XNYS:MOG.A Moog Inc Class A Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:MOG.A (Moog Inc Class A): Fair Value Estimate
Premium
XNYS:MOG.A (Moog Inc Class A): Consider Buying
Premium
XNYS:MOG.A (Moog Inc Class A): Consider Selling
Premium
XNYS:MOG.A (Moog Inc Class A): Fair Value Uncertainty
Premium
XNYS:MOG.A (Moog Inc Class A): Economic Moat
Premium
XNYS:MOG.A (Moog Inc Class A): Stewardship
Premium
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
___________________________________________
(Mark One)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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: 1-5129
_________________________________________
MOOG 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)
        Telephone number including area code: (716) 652-2000

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 x No o

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

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

The number of shares outstanding of each class of common stock as of May 3, 2012 was:
Class A common stock, $1.00 par value 41,261,227 shares
Class B common stock, $1.00 par value 3,992,832 shares





MOOG Inc.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
PART 1
 
FINANCIAL INFORMATION
 
PAGE

 
 
 
 
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3

 
 
 
 
 
 
 
 
 
 
 
 
4

 
 
 
 
 
 
 
 
 
 
 
 
5

 
 
 
 
 
 
 
 
 
 
 
 
6

 
 
 
 
 
 
 
 
 
 
 
 
7-20

 
 
 
 
 
 
 
 
 
Item 2
 
 
21-33

 
 
 
 
 
 
 
 
 
Item 3
 
 
34

 
 
 
 
 
 
 
 
 
Item 4
 
 
34

 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
34

 
 


 
 
 
 
 
 
Item 6
 
 
35

 
 
 
 
 
 
 
 
36




2


PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Moog Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands)
 
March 31,
2012
 
October 1,
2011
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
125,815

 
$
113,679

Receivables
 
710,125

 
655,805

Inventories
 
521,770

 
502,373

Other current assets
 
113,562

 
108,589

TOTAL CURRENT ASSETS
 
1,471,272

 
1,380,446

PROPERTY, PLANT AND EQUIPMENT, net of accumulated
 
 
 
 
depreciation of $535,154 and $513,151 respectively
 
525,484

 
503,872

GOODWILL
 
748,400

 
735,021

INTANGIBLE ASSETS, net
 
194,029

 
197,545

OTHER ASSETS
 
33,561

 
26,083

TOTAL ASSETS
 
$
2,972,746

 
$
2,842,967

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Short-term borrowings
 
$
93,747

 
$
9,283

Current installments of long-term debt
 
365

 
1,407

Accounts payable
 
173,322

 
165,893

Customer advances
 
107,168

 
97,331

Contract loss reserves
 
40,090

 
45,173

Other accrued liabilities
 
228,830

 
227,303

TOTAL CURRENT LIABILITIES
 
643,522

 
546,390

LONG-TERM DEBT, excluding current installments
 
 
 
 
Senior debt
 
274,634

 
336,161

Senior subordinated notes
 
378,588

 
378,596

LONG-TERM PENSION AND RETIREMENT OBLIGATIONS
 
334,276

 
331,050

DEFERRED INCOME TAXES
 
58,544

 
56,729

OTHER LONG-TERM LIABILITIES
 
2,041

 
2,150

TOTAL LIABILITIES
 
1,691,605

 
1,651,076

SHAREHOLDERS' EQUITY
 
 
 
 
Common stock
 
51,280

 
51,280

Other shareholders' equity
 
1,229,861

 
1,140,611

TOTAL SHAREHOLDERS' EQUITY
 
1,281,141

 
1,191,891

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
2,972,746

 
$
2,842,967

See accompanying Notes to Consolidated Condensed Financial Statements.
 
 
 
 

3


Moog Inc.
Consolidated Condensed Statements of Earnings
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands, except per share data)
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
NET SALES
 
$
624,970

 
$
574,226

 
$
1,225,588

 
$
1,128,660

COST OF SALES
 
440,540

 
406,966

 
856,023

 
796,847

GROSS PROFIT
 
184,430

 
167,260

 
369,565

 
331,813

Research and development
 
26,897

 
28,154

 
56,087

 
51,629

Selling, general and administrative
 
97,697

 
87,504

 
193,495

 
173,345

Interest
 
8,636

 
8,970

 
17,182

 
18,181

Other
 
1,411

 
(673
)
 
63

 
(427
)
EARNINGS BEFORE INCOME TAXES
 
49,789

 
43,305

 
102,738

 
89,085

INCOME TAXES
 
14,368

 
12,690

 
30,944

 
25,063

NET EARNINGS
 
$
35,421

 
$
30,615

 
$
71,794

 
$
64,022

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET EARNINGS PER SHARE
 
 
 
 
 
 
 
 
Basic
 
$
0.78

 
$
0.67

 
$
1.59

 
$
1.41

Diluted
 
$
0.77

 
$
0.66

 
$
1.57

 
$
1.39

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
45,227,921

 
45,419,121

 
45,219,828

 
45,404,006

Diluted
 
45,781,587

 
46,058,991

 
45,730,777

 
45,982,772

See accompanying Notes to Consolidated Condensed Financial Statements.



4


Moog Inc.
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)


 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands)
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
NET EARNINGS
 
$
35,421

 
$
30,615

 
$
71,794

 
$
64,022

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
15,293

 
21,040

 
7,262

 
15,725

Retirement liability adjustment
 
2,832

 
1,787

 
5,522

 
3,965

Change in accumulated loss on derivatives
 
301

 
(176
)
 
87

 
(134
)
 
 
18,426

 
22,651

 
12,871

 
19,556

COMPREHENSIVE INCOME
 
$
53,847

 
$
53,266

 
$
84,665

 
$
83,578

 
 
 
 
 
 
 
 
 
See accompanying Notes to Consolidated Condensed Financial Statements.



5


Moog Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)

 
 
Six Months Ended
(dollars in thousands)
 
March 31,
2012
 
April 2,
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
71,794

 
$
64,022

Adjustments to reconcile net earnings to net cash provided
 
 
 
 
by operating activities:
 
 
 
 
Depreciation
 
32,026

 
31,873

Amortization
 
16,543

 
15,099

Provisions for non-cash losses on contracts, inventories and receivables
 
30,043

 
32,119

Equity-based compensation expense
 
4,790

 
5,175

Other
 
(1,243
)
 
1,576

Changes in assets and liabilities providing (using) cash, excluding the
 
 
 
 
effects of acquisitions:
 
 
 
 
Receivables
 
(47,983
)
 
(17,581
)
Inventories
 
(25,449
)
 
(30,843
)
Accounts payable
 
4,567

 
(5,144
)
Customer advances
 
8,787

 
4,542

Accrued expenses
 
(30,903
)
 
(28,844
)
Accrued income taxes
 
3,690

 
11,769

Pension assets and liabilities
 
12,573

 
(4,577
)
Other assets and liabilities
 
(3,845
)
 
(3,241
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
75,390

 
75,945

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Acquisitions of businesses, net of acquired cash
 
(25,673
)
 
(3,073
)
Purchase of property, plant and equipment
 
(53,720
)
 
(34,888
)
Other investing transactions
 
(5,103
)
 
160

NET CASH USED BY INVESTING ACTIVITIES
 
(84,496
)
 
(37,801
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net borrowing (repayments) of short term borrowings
 
85,205

 
(505
)
Net repayments of revolving lines of credit
 
(62,827
)
 
(39,798
)
Payments on long-term debt
 
(1,096
)
 
(7,066
)
Excess tax benefits from equity-based payment arrangements
 
368

 
135

Other financing transactions
 
(1,023
)
 
(5,770
)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
 
20,627

 
(53,004
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
615

 
2,459

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
12,136

 
(12,401
)
Cash and cash equivalents at beginning of period
 
113,679

 
112,421

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
125,815

 
$
100,020

 
 
 
 
 
CASH PAID FOR:
 
 
 
 
Interest
 
$
16,525

 
$
17,629

Income taxes, net of refunds
 
29,156

 
10,939

See accompanying Notes to Consolidated Condensed Financial Statements.

6

MOOG Inc.
Notes to Consolidated Condensed Financial Statements
Six Months Ended March 31, 2012
(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 six months ended March 31, 2012 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 October 1, 2011. All references to years in these financial statements are to fiscal years.

Note 2 - Acquisitions

During the six months ended March 31, 2012, we completed two business combinations. We completed one business combination in our Components segment by acquiring Protokraft, LLC, based in Tennessee, for $12,500 in cash and contingent consideration with an initial fair value of $4,438. Protokraft designs and manufacturers opto-electronic transceivers, ethernet switches and media converters packaged into rugged, environmentally-sealed connectors. We also completed one business combination in our Space and Defense Controls segment by acquiring Bradford Engineering, based in the Netherlands, for $13,173 in cash. Bradford is a developer and manufacturer of satellite equipment including attitude control, propulsion and thermal control subsystems. The purchase price allocations for both Bradford and Protokraft are based on preliminary estimates of fair value of assets acquired and liabilities assumed and are subject to subsequent adjustment as we obtain additional information for our estimates during the measurement period.

In 2011, we completed three business combinations within two of our segments. We completed two business combinations within our Aircraft Controls segment, both of which are located in the U.S. We acquired Crossbow Technology Inc., based in California, for $31,999, net of cash acquired. Crossbow designs and manufactures acceleration sensors that are integrated into inertial navigation and guidance systems used in a variety of aerospace, defense and transportation applications. We also acquired a business that complements our military aftermarket business for $2,373 in cash. We completed one business combination within our Components segment by acquiring Animatics Corporation, based in California. The purchase price, net of cash acquired, was $24,091, which includes 467,749 shares of Moog Class A common stock valued at $18,785 on the day of closing and $1,837 of debt assumed. Animatics supplies integrated servos, linear actuators and control electronics that are used in a variety of industrial, medical and defense applications. The purchase price allocations were completed in the second quarter of 2012.

Note 3 - Receivables

On March 5, 2012, the Company entered into a trade receivables securitization facility (the Securitization Program). Under the Securitization Program, the Company securitizes certain trade receivables in transactions that are accounted for as secured borrowings. The Company maintains 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.





7



Note 4 - Inventories

 
 
March 31,
2012
 
October 1,
2011
Raw materials and purchased parts
 
$
186,618

 
$
197,347

Work in progress
 
265,195

 
235,428

Finished goods
 
69,957

 
69,598

Total
 
$
521,770

 
$
502,373



Note 5 - Goodwill and Intangible Assets

The changes in the carrying amount of goodwill are as follows:

 
 
Balance as of October 1, 2011
 
Acquisitions
Adjustment To Prior Year Acquisitions
 
Foreign Currency Translation
 
Balance as of March 31, 2012
Aircraft Controls
 
$
194,052

 
$

$
(3,865
)
 
$
1,718

 
$
191,905

Space and Defense Controls
 
121,416

 
5,224


 
95

 
126,735

Industrial Systems
 
120,834

 


 
252

 
121,086

Components
 
172,531

 
8,734

(147
)
 
1,407

 
182,525

Medical Devices
 
126,188

 


 
(39
)
 
126,149

Total
 
$
735,021

 
$
13,958

$
(4,012
)
 
$
3,433

 
$
748,400


The components of acquired intangible assets are as follows:

 
 
 
 
March 31, 2012
 
October 1, 2011
 
 
Weighted - Average Life (years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Customer-related
 
10

 
$
166,934

 
$
(72,790
)
 
$
159,861

 
$
(64,420
)
Program-related
 
18

 
66,611

 
(11,592
)
 
64,887

 
(9,163
)
Technology-related
 
9

 
64,213

 
(32,205
)
 
61,276

 
(28,876
)
Marketing-related
 
9

 
24,402

 
(14,994
)
 
23,669

 
(13,828
)
Contract-related
 
3

 
3,328

 
(2,770
)
 
3,238

 
(2,156
)
Artistic-related
 
10

 
25

 
(25
)
 
25

 
(25
)
Acquired intangible assets
 
11

 
$
325,513

 
$
(134,376
)
 
$
312,956

 
$
(118,468
)

All acquired intangible assets other than goodwill are being amortized. Customer-related intangible assets primarily consist of customer relationships. Program-related intangible assets consist of long-term programs. Technology-related intangible assets primarily consist of technology, patents, intellectual property and engineering drawings. Marketing-related intangible assets primarily consist of trademarks, trade names and non-compete agreements. Contract-related intangible assets consist of favorable operating lease terms.

Amortization of acquired intangible assets was $7,622 and $15,293 for the three and six months ended March 31, 2012 and $7,012 and $13,956 for the three and six months ended April 2, 2011. Based on acquired intangible assets recorded at March 31, 2012, amortization is expected to be approximately $31,175 in 2012, $27,556 in 2013, $24,967 in 2014, $21,924 in 2015 and $19,994 in 2016.                                         



8


Note 6 - Indebtedness

Short-term borrowings consist of:
 
 
 
 
 
March 31, 2012

 
October 1, 2011

Securitization program
$
83,500

 
$

Lines of credit
8,447

 
8,426

Other short-term debt
1,800

 
857

Short-term borrowings
$
93,747

 
$
9,283



On March 5, 2012, the Company entered into a trade receivables securitization facility (the Securitization Program). The Securitization Program, which matures on March 4, 2013, effectively increases the Company's borrowing capacity by up to $100,000. Under the Securitization Program, the Company sells 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. The Securitization Program can be extended by agreement of the parties thereto for successive 364-day terms.

The Company utilizes proceeds from the Securitization Program as an alternative to other forms of debt, effectively reducing borrowing costs. Interest rates for the Securitization Program are based on prevailing market rates for short-term commercial paper 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.








9



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 thirty-six months. We determine warranty reserves needed by product line based on historical experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Warranty accrual at beginning of period
 
$
18,552

 
$
16,305

 
$
19,247

 
$
14,856

Additions from acquisitions
 
40

 

 
40

 

Warranties issued during current period
 
2,501

 
3,597

 
4,261

 
6,746

Adjustments to pre-existing warranties
 
(331
)
 
397

 
(305
)
 
390

Reductions for settling warranties
 
(3,186
)
 
(2,063
)
 
(5,545
)
 
(3,643
)
Foreign currency translation
 
144

 
334

 
22

 
221

Warranty accrual at end of period
 
$
17,720

 
$
18,570

 
$
17,720

 
$
18,570



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. There were no outstanding interest rate swaps at March 31, 2012.

We use foreign currency forward contracts as cash flow hedges to effectively fix the exchange rates on future payments. To mitigate exposure in movements between various currencies, primarily the Philippine peso, we had outstanding foreign currency forwards with notional amounts of $24,115 at March 31, 2012. These contracts mature at various times through the fourth quarter of 2013.

These interest rate swaps and foreign currency forwards are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders’ equity as a component of Accumulated Other Comprehensive Income (Loss) (AOCI). These deferred gains and losses are reclassified into expense during the periods in which the related payments or receipts affect earnings. However, to the extent the interest rate swaps and foreign currency forwards are not perfectly effective in offsetting the change in the value of the payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was not material in 2012 or 2011.

10



Activity in AOCI related to these derivatives is summarized below:
 
 
Three Months Ended
 
Six Months Ended
 
 
March 31, 2012
 
April 2, 2011
 
March 31, 2012
 
April 2, 2011
Balance at beginning of period
 
$
(379
)
 
$186
 
$
(165
)
 
$
144

Net deferral in AOCI of derivatives:
 
 
 
 
 
 
 
 
Net increase (decrease) in fair value of derivatives
 
426

 
(158
)
 
195

 
45

Tax effect
 
(146
)
 
61

 
(72
)
 
(15
)
 
 
280

 
(97
)
 
123

 
30

Net reclassification from AOCI into earnings:
 
 
 
 
 
 
 
 
Reclassification from AOCI into earnings
 
21

 
(128
)
 
(72
)
 
(255
)
Tax effect
 

 
49

 
36

 
91

 
 
21

 
(79
)
 
(36
)
 
(164
)
Balance at end of period
 
$
(78
)
 
$
10

 
$
(78
)
 
$
10



Activity and classification of derivatives are as follows:




Net deferral in AOCI of derivatives (effective portion)



Three Months Ended

Six Months Ended

Statement of earnings classification

March 31, 2012

April 2, 2011

March 31, 2012

April 2, 2011
Interest rate swaps
Interest expense

$

 
$
(30
)
 
$

 
$
(58
)
Foreign currency forwards
Cost of sales

426

 
(128
)
 
195

 
103

Net gain (loss)


$
426

 
$
(158
)
 
$
195

 
$
45

 
 
 
Net reclassification from AOCI into earnings (effective portion)
 
 
 
Three Months Ended
 
Six Months Ended
 
Statement of earnings classification
 
March 31, 2012
 
April 2, 2011
 
March 31, 2012
 
April 2, 2011
Interest rate swaps
Interest expense
 
$

 
$
(105
)
 
$
(67
)
 
$
(210
)
Foreign currency forwards
Cost of sales
 
(21
)
 
233

 
139

 
465

Net (loss) gain

 
$
(21
)
 
$
128

 
$
72

 
$
255



11



Derivatives not designated as hedging instruments
We also have foreign currency exposure on intercompany balances that are denominated in a foreign currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the statements of earnings. To minimize foreign currency exposure, we had foreign currency forwards with notional amounts of $164,654 at March 31, 2012. The foreign currency forwards are recorded in the consolidated balance sheet at fair value and resulting gains or losses are recorded in the statements of earnings. We recorded the following gains and losses on foreign currency forwards which are included in other income or expense and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Net gain (loss)
 
$
811

 
$
1,648

 
$
(571
)
 
$
(675
)

Summary of derivatives

The fair value and classification of derivatives on the consolidated balance sheets are summarized as follows:

 
 
 
March 31,
2012
 
October 1,
2011
Derivatives designated as hedging instruments:
 
 
 
 
   Foreign currency forwards
Other current assets
 
$
16

 
$
25

 
 
 
$
16

 
$
25

   Foreign currency forwards
Other accrued liabilities
 
$
113

 
$
143

   Foreign currency forwards
Other long-term liabilities
 
12

 
81

   Interest rate swaps
Other accrued liabilities
 

 
102

 
 
 
$
125

 
$
326

Derivatives not designated as hedging instruments:
 
 
 
 
   Foreign currency forwards
Other current assets
 
$
308

 
$
1,524

 
 
 
$
308

 
$
1,524

   Foreign currency forwards
Other accrued liabilities
 
$
2,252

 
$
2,640

 
 
 
$
2,252

 
$
2,640




12



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, classified as Level 2 within the valuation hierarchy. Our Level 3 fair value liabilities represent contingent consideration recorded for acquisitions to be paid if various financial targets are met. The amounts recorded were calculated for each payment scenario in each period using an estimate of the probability of the future cash outflows. The varying contingent payments were then discounted to the present value at the weighted average cost of capital. Fair value is assessed on a quarterly basis, or whenever events or circumstances change that indicates an adjustment is required. The assessment includes an evaluation of the performance of the acquired business compared to previous expectations, changes to future projections and the probability of achieving the earn out targets.


13


The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis as of March 31, 2012:

 
 
Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forwards
 
Other current assets
 
$

 
$
324

 
$

 
$
324

 
 
 
 
$

 
$
324

 
$

 
$
324

Foreign currency forwards
 
Other accrued liabilities
 
$

 
$
2,365

 
$

 
$
2,365

Foreign currency forwards
 
Other long-term liabilities
 

 
12

 

 
12

Acquisition contingent consideration
 
Other accrued liabilities
 

 

 
4,713

 
4,713

Acquisition contingent consideration
 
Other long-term liabilities
 

 

 
1,230

 
1,230

 
 
 
 
$

 
$
2,377

 
$
5,943

 
$
8,320


The following is a roll forward of financial liabilities classified as Level 3 within the fair value hierarchy related to contingent consideration for acquisitions:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Balance at beginning of period
 
$
1,990

 
$
3,304

 
$
1,990

 
$
3,112

Additions from acquisitions
 
4,438

 

 
4,438

 

Increase in discounted future cash flows recorded as interest expense
 
44

 
107

 
88

 
299

Decrease in earn out provisions recorded as other income
 
(529
)
 
(995
)
 
(573
)
 
(995
)
Balance at end of period
 
$
5,943

 
$
2,416

 
$
5,943

 
$
2,416


Our only financial instrument for which the carrying value differs from its fair value is long-term debt. At March 31, 2012, the fair value of long-term debt was $667,406 compared to its carrying value of $653,587. 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.

Note 10 - Employee Benefit Plans

Net periodic benefit costs for U.S. pension plans consist of:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Service cost
 
$
5,837

 
$
5,642

 
$
11,674

 
$
11,284

Interest cost
 
7,446

 
7,171

 
14,892

 
14,342

Expected return on plan assets
 
(10,492
)
 
(9,772
)
 
(20,984
)
 
(19,544
)
Amortization of prior service cost
 
2

 
2

 
4

 
4

Amortization of actuarial loss
 
4,256

 
2,823

 
8,512

 
5,646

Pension expense for defined benefit plans
 
7,049

 
5,866

 
14,098

 
11,732

Pension expense for defined contribution plans
 
2,150

 
1,678

 
4,197

 
3,225

Total pension expense for U.S. plans
 
$
9,199

 
$
7,544

 
$
18,295

 
$
14,957


14



Net periodic benefit costs for non-U.S. pension plans consist of:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31, 2012
 
April 2, 2011
 
March 31, 2012
 
April 2, 2011
Service cost
 
$
1,005

 
$
1,188

 
$
2,021

 
$
2,360

Interest cost
 
1,502

 
1,553

 
2,969

 
3,079

Expected return on plan assets
 
(972
)
 
(971
)
 
(1,925
)
 
(1,925
)
Amortization of prior service credit
 
(13
)
 
(14
)
 
(29
)
 
(28
)
Amortization of actuarial loss
 
217

 
385

 
435

 
763

Pension expense for defined benefit plans
 
1,739

 
2,141

 
3,471

 
4,249

Pension expense for defined contribution plans
 
1,218

 
1,102

 
2,416

 
2,249

Total pension expense for non-U.S. plans
 
$
2,957

 
$
3,243

 
$
5,887

 
$
6,498


Net periodic benefit costs for post-retirement health care benefit plan consists of:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31, 2012
 
April 2, 2011
 
March 31, 2012
 
April 2, 2011
Service cost
 
$
82

 
$
122

 
$
164

 
$
245

Interest cost
 
196

 
275

 
392

 
551

Amortization of transition obligation
 
99

 
99

 
198

 
198

Amortization of actuarial loss
 

 
149

 

 
298

Total periodic post-retirement benefit cost
 
$
377

 
$
645

 
$
754

 
$
1,292



15



Activity in AOCI related to U.S. pension plans, non-U.S. pension plans and post-retirement health care benefit plans is summarized below:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Balance at beginning of period
 
$
(231,438
)
 
$
(180,158
)
 
$
(234,128
)
 
$
(182,336
)
Net reclassification from AOCI into earnings:
 
 
 
 
 
 
 
 
Reclassification from AOCI into earnings
 
4,529

 
3,051

 
8,918

 
6,492

Tax effect
 
(1,697
)
 
(1,264
)
 
(3,396
)
 
(2,527
)
 
 
2,832

 
1,787

 
5,522

 
3,965

Balance at end of period
 
$
(228,606
)
 
$
(178,371
)
 
$
(228,606
)
 
$
(178,371
)


Actual contributions for the six months ended March 31, 2012 and anticipated additional 2012 contributions to our defined benefit pension are as follows:

 
 
U.S. Plans
 
Non-U.S. Plans
 
Total
Actual
 
$
513

 
$
4,779

 
$
5,292

Anticipated
 
472

 
2,909

 
3,381

 
 
$
985

 
$
7,688

 
$
8,673


Note 11 - Income Taxes

The effective tax rates of 28.9% and 30.1% for the three and six months ended March 31, 2012 and 29.3% and 28.1% for the three and six months ended April 2, 2011 are lower than would be expected by applying the U.S. federal statutory tax rate to earnings before income taxes primarily as a result of a significant portion of our earnings that come from foreign operations with lower tax rates.



16



Note 12 - Shareholders’ Equity

The changes in shareholders’ equity for the six months ended March 31, 2012 are summarized as follows:

 
 
 
 
Number of Shares
 
 
Amount
 
Class A Common Stock
 
Class B Common Stock
COMMON STOCK
 
 
 
 
 
 
Beginning and end of period
 
$
51,280

 
43,534,575

 
7,745,138

Conversion of Class B to Class A
 

 
13,261

 
(13,261
)
End of Period
 
51,280

 
43,547,836

 
7,731,877

 
 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
Beginning of period
 
412,370

 
 
 
 
Equity-based compensation expense
 
4,790

 
 
 
 
Issuance of treasury shares at more than cost
 
817

 
 
 
 
Adjustment to market - SECT, and other
 
4,292

 
 
 
 
End of period
 
422,269

 
 
 
 
 
 
 
 
 
 
 
RETAINED EARNINGS
 
 
 
 
 
 
Beginning of period
 
1,016,754

 
 
 
 
Net earnings
 
71,794

 
 
 
 
End of period
 
1,088,548

 
 
 
 
 
 
 
 
 
 
 
TREASURY STOCK
 
 
 
 
 
 
Beginning of period
 
(74,479
)
 
(2,393,039
)
 
(3,305,971
)
Issuance of treasury shares
 
618

 
115,915

 

Purchase of treasury shares
 
(831
)
 
(20,131
)
 

End of period
 
(74,692
)
 
(2,297,255
)
 
(3,305,971
)
 
 
 
 
 
 
 
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
 
 
Beginning of period
 
(13,090
)
 

 
(395,470
)
Purchase of shares
 
(1,176
)
 

 
(27,567
)
Adjustment to market - SECT
 
(3,925
)
 

 

End of period
 
(18,191
)
 

 
(423,037
)
 
 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
Beginning of period
 
(200,944
)
 

 
 
Other comprehensive income
 
12,871

 
 
 
 
End of period
 
(188,073
)
 
 
 
 
TOTAL SHAREHOLDERS' EQUITY
 
$
1,281,141

 
41,250,581

 
4,002,869


17


The components of accumulated other comprehensive income (loss), net of tax, are as follows:

 
 
March 31,
2012
 
October 1,
2011
Cumulative foreign currency translation adjustment
 
$
40,611

 
$
33,349

Accumulated retirement liability adjustments
 
(228,606
)
 
(234,128
)
Accumulated loss on derivatives
 
(78
)
 
(165
)
Accumulated other comprehensive loss
 
$
(188,073
)
 
$
(200,944
)

Note 13 - Stock Employee Compensation 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. The shares in the SECT are not considered outstanding for purposes of calculating earnings per share. However, in accordance with the trust agreement governing the SECT, the SECT trustee votes all shares held by the SECT on all matters submitted to shareholders.

Note 14 - Earnings per Share

Basic and diluted weighted-average shares outstanding are as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Weighted-average shares outstanding - Basic
 
45,227,921

 
45,419,121

 
45,219,828

 
45,404,006

Dilutive effect of equity-based awards
 
553,666

 
639,870

 
510,949

 
578,766

Weighted-average shares outstanding - Diluted
 
45,781,587

 
46,058,991

 
45,730,777

 
45,982,772




18



Note 15 - Segment Information

Below are sales and operating profit by segment for the three and six months ended March 31, 2012 and
April 2, 2011 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
 
Six Months Ended
 
 
March 31,
2012
 
April 2,
2011
 
March 31,
2012
 
April 2,
2011
Net sales:
 
 
 
 
 
 
 
 
Aircraft Controls
 
$
236,388

 
$
206,030

 
$
467,468

 
$
401,981

Space and Defense Controls
 
89,811

 
87,791

 
178,205

 
183,537

Industrial Systems
 
168,015

 
155,851

 
326,100

 
299,596

Components
 
95,643

 
90,348

 
183,790

 
176,699

Medical Devices
 
35,113

 
34,206

 
70,025

 
66,847

Net sales
 
$
624,970

 
$
574,226

 
$
1,225,588

 
$
1,128,660

Operating profit (loss) and margins:
 
 
 
 
 
 
 
 
Aircraft Controls
 
$
22,783

 
$
19,168

 
$
47,610

 
$
39,363

 
 
9.6
%
 
9.3
 %
 
10.2
%
 
9.8
 %
Space and Defense Controls
 
9,903

 
13,083

 
22,646

 
28,898

 
 
11.0
%
 
14.9
 %
 
12.7
%
 
15.7
 %
Industrial Systems
 
19,272

 
15,858

 
35,098

 
30,265

 
 
11.5
%
 
10.2
 %
 
10.8
%
 
10.1
 %
Components
 
13,479

 
13,255

 
28,508

 
28,058

 
 
14.1
%
 
14.7
 %
 
15.5
%
 
15.9
 %
Medical Devices
 
1,489

 
(1,504
)
 
3,087

 
(2,995
)
 
 
4.2
%
 
(4.4
)%
 
4.4
%
 
(4.5
)%
Total operating profit
 
66,926

 
59,860

 
136,949

 
123,589

 
 
10.7
%
 
10.4
 %
 
11.2
%
 
11.0
 %
Deductions from operating profit:
 
 
 
 
 
 
 
 
Interest expense
 
8,636

 
8,970

 
17,182

 
18,181

Equity-based compensation expense
 
685

 
1,742

 
4,790

 
5,175

Corporate expenses and other
 
7,816

 
5,843

 
12,239

 
11,148

Earnings before income taxes
 
$
49,789

 
$
43,305

 
$
102,738

 
$
89,085


Note 16 - Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820) – Improving Disclosures About Fair Value Measurements.” This amendment requires separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The new disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted this standard in the first quarter of 2012. Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on our consolidated financial statements.

19



In December 2010, the FASB issued ASU No. 2010-28, “Intangibles - Goodwill and Other (ASC Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” This amendment modifies the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts, and it requires performing Step 2 if qualitative factors indicate that it is more likely than not that an impairment exists. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Any goodwill impairment resulting from the initial adoption of the amendments should be recorded as a cumulative effect adjustment to beginning retained earnings. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. We adopted this standard in the first quarter of 2012. The adoption of this new guidance did not have a material impact on our financial statements.

In December 2010, the FASB issued ASU No. 2010-29, “Business Combinations (ASC Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” This amendment expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This amendment is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We adopted this standard in the first quarter of 2012. Other than requiring additional disclosures, the adoption of this amendment did not have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The amendments also change certain fair value measurement principles and enhance the disclosure requirements, particularly for Level 3 fair value measurements. The amendments are effective during interim and annual periods beginning after December 15, 2011 and should be applied prospectively. Early adoption is not permitted. We adopted this standard during the second quarter of 2012. Other than requiring additional disclosures, the adoption of this amendment did not have a material impact on our consolidated financial statements.
In July 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The amendment eliminates the option to present other comprehensive income and its components in the statement of stockholders’ equity. The amendment requires all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment, which must be applied retrospectively, is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. We adopted this standard during the second quarter of 2012. Other than requiring a change in the format of our financial statement presentation, the adoption of this amendment did not have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments of 2011-05.” The amendment allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the guidance in place prior to the issuance of ASU No. 2011-05. While the Board is considering the operational concerns about presentation requirements for reclassification adjustments, it stated that the deferral did not affect the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The amendment, which must be applied retrospectively, is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. We adopted this standard during the second quarter of 2012. The adoption of this amendment did not have a material impact on our consolidated financial statements.



20


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 October 1, 2011. All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years.

OVERVIEW

We are a worldwide designer, manufacturer and integrator of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and defense, industrial and medical markets. Our aerospace and defense products and systems include military and commercial aircraft flight controls, satellite positioning controls, controls for steering tactical and strategic missiles, thrust vector controls for space launch vehicles, controls for gun aiming, stabilization and automatic ammunition loading for armored combat vehicles, and homeland security products. Our industrial products are used in a wide range of applications, including wind energy, pilot training simulators, injection molding machines, power generation, material and automotive testing, metal forming, heavy industry and oil exploration. Our medical products include infusion therapy pumps, enteral clinical nutrition pumps, slip rings used on CT scanners and motors used in sleep apnea devices. We operate under five segments, Aircraft Controls, Space and Defense Controls, Industrial Systems, Components and Medical Devices. Our principal manufacturing facilities are located in the United States, England, the Philippines, Germany, China, Italy, India, Costa Rica, the Netherlands, Luxembourg, Canada, Ireland and Japan.

We have long-term contracts with some of our customers. These contracts are predominantly within Aircraft Controls and Space and Defense Controls and represent 29% of our sales. 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, Components and Medical Devices segments, as well as with aftermarket activity.

We concentrate on providing our customers with products designed and manufactured to the highest quality standards. In achieving a leadership position in the high performance, precision controls market, we have capitalized on our strengths, which include:

superior technical competence and customer intimacy that breed market leadership,
customer diversity and broad product portfolio,
well-established international presence serving customers worldwide, and
proven ability to successfully integrate acquisitions.

We intend to increase our revenue base and improve our profitability and cash flows from operations by building on our market leadership positions, by strengthening our niche market positions in the principal markets that we serve and by extending our participation on the platforms we supply by providing more systems solutions. We also expect to maintain a balanced, diversified portfolio in terms of markets served, product applications, customer base and geographic presence. Our strategy to achieve our objectives includes:

maintaining our technological excellence by building upon our systems integration capabilities while solving our customers’ most demanding technical problems,
taking advantage of our global capabilities,
growing our profitable aftermarket business,
capitalizing on strategic acquisitions and opportunities,
developing products for new and emerging markets, and
striving for continuing cost improvements.

We face numerous challenges to improve shareholder value. These include but are not limited to: adjusting to dynamic global economic conditions that are influenced by governmental, industrial and commercial factors, foreign currency fluctuations, pricing pressures from customers, strong competition and increases in costs such as health care benefits. We address these challenges by focusing on strategic revenue growth and by continuing to improve operating efficiencies through various process and manufacturing initiatives and using low cost manufacturing facilities without compromising quality.

21


Acquisitions

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 on the balance sheet. The purchase price described for each acquisition below is net of any cash acquired and includes debt issued or assumed.

During the six months ended March 31, 2012, we completed two business combinations. We completed one business combination in our Components segment by acquiring Protokraft, LLC, based in Tennessee, for $13 million plus contingent consideration with an initial fair value of $4 million. Protokraft designs and manufacturers opto-electronic transceivers, ethernet switches and media converters packaged into rugged, environmentally-sealed connectors. We also completed one business combination in our Space and Defense Controls segment by acquiring Bradford Engineering, based in the Netherlands, for $13 million. Bradford is a developer and manufacturer of satellite equipment including attitude control, propulsion and thermal control subsystems.

In 2011, we completed three business combinations within two of our segments. We completed two business combinations within our Aircraft Controls segment, both of which are located in the U.S. We acquired Crossbow Technology Inc., based in California, for $32 million. Crossbow designs and manufactures acceleration sensors that are integrated into inertial navigation and guidance systems used in a variety of aerospace, defense and transportation applications. We also acquired a business that complements our military aftermarket business for $2 million. We completed one business combination within our Components segment by acquiring Animatics Corporation, based in California. The purchase price was $24 million, which includes 467,749 shares of Moog Class A common stock valued at $19 million on the day of closing. Animatics supplies integrated servos, linear actuators and control electronics that are used in a variety of industrial, medical and defense applications.

CRITICAL ACCOUNTING POLICIES

On an ongoing 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, reserves for inventory valuation, contract loss reserves, reviews for impairment of goodwill, purchase price allocations for business combinations, pension assumptions and deferred tax asset valuation allowances.

There have been no material changes in critical accounting policies in the current year from those disclosed in our 2011 Annual Report filed on Form 10-K.




22


CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
(dollars in millions, except per share data)
March 31,
2012
April 2,
2011
$
Variance
%
Variance
 
March 31,
2012
April 2,
2011
$
Variance
%
Variance
Net sales
$
625.0

$
574.2

$
50.8

9
 %
 
$
1,225.6

$
1,128.7

$
96.9

9
 %
Gross margin
29.5
%
29.1
%
 
 
 
30.2
%
29.4
%
 
 
Research and development expenses
$
26.9

$
28.2

$
(1.3
)
(4
)%
 
$
56.1

$
51.6

$
4.5

9
 %
Selling, general and administrative expenses as a percentage of sales
15.6
%
15.2
%
 
 
 
15.8
%
15.3
%
 
 
Interest expense
$
8.6

$
9.0

$
(0.4
)
(4
)%
 
$
17.2

$
18.2

$
(1.0
)
(5
)%
Effective tax rate
28.9
%
29.3
%
 
 
 
30.1
%
28.1
%
 
 
Net earnings
$
35.4

$
30.6

$
4.8

16
 %
 
$
71.8

$
64.0

$
7.8

12
 %
Diluted earnings per share
$
0.77

$
0.66

$
0.11

17
 %
 
$
1.57

$
1.39

$
0.18

13
 %

Net sales increased in the second quarter of 2012 compared to 2011. Sales increased in each of our segments with the largest increases coming from Aircraft Controls and Industrial Systems.

Net sales also increased in the first half of 2012 compared to 2011 with contributions from four of our five segments. The largest increases were in Aircraft Controls, Industrial Systems and Components.

Our gross margin was stronger in the second quarter of 2012 compared to the same period last year. We had stronger gross margins in each of our segments except Space and Defense Controls, which was negatively impacted by sales mix. Our gross margin was also stronger in the first half of 2012 compared to 2011, reflecting contract loss reserve charges that were $5 million less in the first half of 2012 compared to 2011, primarily within Aircraft Controls.

Research and development expenses decreased in the second quarter of 2012 due to reimbursements negotiated on commercial transport programs, offset by increased activity on the Airbus A350 program. The increase in research and development expenses for the first half of 2012 was mainly attributable to increased activity on the Airbus A350 program, partially offset by the commercial transport reimbursements in the second quarter of 2012.

Selling, general and administrative expenses as a percentage of sales were higher in the second quarter of 2012 and in the first half of 2012 compared to 2011. The increase was largely due to a move to a newly constructed facility in the U.K. within our Aircraft Controls segment.

Interest expense decreased in the second quarter and first half of 2012 compared to the same periods in 2011 mostly as a result of lower interest rates.

The effective tax rate for the second quarter of 2012 is lower than the same period last year primarily due to increased earnings in countries with lower tax rates. The effective tax rate for the first half of 2012 is higher than the first half of 2011 due to the expiration of a foreign tax credit as a result of a tax law change. In addition, the first quarter of 2011 included a catch up adjustment for research and development tax credits due to delayed passage of the legislation in 2010.

2012 Outlook – We expect sales in 2012 to increase $143 million, or 6%, to approximately $2.47 billion with increases in all of our segments. We expect operating margins to improve to 11.3% in 2012 compared to 10.6% in 2011 with increases in all of our segments except for Space and Defense Controls. We expect net earnings to increase to $152 million and diluted earnings per share to increase by 12% to $3.31.

23



SEGMENT RESULTS OF OPERATIONS AND OUTLOOK

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, number of employees or profit. Operating profit is reconciled to earnings before income taxes in Note 15 of the Notes to Consolidated Condensed Financial Statements included in this report.

Aircraft Controls

 
Three Months Ended
 
Six Months Ended
(dollars in millions)
March 31,
2012
April 2,
2011
$
Variance
%
Variance
 
March 31,
2012
April 2,
2011
$
Variance
%
Variance
Net sales - military aircraft
$
142.8

$
130.5

$
12.3

9
%
 
$
285.6

$
250.5

$
35.1

14
%
Net sales - commercial aircraft
93.6

75.6

18.0

24
%
 
181.9

151.5

30.4

20
%
 
$
236.4

$
206.1

$
30.3

15
%
 
$
467.5

$
402.0

$
65.5

16
%
Operating profit
$
22.8