019 results before adoption of the standard. In addition, a cumulative adjustment will be necessary to Shareholder's Equity at the beginning of fiscal 2019. We are assessing the impact of the standard on our financial statements and related disclosures, internal controls and financial policies and information technology systems. We have not yet quantified the impact on our financial statements and related disclosures. | ||
Planned date of adoption: Q1 2019 | ||||
ASU no. 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities | The standard requires most equity investments to be measured at fair value, with subsequent changes in fair value recognized in net income. The amendment also impacts the measurement of financial liabilities under the fair value option as well as certain presentation and disclosure requirements for financial instruments. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for some, but not all, provisions. The amendment requires certain provisions to be applied prospectively and others to be applied by means of a cumulative-effect adjustment. | We are currently evaluating the effect on our financial statements and related disclosures. | ||
Planned date of adoption: Q1 2019 | ||||
ASU no. 2016-02 Leases (And All Related ASUs) | The standard requires most lease arrangements to be recognized in the balance sheet as lease assets and lease liabilities. The standard also requires additional disclosures about the leasing arrangements. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. | We are currently evaluating the effect on our financial statements and related disclosures. | ||
Planned date of adoption: Q1 2020 | ||||
ASU no. 2017-07 Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost | The standard amends existing guidance on the presentation of net periodic benefit cost in the income statement and what qualifies for capitalization on the balance sheet. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The amendment requires income statement presentation provisions to be applied retrospectively and capitalization in assets provisions to be applied prospectively. | We are currently evaluating the effect on our financial statements and related disclosures. | ||
Planned date of adoption: Q1 2019 | ||||
ASU no. 2017-12 Targeted Improvements to Accounting for Hedging Activities | The standard expands the hedging strategies eligible for hedge accounting, while simplifying presentation and disclosure by eliminating separate measurement and reporting of hedge ineffectiveness. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. | We are currently evaluating the effect on our financial statements and related disclosures. | ||
Planned date of adoption: Q1 2020 | ||||
We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.
9
Note 2 - Acquisitions, Divestitures and Equity Method Investments
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. At December 30, 2017, we have made total contributions of $1,541 to MASA and intend to make two additional contributions during 2018. This operation is included in our Aircraft Controls segment.
In 2017, we sold non-core businesses of our Space and Defense Controls segment for $7,210 in cash and recorded losses in other expense of $13,119 related to the sales.
On April 2, 2017, we acquired Rotary Transfer Systems, a manufacturer of electromechanical systems, located in Germany and France for a purchase price, net of acquired cash, of $42,593, consisting of $40,545 in cash and $2,048 in assumed pension obligations. 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.
Note 3 - Receivables
Receivables consist of:
December 30, 2017 | September 30, 2017 | |||||||
Accounts receivable | $ | 275,939 | $ | 286,773 | ||||
Long-term contract receivables: | ||||||||
Amounts billed | 130,452 | 148,087 | ||||||
Unbilled recoverable costs and accrued profits | 289,784 | 282,154 | ||||||
Total long-term contract receivables | 420,236 | 430,241 | ||||||
Other | 48,139 | 15,077 | ||||||
Total receivables | 744,314 | 732,091 | ||||||
Less allowance for doubtful accounts | (4,583 | ) | (4,351 | ) | ||||
Receivables | $ | 739,731 | $ | 727,740 | ||||
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 6, Indebtedness, for additional disclosures related to the Securitization Program.
Note 4 - Inventories
Inventories, net of reserves, consist of:
December 30, 2017 | September 30, 2017 | |||||||
Raw materials and purchased parts | $ | 201,228 | $ | 189,517 | ||||
Work in progress | 239,875 | 229,202 | ||||||
Finished goods | 70,550 | 70,408 | ||||||
Inventories | $ | 511,653 | $ | 489,127 | ||||
There are no material inventoried costs relating to long-term contracts where revenue is accounted for using the percentage of completion, cost-to-cost method of accounting as of December 30, 2017 or September 30, 2017.
10
Note 5 - 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 30, 2017 | $ | 181,375 | $ | 259,951 | $ | 332,942 | $ | 774,268 | ||||
Foreign currency translation | 430 | 111 | 1,347 | 1,888 | ||||||||
Balance at December 30, 2017 | $ | 181,805 | $ | 260,062 | $ | 334,289 | $ | 776,156 | ||||
In 2018, we changed our segment reporting structure as our former Components segment was separated and merged into Space and Defense Controls and Industrial Systems. As a result, the September 30, 2017 balances for those segments were restated to reflect this change. Goodwill for Space and Defense Controls and Industrial Systems increased by $86,995 and $224,194, respectively, than what was previously reported.
Goodwill in our Space and Defense Controls segment is net of a $4,800 accumulated impairment loss at December 30, 2017.
Goodwill in our Medical Devices reporting unit, included in our Industrial Systems segment, is net of a $38,200 accumulated impairment loss at December 30, 2017.
The components of intangible assets are as follows:
December 30, 2017 | September 30, 2017 | |||||||||||||||||
Weighted- Average Life (years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||
Customer-related | 11 | $ | 177,239 | $ | (131,433 | ) | $ | 175,872 | $ | (128,019 | ) | |||||||
Technology-related | 9 | 72,215 | (56,018 | ) | 71,924 | (55,069 | ) | |||||||||||
Program-related | 19 | 66,889 | (31,876 | ) | 66,458 | (30,675 | ) | |||||||||||
Marketing-related | 9 | 26,659 | (19,727 | ) | 26,552 | (19,251 | ) | |||||||||||
Other | 10 | 4,445 | (3,479 | ) | 4,379 | (3,353 | ) | |||||||||||
Intangible assets | 12 | $ | 347,447 | $ | (242,533 | ) | $ | 345,185 | $ | (236,367 | ) | |||||||
Substantially all acquired intangible assets other than goodwill are being amortized. Customer-related intangible assets primarily consist of customer relationships. Technology-related intangible assets primarily consist of technology, patents, intellectual property and software. Program-related intangible assets consist of long-term programs represented by current contracts and probable follow on work. Marketing-related intangible assets primarily consist of trademarks, trade names and non-compete agreements.
Amortization of acquired intangible assets was $4,600 for the three months ended December 30, 2017 and $4,477 for the three months ended December 31, 2016. Based on acquired intangible assets recorded at December 30, 2017, amortization is expected to be approximately $18,400 in 2018, $17,300 in 2019, $15,100 in 2020, $9,400 in 2021 and $7,200 in 2022.
11
Note 6 - 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 30, 2017 | September 30, 2017 | |||||||
U.S. revolving credit facility | $ | 535,000 | $ | 540,110 | ||||
Senior notes | 300,000 | 300,000 | ||||||
Securitization program | 130,000 | 120,000 | ||||||
Obligations under capital leases | 263 | 306 | ||||||
Senior debt | 965,263 | 960,416 | ||||||
Less deferred debt issuance cost | (2,998 | ) | (3,468 | ) | ||||
Less current installments | (259 | ) | (295 | ) | ||||
Long-term debt | $ | 962,006 | $ | 956,653 | ||||
Our U.S. revolving credit facility matures on June 28, 2021. Our U.S. revolving credit facility has a capacity of $1,100,000 and provides an expansion option, which permits us to request an increase of up to $200,000 to the credit facility upon satisfaction of certain conditions. The credit facility is secured by substantially all of our U.S. assets. The loan agreement contains various covenants which, among others, specify interest coverage and maximum leverage and capital expenditures. We are in compliance with all covenants.
At December 30, 2017, we had $300,000 aggregate principal amount of 5.25% senior notes due December 1, 2022 with interest paid semiannually on June 1 and December 1 of each year. The senior notes are unsecured obligations, guaranteed on a senior unsecured basis by certain subsidiaries and contain normal incurrence-based covenants and limitations such as the ability to incur additional indebtedness, pay dividends, make other restricted payments and investments, create liens and certain corporate acts such as mergers and consolidations.
The Securitization Program was extended on October 23, 2017 and now matures on October 23, 2019. The Securitization Program provides up to $130,000 of borrowing capacity. 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 30, 2017, our minimum borrowing requirement was $104,000.
12
Note 7 - Product Warranties
In the ordinary course of business, we warrant our products against defects in design, materials and workmanship typically over periods ranging from twelve to sixty months. We determine warranty reserves needed by product line based on historical experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:
Three Months Ended | ||||||||
December 30, 2017 | December 31, 2016 | |||||||
Warranty accrual at beginning of period | $ | 25,848 | $ | 21,363 | ||||
Warranties issued during current period | 4,757 | 3,414 | ||||||
Adjustments to pre-existing warranties | (70 | ) | (265 | ) | ||||
Reductions for settling warranties | (2,915 | ) | (1,044 | ) | ||||
Foreign currency translation | 128 | (585 | ) | |||||
Warranty accrual at end of period | $ | 27,748 | $ | 22,883 | ||||
Note 8 - 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 30, 2017, we had interest rate swaps with notional amounts totaling $150,000. The interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at 2.62%, including the applicable margin of 1.38% as of December 30, 2017. 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 and the British pound, we had outstanding foreign currency forwards with notional amounts of $51,608 at December 30, 2017. These contracts mature at various times through November 29, 2019.
These interest rate swaps and foreign currency contracts 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 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 2018 or 2017.
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Derivatives not designated as hedging instruments
We also have foreign currency exposure on balances, primarily intercompany, that are denominated in foreign currencies and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the consolidated condensed statements of earnings. To minimize foreign currency exposure, we had foreign currency contracts with notional amounts of $107,528 at December 30, 2017. 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 | |||||||||
December 30, 2017 | December 31, 2016 | ||||||||
Net gain (loss) | $ | (628 | ) | $ | 1,394 | ||||
Summary of derivatives
The fair value and classification of derivatives is summarized as follows:
December 30, 2017 | September 30, 2017 | ||||||||
Derivatives designated as hedging instruments: | |||||||||
Foreign currency contracts | Other current assets | $ | 639 | $ | 551 | ||||
Foreign currency contracts | Other assets | 298 | 50 | ||||||
Interest rate swaps | Other current assets | 989 | 552 | ||||||
Interest rate swaps | Other assets | 471 | 314 | ||||||
Total asset derivatives | $ | 2,397 | $ | 1,467 | |||||
Foreign currency contracts | Other accrued liabilities | $ | 601 | $ | 1,434 | ||||
Foreign currency contracts | Other long-term liabilities | — | 244 | ||||||
Interest rate swaps | Other accrued liabilities | — | 10 | ||||||
Interest rate swaps | Other long-term liabilities | — | 15 | ||||||
Total liability derivatives | $ | 601 | $ | 1,703 | |||||
Derivatives not designated as hedging instruments: | |||||||||
Foreign currency contracts | Other current assets | $ | 314 | $ | 95 | ||||
Foreign currency contracts | Other accrued liabilities | $ | 515 | $ | 383 | ||||
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Note 9 - 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.
Classification | December 30, 2017 | September 30, 2017 | ||||||||
Foreign currency contracts | Other current assets | $ | 953 | $ | 646 | |||||
Foreign currency contracts | Other assets | 298 | 50 | |||||||
Interest rate swaps | Other current assets | 989 | 552 | |||||||
Interest rate swaps | Other assets | 471 | 314 | |||||||
Total assets | $ | 2,711 | $ | 1,562 | ||||||
Foreign currency contracts | Other accrued liabilities | $ | 1,116 | $ | 1,817 | |||||
Foreign currency contracts | Other long-term liabilities | — | 244 | |||||||
Interest rate swaps | Other accrued liabilities | — | 10 | |||||||
Interest rate swaps | Other long-term liabilities | — | 15 | |||||||
Total liabilities | $ | 1,116 | $ | 2,086 | ||||||
Our only financial instrument for which the carrying value differs from its fair value is long-term debt. At December 30, 2017, the fair value of long-term debt was $974,451 compared to its carrying value of $965,263. 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.
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Note 10 - Employee Benefit Plans
Net periodic benefit costs for our defined benefit pension plans are as follows:
Three Months Ended | ||||||||
December 30, 2017 | December 31, 2016 | |||||||
U.S. Plans | ||||||||
Service cost | $ | 5,634 | $ | 6,022 | ||||
Interest cost | 8,073 | 7,636 | ||||||
Expected return on plan assets | (13,576 | ) | (13,628 | ) | ||||
Amortization of prior service cost (credit) | 47 | 47 | ||||||
Amortization of actuarial loss | 6,902 | 8,419 | ||||||
Pension expense for U.S. defined benefit plans | $ | 7,080 | $ | 8,496 | ||||
Non-U.S. Plans | ||||||||
Service cost | $ | 1,470 | $ | 1,532 | ||||
Interest cost | 1,055 | 751 | ||||||
Expected return on plan assets | (1,243 | ) | (1,131 | ) | ||||
Amortization of prior service cost (credit) | (14 | ) | (27 | ) | ||||
Amortization of actuarial loss | 624 | 1,120 | ||||||
Pension expense for non-U.S. defined benefit plans | $ | 1,892 | $ | 2,245 | ||||
Pension expense for our defined contribution plans consists of:
Three Months Ended | ||||||||
December 30, 2017 | December 31, 2016 | |||||||
U.S. defined contribution plans | $ | 3,972 | $ | 3,670 | ||||
Non-U.S. defined contribution plans | 1,709 | 1,360 | ||||||
Total pension expense for defined contribution plans | $ | 5,681 | $ | 5,030 | ||||
In 2018, expected contributions for our U.S. defined benefit pension plans is approximately $149,000.
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Note 11 - Restructuring
Restructuring activity for severance and other costs is as follows:
Total | |||
Balance at September 30, 2017 | $ | 1,168 | |
Cash payments - 2016 plan | (254 | ) | |
Balance at December 30, 2017 | $ | 914 | |
Restructuring is expected to be paid by July 1, 2019 and is classified as current or long-term liabilities based on payment arrangements.
Note 12 - Income Taxes
The effective tax rate for the three months ended December 30, 2017 was 97.3%. The effective rate for this period was significantly impacted by the enactment of the Tax Cuts and Jobs Act (the "Act") of 2017.
The Act was enacted on December 22, 2017. It reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 30, 2017, we have not completed the accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on the one-time transition tax, withholding taxes deemed to be repatriated and existing deferred tax balances. These amounts are provisional and subject to change as the determination of the impact of the income tax effects will require additional analysis of historical records, annual data and further interpretation of the Act from yet to be issued U.S. Treasury regulations.
During the three months ended December 30, 2017 we recorded a $31,000, one-time transition tax on undistributed foreign earnings deemed to be repatriated and a tax charge of $15,250 as an additional provision for withholding taxes on undistributed earnings not considered to be permanently reinvested. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities is not practicable. These charges are partially offset by a $12,225 benefit due to the remeasurement of deferred tax assets and liabilities arising from a lower U.S. corporate tax rate, which took into account our decision to accelerate pension contributions into our 2017 pension plan year. This allows the pension contribution tax deduction to be taken in our 2017 federal income tax return which is taxed at the 35% federal rate.
The effective tax rate for the three months ended December 31, 2016 was 17.6%. The effective tax rate for this period is lower than would be expected by applying the U.S. federal statutory tax rate to earnings before income taxes primarily from tax benefits associated with selling our European space businesses.
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Note 13 - Accumulated Other Comprehensive Income (Loss)
The changes in AOCIL, net of tax, by component for the three months ended December 30, 2017 are as follows:
Accumulated foreign currency translation | Accumulated retirement liability | Accumulated gain (loss) on derivatives | Total | |||||||||||||
AOCIL at September 30, 2017 | $ | (83,166 | ) | $ | (251,865 | ) | $ | (460 | ) | $ | (335,491 | ) | ||||
Other comprehensive income (loss) before reclassifications | 10,364 | (363 | ) | 905 | 10,906 | |||||||||||
Amounts reclassified from AOCIL | — | 4,619 | 329 | 4,948 | ||||||||||||
Other comprehensive income (loss) | 10,364 | 4,256 | 1,234 | 15,854 | ||||||||||||
AOCIL at December 30, 2017 | $ | (72,802 | ) | $ | (247,609 | ) | $ | 774 | $ | (319,637 | ) | |||||
The amounts reclassified from AOCIL into earnings are as follows:
Three Months Ended | ||||||||||
Statement of earnings classification | December 30, 2017 | December 31, 2016 | ||||||||
Retirement liability: | ||||||||||
Prior service cost (credit) | $ | (85 | ) | $ | 19 | |||||
Actuarial losses | 7,396 | 9,417 | ||||||||
Reclassification from AOCIL into earnings (1) | 7,311 | 9,436 | ||||||||
Tax effect | (2,692 | ) | (3,427 | ) | ||||||
Net reclassification from AOCIL into earnings | $ | 4,619 | $ | 6,009 | ||||||
Derivatives: | ||||||||||
Foreign currency contracts | Sales | $ | (118 | ) | $ | 1,297 | ||||
Foreign currency contracts | Cost of sales | 696 | 467 | |||||||
Interest rate swaps | Interest | (14 | ) | 115 | ||||||
Reclassification from AOCIL into earnings | 564 | 1,879 | ||||||||
Tax effect | (235 | ) | (591 | ) | ||||||
Net reclassification from AOCIL into earnings | $ | 329 | $ | 1,288 | ||||||
(1) The reclassifications are included in the computation of net periodic pension cost and postretirement benefit cost.
The amounts deferred in AOCIL are as follows:
Net deferral in AOCIL - effective portion | ||||||||||
Three Months Ended | ||||||||||
December 30, 2017 | December 31, 2016 | |||||||||
Foreign currency contracts | $ | 828 | $ | (1,786 | ) | |||||
Interest rate swaps | 617 | 694 | ||||||||
Net gain (loss) | 1,445 | (1,092 | ) | |||||||
Tax effect | (540 | ) | 378 | |||||||
Net deferral in AOCIL of derivatives | $ | 905 | $ | (714 | ) | |||||
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Note 14 - Stock Employee Compensation Trust and Supplemental Retirement Plan Trust
The Stock Employee Compensation Trust (SECT) assists in administering and provides funding for equity-based compensation plans and benefit programs, including the Moog Inc. Retirement Savings Plan (RSP). The Supplemental Retirement Plan (SERP) Trust provides funding for benefits under the Moog Inc. SERP. Both the SECT and the SERP Trust hold shares as investments. The shares in the SECT and SERP Trust are not considered outstanding for purposes of calculating earnings per share. However, in accordance with the trust agreements governing the SECT and SERP Trust, the trustees vote all shares held by the SECT and SERP Trust on all matters submitted to shareholders.
Note 15 - Earnings per Share
Basic and diluted weighted-average shares outstanding are as follows:
Three Months Ended | ||||||
December 30, 2017 | December 31, 2016 | |||||
Basic weighted-average shares outstanding | 35,772,406 | 35,869,052 | ||||
Dilutive effect of equity-based awards | 428,648 | 403,715 | ||||
Diluted weighted-average shares outstanding | 36,201,054 | 36,272,767 | ||||
For the three months ended December 30, 2017 and December 31, 2016, there were 13,530 and 111,574 common shares from equity-based awards, respectively, excluded from the calculation of diluted earnings per share as they would be anti-dilutive.
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Note 16 - Segment Information
Effective October 1, 2017, we made changes to our segment reporting structure that resulted in three reporting segments. Our former Components segment has been separated and merged into Space and Defense Controls and Industrial Systems. All amounts have been restated to reflect this change.
Below are sales and operating profit by segment for the three months ended December 30, 2017 and December 31, 2016 and a reconciliation of segment operating profit to earnings before income taxes. Operating profit is net sales less cost of sales and other operating expenses, excluding interest expense, equity-based compensation 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, number of employees or profit.
Three Months Ended | ||||||||
December 30, 2017 | December 31, 2016 | |||||||
Net sales: | ||||||||
Aircraft Controls | $ | 278,534 | $ | 268,450 | ||||
Space and Defense Controls | 133,393 | 122,590 | ||||||
Industrial Systems | 215,608 | 198,630 | ||||||
Net sales | $ | 627,535 | $ | 589,670 | ||||
Operating profit: | ||||||||
Aircraft Controls | $ | 30,768 | $ | 23,111 | ||||
Space and Defense Controls | 16,289 | 9,088 | ||||||
Industrial Systems | 19,246 | 20,163 | ||||||
Total operating profit | 66,303 | 52,362 | ||||||
Deductions from operating profit: | ||||||||
Interest expense | 8,646 | 8,486 | ||||||
Equity-based compensation expense | 2,001 | 2,168 | ||||||
Corporate and other expenses, net | 7,822 | 5,220 | ||||||
Earnings before income taxes | $ | 47,834 | $ | 36,488 | ||||
The amounts reclassified for net sales and operating profit as a result of the revised segment reporting structure for the three months ended December 31, 2016 are as follows:
December 31, 2016 | ||||
Net sales: | ||||
Space and Defense Controls | $ | 29,660 | ||
Industrial Systems | 86,231 | |||
Total | $ | 115,891 | ||
Operating profit: | ||||
Space and Defense Controls | $ | 1,992 | ||
Industrial Systems | 9,462 | |||
Total | $ | 11,454 | ||
Segment assets for Space and Defense Controls and Industrial Systems are approximately $613,000 and $1,142,000, respectively, as of December 30, 2017 as a result of the change to our segment reporting structure.
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Note 17 - Related Party Transactions
On November 20, 2017, John Scannell was elected to the Board of Directors of M&T Bank Corporation and M&T Bank. We currently engage with M&T Bank in the ordinary course of business for various financing activities, all of which were initiated prior to the election of Mr. Scannell to the Board. M&T Bank provides credit extension for routine purchases, which for the three months ended December 30, 2017 totaled $5,459. At December 30, 2017, we held a $15,000 interest rate swap with M&T Bank and outstanding leases with a total original cost of $27,955. M&T Bank also maintains an interest of approximately 12% in our U.S. revolving credit facility. Further details of the U.S. revolving credit facility can be found in Note 6, Indebtedness.
Note 18 - Commitments and Contingencies
From time to time, we are involved in legal proceedings. We are not a party to any pending legal proceedings which management believes will result in a material adverse effect on our financial condition, results of operations or cash flows.
We are engaged in administrative proceedings with governmental agencies and legal proceedings with governmental agencies and other third parties in the normal course of our business, including litigation under Superfund laws, regarding environmental matters. We believe that adequate reserves have been established for our share of the estimated cost for all currently pending environmental administrative or legal proceedings and do not expect that these environmental matters will have a material adverse effect on our financial condition, results of operations or cash flows.
In the ordinary course of business we could be subject to ongoing claims or disputes from our customers, the ultimate settlement of which could have a material adverse impact on our consolidated results of operations. While the receivables and any loss provisions recorded to date reflect management's best estimate of the projected costs to complete a given project, there may still be significant effort required to complete the ultimate deliverable. Future variability in internal cost as well as future profitability is dependent upon a number of factors including deliveries, performance and government budgetary pressures. The inability to achieve a satisfactory contractual solution, further unplanned delays, additional developmental cost growth or variations in any of the estimates used in the existing contract analysis could lead to further loss provisions. Additional losses could have a material adverse impact on our financial condition, results of operations or cash flows in the period in which the loss may be recognized.
We are contingently liable for $48,793 of standby letters of credit issued by a bank to third parties on our behalf at December 30, 2017.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report filed on Form 10-K for the fiscal year ended September 30, 2017. All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years and amounts may differ from reported values due to rounding.
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. |
• | Commercial 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. |
• | Energy market - power generation, oil and gas exploration and wind energy. |
• | Medical market - enteral clinical nutrition and infusion therapy pumps, ultrasonic sensors and surgical handpieces and CT scanners. |
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, Costa Rica, India, China, Japan, Italy, Netherlands, Canada, Ireland and Luxembourg.
We have long-term contracts with some of our customers. These contracts are predominantly within Aircraft Controls and Space and Defense Controls and represent 38%, 34% and 33% of our sales in 2017, 2016 and 2015, respectively. We recognize revenue on these contracts using the percentage of completion, cost-to-cost method of accounting as work progresses toward completion. The remainder of our sales are recognized when the risks and rewards of ownership and title to the product are transferred to the customer, principally as units are delivered or as service obligations are satisfied. This method of revenue recognition is predominantly used within the Industrial Systems segment, as well as with aftermarket activity.
We concentrate on providing our customers with products designed and manufactured to the highest quality standards. Our products are applied in demanding applications, "When Performance Really Matters®." We believe we have achieved a leadership position in the high performance, precision controls market, by capitalizing on our core foundational strengths, which are our technical experts working collaboratively around the world and the capabilities we deliver for mission-critical solutions. 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 innovate our control product franchise from one market to another, organically growing from a high-performance components supplier to a high-performance systems supplier. In addition, we continue achieving substantial content positions on the platforms on which we currently participate, seeking to be the dominant supplier in the current niche markets we serve. We also look for innovation in all aspects of our business, employing new technologies to improve productivity and to develop innovative business models.
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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, which may include strategic acquisitions or further share buyback activity, in order to maximize shareholder returns over the long-term.
Acquisitions and Divestitures
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 2017, we acquired Rotary Transfer Systems, a manufacturer of electromechanical systems, located in Germany and France for $43 million. This acquisition is included in our Industrial Systems segment. We also sold non-core businesses in our Space and Defense Controls segment for $7 million and recorded losses in other expense of $13 million related to the sales.
CRITICAL ACCOUNTING POLICIES
On a regular basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, revenue recognition on long-term contracts, contract and contract-related loss reserves, reserves for inventory valuation, reviews for impairment of goodwill, reviews for impairment of long-lived assets, pension assumptions and income taxes. See Note 12 of the Consolidated Condensed Financial Statements included in Item 1, Financial Statements of this report for the impact of the enactment of the Tax Cuts and Jobs Act of 2017.
Other than that described below, there have been no material changes in critical accounting policies in the current year from those disclosed in our 2017 Annual Report on Form 10-K.
Reviews for Impairment of Goodwill
Interim Test
Effective October 1, 2017, we changed our segment reporting structure from four to three reporting segments. The former Components reporting segment has been divided and merged into the Space and Defense Controls and Industrial Systems reporting segments. This change also impacted the reporting units we use to review goodwill for impairment. Based on the accounting rules that require aggregation of components with similar economic characteristics, we have changed the number of reporting units from five to four - Aircraft Controls, Space and Defense Controls, Industrial Systems and Medical Devices.
We transferred or allocated the assets and liabilities of the former Components business including the proportionate share of goodwill based on the relative fair value of the business to the new respective reporting units - Space and Defense Controls and Industrial Systems. We then compared the fair values to the carrying values of the reporting units and the resulting fair values exceeded the carrying values, so we determined that goodwill was not impaired.
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The fair value of each of these two reporting units exceeded the carrying amounts by over 100%. While any individual assumption could differ from those that we used, we believe the overall fair values of these reporting units are reasonable, as the values are derived from a mix of reasonable assumptions. Had we used discount rates that were 100 basis points higher or a terminal growth rate that was 100 basis points lower than those we assumed, the fair values of each of these reporting units would have continued to exceed their carrying amounts by at least 80%.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Condensed Financial Statements included in Item 1, Financial Statements of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates ("ASU").
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CONSOLIDATED RESULTS OF OPERATIONS | |||||||||||
Three Months Ended | |||||||||||
(dollars and shares in millions, except per share data) | December 30, 2017 | December 31, 2016 | $ Variance | % Variance | |||||||
Net sales | $ | 628 | $ | 590 | $ | 38 | 6 | % | |||
Gross margin | 29.3 | % | 29.3 | % | |||||||
Research and development expenses | $ | 32 | $ | 35 | $ | (2 | ) | (6 | %) | ||
Selling, general and administrative expenses as a percentage of sales | 15.3 | % | 14.4 | % | |||||||
Interest expense | $ | 9 | $ | 8 | $ | — | 2 | % | |||
Other | $ | (1 | ) | $ | 8 | $ | (9 | ) | (109 | %) | |
Effective tax rate | 97.3 | % | 17.6 | % | |||||||
Net earnings attributable to Moog | $ | 1 | $ | 31 | $ | (29 | ) | (96 | %) | ||
Diluted average common shares outstanding | 36 | 36 | — | — | % | ||||||
Diluted earnings per share attributable to Moog | $ | 0.04 | $ | 0.84 | $ | (0.80 | ) | (95 | %) | ||
Net sales increased across all of our segments in the first quarter of 2018 compared to the first quarter of 2017.
Gross margin was unchanged in the first quarter of 2018 compared to the same period of 2017. Aircraft Controls' gross margin increased due primarily to a more favorable sales mix from foreign military sales; however, Space and Defense Controls' gross margin decreased due to the reduced amount of last year's favorable defense controls sales.
Research and development expenses decreased in the first quarter of 2018 compared to the same period of 2017. Within Aircraft Controls, research and development expenses decreased $4 million, as we had lower activity across our major commercial OEM programs. The reduced spend was offset by increases in research and development activities across our remaining two segments.
Selling, general and administrative expenses as a percentage of sales increased in the first quarter of 2018 compared to the first quarter of 2017. Administrative expense increased $3 million due to the timing of expenses in the prior year's quarter, and we had higher planned selling expense in select growth markets.
Other expense in the first quarter of 2017 includes $9 million of losses associated with selling our European space businesses.
The effective tax rate in the first quarter of 2018 was impacted by the enactment of the Tax Cuts and Jobs Act of 2017. We recorded a $31 million, one-time transition tax on undistributed foreign earnings deemed to be repatriated and a tax charge of $15 million as an additional provision for withholding taxes on undistributed earnings not considered to be permanently reinvested. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities is not practicable. These charges are partially offset by a $12 million benefit due to the remeasurement of deferred tax assets and liabilities arising from a lower U.S. corporate tax rate, which took into account our decision to accelerate pension contributions into our 2017 pension plan year. This allows the pension contribution tax deduction to be taken in our 2017 federal income tax return which is taxed at the 35% federal rate. Excluding all of the impacts due to the Act, the effective tax rate for the first quarter of 2018 was 29.6%.
Our effective tax rate in 2017 is lower than the U.S. statutory tax rate, as it included the tax benefits associated with divesting our European space businesses. Excluding the impact of the divestiture, the effective tax rate for the first quarter of 2017 was 28.7%.
Other comprehensive income in the first quarter of 2018 includes $10 million of foreign currency translation income. Other comprehensive loss in the first quarter of 2017 includes $42 million of foreign currency translation loss. Foreign currency translation adjustments increased $52 million during this period, primarily attributable to changes in the Euro and the British Pound.
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SEGMENT RESULTS OF OPERATIONS
Effective October 1, 2017, we changed our segment reporting structure to three reporting segments. Our former Components segment has been separated and merged into Space and Defense Controls and Industrial Systems. All amounts have been restated to conform to the current presentation.
Operating profit, as presented below, is net sales less cost of sales and other operating expenses, excluding interest expense, equity-based compensation 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 16 of the Notes to Consolidated Condensed Financial Statements included in this report.
Aircraft Controls
Three Months Ended | |||||||||||
(dollars in millions) | December 30, 2017 | December 31, 2016 | $ Variance | % Variance | |||||||
Net sales - military aircraft | $ | 124 | $ | 128 | $ | (4 | ) | (3 | %) | ||
Net sales - commercial aircraft | 154 | 141 | 14 | 10 | % | ||||||
$ | 279 | $ | 268 | $ | 10 | 4 | % | ||||
Operating profit | $ | 31 | $ | 23 | $ | 8 | 33 | % | |||
Operating margin | 11.0 | % | 8.6 | % | |||||||
Backlog | $ | 590 | $ | 610 | $ | (20 | ) | (3 | %) | ||
Aircraft Controls' net sales increased in commercial aircraft programs the first quarter of 2018 compared to the first quarter of 2017, but were partially offset by military aircraft sales declines.
Commercial OEM and commercial aftermarket sales each increased $7 million in the first quarter of 2018 compared to the first quarter of 2017. OEM sales for the Airbus A350 increased $5 million due to the program's production volume ramp up, while aftermarket sales for the A350 increased $4 million due to higher initial provisioning. Additionally, aftermarket sales for legacy Boeing programs increased $4 million due to higher repair activity.
Military aftermarket sales declined $5 million in the first quarter of 2018 compared to the first quarter of 2017 due primarily to production delays on the V-22 program. Military OEM sales were relatively flat, as higher foreign military sales were mostly offset by lower F-35 sales. In the first quarter of 2017, F-35 sales were high due to a production increase ahead of an upcoming milestone delivery.
Operating margin increased in the first quarter of 2018 compared to the first quarter of 2017. Research and development expenses decreased $4 million, as we had lower activity on our major commercial OEM programs. Additionally, operating profit benefited from higher amounts of foreign military sales.
The decrease of twelve-month backlog for Aircraft Controls at December 30, 2017 compared to December 31, 2016 is primarily due to the timing of orders for the F-35.
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Space and Defense Controls
Three Months Ended | |||||||||||
(dollars in millions) | December 30, 2017 | December 31, 2016 | $ Variance | % Variance | |||||||
Net sales | $ | 133 | $ | 123 | $ | 11 | 9 | % | |||
Operating profit | $ | 16 | $ | 9 | $ | 7 | 79 | % | |||
Operating margin | 12.2 | % | 7.4 | % | |||||||
Backlog | $ | 411 | $ | 365 | $ | 46 | 13 | % | |||
Space and Defense Controls' net sales increased in our space and our defense markets in the first quarter of 2018 compared to the same period of 2017. Partially offsetting the sales growth was a decline of $6 million due to lost sales associated the 2017 divestitures of non-core businesses.
Sales in our defense market increased $9 million in the first quarter of 2018 compared to the first quarter of 2017. Spares sales for controls for domestic and European defense vehicles increased $6 million, and sales for defense components increased $4 million. Sales in our space market increased $2 million in the first quarter of 2018 compared to the first quarter of 2017. New satellite avionics programs and new launch vehicle programs increased sales by $7 million, but were offset by the lost sales associated with the divestitures.
Operating margin increased in the first quarter of 2018 compared to the first quarter of 2017 due to the absence of last year's losses associated with selling our European space businesses. Operating margin excluding the losses would have been 14.7% in the first quarter of 2017, reflecting a more favorable sales mix in our defense markets.
Twelve-month backlog for Space and Defense Controls at December 30, 2017 compared to December 31, 2016 increased as growth in satellite avionics and launch vehicles was partially offset by completing defense controls programs.
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Industrial Systems
Three Months Ended | |||||||||||
(dollars in millions) | December 30, 2017 | December 31, 2016 | $ Variance | % Variance | |||||||
Net sales | $ | 216 | $ | 199 | $ | 17 | 9 | % | |||
Operating profit | $ | 19 | $ | 20 | $ | (1 | ) | (5 | %) | ||
Operating margin | 8.9 | % | 10.2 | % | |||||||
Backlog | $ | 272 | $ | 216 | $ | 55 | 25 | % | |||
Industrial Systems' net sales increased across our four markets in the first quarter of 2018 compared to the first quarter of 2017. Stronger foreign currencies, primarily the Euro relative to the U.S. Dollar, increased sales $6 million, and the recent acquisition of Rotary Transfer Systems also increased sales $6 million, primarily in our industrial automation market.
Excluding the currency effects on sales in the first quarter of 2018 compared to the first quarter of 2017, sales increased in our simulation and test market due to the timing of shipments of our auto test and entertainment applications. Sales also increased in our medical market due to higher sales volumes for IV pumps and sets as well as medical components. In addition, shipments for energy exploration products increased for on-shore drilling applications.
Operating margin decreased in the first quarter of 2018 compared to the first quarter of 2017. We had higher operating expenses, including increased investments in research and development and selling, whose increases offset the incremental margin from the higher sales volume.
The higher level of twelve-month backlog in Industrial Systems at December 31, 2017 compared to December 31, 2016 is mostly due to higher orders in our simulation and test market.
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CONSOLIDATED AND SEGMENT OUTLOOK | ||||||||||||||
2018 vs. 2017 | ||||||||||||||
(dollars in millions) | 2018 | 2017 | $ Variance | % Variance | ||||||||||
Net sales: | ||||||||||||||
Aircraft Controls | $ | 1,175 | $ | 1,125 | $ | 50 | 4 | % | ||||||
Space and Defense Controls | 547 | 529 | 18 | 3 | % | |||||||||
Industrial Systems | 894 | 843 | 51 | 6 | % | |||||||||
$ | 2,617 | $ | 2,498 | $ | 119 | 5 | % | |||||||
Operating profit: | ||||||||||||||
Aircraft Controls | $ | 125 | $ | 114 | $ | 11 | 9 | % | ||||||
Space and Defense Controls | 63 | 49 | 14 | 30 | % | |||||||||
Industrial Systems | 100 | 88 | 13 | 14 | % | |||||||||
$ | 288 | $ | 250 | $ | 38 | 15 | % | |||||||
Operating margin: | ||||||||||||||
Aircraft Controls | 10.6 | % | 10.1 | % | ||||||||||
Space and Defense Controls | 11.5 | % | 9.2 | % | ||||||||||
Industrial Systems | 11.2 | % | 10.4 | % | ||||||||||
11.0 | % | 10.0 | % | |||||||||||
2018 Outlook – We expect that all three segments will contribute to higher sales in 2018, driven primarily by industrial automation sales in Industrial Systems and military OEM sales for the F-35 program in Aircraft Controls. We expect 2018 operating margin will increase due to the absence of 2017's losses associated with divesting non-core businesses, as well as incremental margin from higher sales. However, we expect that the impact of the Tax Cuts and Jobs Act will result in an unusually high effective tax rate of 42% in 2018. This will result in a 12% decrease in net earnings attributable to common shareholders to $124 million, and diluted earnings per share will range between $3.23 and $3.63 with a midpoint of $3.43. Excluding all of the impacts due to the Act, we expect an effective tax rate of 31%, net earnings attributable to common shareholders of $148 million and diluted earnings per share will range between $3.90 and $4.30, with a midpoint of $4.10, an increase of 5% compared to 2017.
2018 Outlook for Aircraft Controls – We expect 2018 sales in Aircraft Controls will increase primarily due to the continued ramp ups of the F-35 program and the Airbus A350 program. Partially offsetting the increases is an expected sales decline of legacy Boeing OEM programs. We expect 2018 operating margin will increase compared to 2017. We expect that research and development costs will decrease $6 million and that we will continue to realize the benefits of cost saving activities. However, we expect a negative sales mix, as sales on our mature commercial programs are replaced with sales growth on newer commercial programs.
2018 Outlook for Space and Defense Controls – We expect 2018 sales in Space and Defense Controls will increase due to sales growth from launch vehicles and satellite programs. Also, within our defense market, we expect higher missile systems and security sales will offset a decline in defense controls sales. We expect 2018 operating margin will increase, as the losses associated with divesting non-core businesses do not repeat.
2018 Outlook for Industrial Systems – We expect 2018 sales in Industrial Systems to increase across all of our major markets, lead primarily by growth in our industrial automation products. We expect 2018 operating margin will increase as we benefit from incremental margin on higher sales volumes.
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FINANCIAL CONDITION AND LIQUIDITY
Three Months Ended | |||||||||||
(dollars in millions) | December 30, 2017 | December 31, 2016 | $ Variance | % Variance | |||||||
Net cash provided (used) by: | |||||||||||
Operating activities | $ | 44 | $ | 51 | $ | (6 | ) | (13 | %) | ||
Investing activities | (22 | ) | (16 | ) | (6 | ) | 37 | % | |||
Financing activities | (1 | ) | (13 | ) | 12 | (95 | %) | ||||
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 December 30, 2017, our cash balances were $395 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. Due to provisions in the Tax Cuts and Jobs Act, we plan to repatriate substantial amounts of our existing offshore cash and future earnings back to the U.S.
Operating activities
Net cash provided by operating activities decreased in the first quarter of 2018 compared to the same period of 2017. Operationally, increases in inventory, primarily in Aircraft Controls and Industrial Systems, used $29 million more in cash, and the unfavorable timing of payments across all of our segments used $21 million. These uses were principally offset by strong cash collections from accounts receivable and customer advances in Space and Defense Controls and Aircraft Controls.
Investing activities
Net cash used by investing activities in the first quarter of 2018 included $21 million for capital expenditures, while net cash used by investing activities in 2017 included $15 million for capital expenditures.
We expect our 2018 capital expenditures to be approximately $95 million, due to facilities investments supporting the increased production of the F-35 program, as well as engine propulsion testing.
Financing activities
Cash used by financing activities in the first quarters of 2018 and 2017 both include net payments on our credit facility.
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 results of operations or financial condition.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments have not changed materially from the disclosures in our 2017 Annual Report on Form 10-K, with the exception of tax payments required as a result of the Tax Cuts and Jobs Act of 2017 and accelerated pension contributions into our 2017 pension plan year. See Notes 10 and 12 of the Consolidated Condensed Financial Statements included in Item 1, Financial Statements of this report for the impact.
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CAPITAL STRUCTURE AND RESOURCES
We maintain bank credit facilities to fund our short and long-term capital requirements, including for acquisitions. From time to time, we also sell debt and equity securities to fund acquisitions or take advantage of favorable market conditions.
Our U.S. revolving credit facility matures on June 28, 2021. The 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 $200 million to the credit facility upon satisfaction of certain conditions. The U.S. revolving credit facility had an outstanding balance of $535 million at December 30, 2017. The weighted-average interest rate on all of the outstanding credit facility borrowings was 2.89% and is based on LIBOR plus the applicable margin, which was 1.38% at December 30, 2017. 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, including letters of credit, to EBITDA for the most recent four quarters, is 3.5. 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.
At December 30, 2017, we had $529 million of unused capacity, including $516 million from the U.S. revolving credit facility after considering standby letters of credit.
We have $300 million aggregate 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.
We have a trade receivables securitization facility (the "Securitization Program"), which was extended on October 23, 2017 and now matures on October 23, 2019. 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 December 30, 2017. The Securitization Program has a minimum borrowing requirement, which was $104 million at December 30, 2017. Interest on the secured borrowings under the Securitization Program was 2.39% at December 30, 2017 and is based on 30-day LIBOR plus an applicable margin.
Net debt to capitalization was 32% at December 30, 2017 and 33% at September 30, 2017. The decrease in net debt to capitalization is primarily due to positive cash flow.
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.
The Board of Directors has 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 shares, and allows us to buy up to an aggregate 13 million common shares. Under this program, we have purchased approximately 9.7 million shares for $650 million as of December 30, 2017.
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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 2017 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. 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. Our security and surveillance product line is dependent on government funding at federal and local levels, as well as private sector demand.
Reductions in the U.S. Department of Defense's mandatory and discretionary budgeted spending, which became effective on March 1, 2013, resulting from the Budget Control Act of 2011, has had ramifications for the domestic aerospace and defense market. As originally passed, the Budget Control Act provided that, in addition to an initial significant reduction in future domestic defense spending, further automatic cuts to defense spending authorization (which is generally referred to as sequestration) of approximately $500 billion through the Federal Government's 2021 fiscal year would be triggered by the failure of Congress to produce a deficit reduction bill. The sequestration spending cuts were intended to be uniform by category for programs, projects and activities within accounts. The Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015 provided stability and modest growth in Department of Defense spending through 2017. However, future budgets beyond 2017 are uncertain with respect to the overall levels of defense spending. Currently, we expect approximately $720 million of U.S. defense sales in 2018.
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 commercial space market is comprised of large satellite customers, traditionally 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 replacement and global navigation needs. The space market is also partially dependent on the governmental-authorized levels of funding for satellite communications, as well as investment for commercial and exploration activities.
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Industrial
Approximately one-third of our 2017 sales were generated in industrial markets. Within industrial, we serve three end markets: industrial automation, energy 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.
The energy market we serve is affected by changing oil and natural gas prices, global urbanization, the resulting change in supply and demand for global energy and the political climate and corresponding public support for investments in renewable energy generation capacity. Historically, drivers for global growth include investments in power generation infrastructure, including renewable energy, and exploration in search of new oil and gas resources. However, the significant decline in the price of crude oil has reduced investment in exploration activities. This reduced investment has directly affected our energy business. Currently, we expect approximately $34 million of oil exploration-related sales in 2018, down from approximately $100 million in 2014.
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-quarter of our 2017 sales were denominated in foreign currencies. During the first three months of 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 sales by $8 million compared to the same period one year ago.
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Cautionary Statement
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. These important factors, risks and uncertainties include:
• | the markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operating results to fluctuate; |
• | we operate in highly competitive markets with competitors who may have greater resources than we possess; |
• | 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; |
• | we make estimates in accounting for long-term contracts, and changes in these estimates may have significant impacts on our earnings; |
• | we enter into fixed-price contracts, which could subject us to losses if we have cost overruns; |
• | we may not realize the full amounts reflected in our backlog as revenue, which could adversely affect our future revenue and growth prospects; |
• | 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; |
• | contracting on government programs is subject to significant regulation, including rules related to bidding, billing and accounting kickbacks and false claims, and any non-compliance could subject us to fines and penalties or possible debarment; |
• | 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; |
• | our new product research and development efforts may not be successful which could reduce our sales and earnings; |
• | our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete; |
• | our business operations may be adversely affected by information systems interruptions, intrusions or new software implementations; |
• | our indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility; |
• | 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; |
• | a write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth; |
• | our sales and earnings may be affected if we cannot identify, acquire or integrate strategic acquisitions, or if we engage in divesting activities; |
• | our operations in foreign countries expose us to political and currency risks and adverse changes in local legal and regulatory environments; |
• | unforeseen exposure to additional income tax liabilities may affect our operating results; |
• | government regulations could limit our ability to sell our products outside the United States and otherwise adversely affect our business; |
• | governmental regulations and customer demands related to conflict minerals may adversely impact our operating results; |
• | 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; |
• | future terror attacks, war, natural disasters or other catastrophic events beyond our control could negatively impact our business; |
• | our operations are subject to environmental laws, and complying with those laws may cause us to incur significant costs; and |
• | we are involved in various legal proceedings, the outcome of which may be unfavorable to us. |
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These factors are not exhaustive. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2017 for a complete discussion of our market risk. There have been no material changes in the current year regarding this market risk information.
Item 4. Controls and Procedures.
(a) | Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report, to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. |
(b) | Changes in Internal Control over Financial Reporting. There have been no changes during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
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PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) | The following table summarizes our purchases of our common stock for the quarter ended December 30, 2017. |
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) | |||||||||
October 1, 2017 - October 31, 2017 | 19,459 | $ | 87.15 | — | 3,349,819 | ||||||||
November 1, 2017 - November 30, 2017 | 54,388 | 83.17 | — | 3,349,819 | |||||||||
December 1, 2017 - December 30, 2017 | 3,850 | 87.68 | — | 3,349,819 | |||||||||
Total | 77,697 | $ | 84.39 | — | 3,349,819 | ||||||||
(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") at average prices as follows: 17,494 shares at $87.00 per share during October; and 27,168 shares at $84.69 per share during November. |
(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 October, we accepted delivery of 1,965 shares at $88.49 per share, in November, we accepted delivery of 27,220 shares at $81.65 per share and in December, we accepted delivery of 3,850 shares at $87.68 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. |
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Item 6. Exhibits.
(a) | Exhibits | ||
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
101 | Interactive Date files (submitted electronically herewith) | ||
(101.INS) | XBRL Instance Document |
(101.SCH) | XBRL Taxonomy Extension Schema Document |
(101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document |
(101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document |
(101.LAB) | XBRL Taxonomy Extension Label Linkbase Document |
(101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document |
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Moog Inc. | |||||
(Registrant) | |||||
Date: | January 26, 2018 | By | /s/ John R. Scannell | ||
John R. Scannell | |||||
Chairman Chief Executive Officer (Principal Executive Officer) | |||||
Date: | January 26, 2018 | By | /s/ Donald R. Fishback | ||
Donald R. Fishback | |||||
Vice President Chief Financial Officer (Principal Financial Officer) | |||||
Date: | January 26, 2018 | By | /s/ Jennifer Walter | ||
Jennifer Walter | |||||
Vice President - Finance Controller (Principal Accounting Officer) | |||||
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