XNYS:MOG.A Moog Inc Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:MOG.A (Moog Inc Class A): Fair Value Estimate
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XNYS:MOG.A (Moog Inc Class A): Fair Value Uncertainty
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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 June 30, 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 July 30, 2012 was:
Class A common stock, $1.00 par value 41,281,177 shares
Class B common stock, $1.00 par value 4,015,361 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
 
 
21-35

 
 
 
 
 
 
 
 
 
Item 3
 
 
35

 
 
 
 
 
 
 
 
 
Item 4
 
 
35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
35

 
 


 
 
 
 
 
 
Item 6
 
 
36

 
 
 
 
 
 
 
 
37




2


PART I FINANCIAL INFORMATION

Item 1. Financial Statements

MOOG Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
(dollars in thousands)
 
June 30,
2012
 
October 1,
2011
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
139,450

 
$
113,679

Receivables
 
710,100

 
655,805

Inventories
 
522,572

 
502,373

Other current assets
 
118,852

 
108,589

TOTAL CURRENT ASSETS
 
1,490,974

 
1,380,446

PROPERTY, PLANT AND EQUIPMENT, net of accumulated
 
 
 
 
depreciation of $543,178 and $513,151 respectively
 
528,357

 
503,872

GOODWILL
 
740,829

 
735,021

INTANGIBLE ASSETS, net
 
185,083

 
197,545

OTHER ASSETS
 
29,413

 
26,083

TOTAL ASSETS
 
$
2,974,656

 
$
2,842,967

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Short-term borrowings
 
$
103,699

 
$
9,283

Current installments of long-term debt
 
279

 
1,407

Accounts payable
 
161,847

 
165,893

Customer advances
 
112,236

 
97,331

Contract loss reserves
 
45,610

 
45,173

Other accrued liabilities
 
238,944

 
227,303

TOTAL CURRENT LIABILITIES
 
662,615

 
546,390

LONG-TERM DEBT, excluding current installments
 
 
 
 
Senior debt
 
238,811

 
336,161

Senior subordinated notes
 
378,584

 
378,596

LONG-TERM PENSION AND RETIREMENT OBLIGATIONS
 
333,730

 
331,050

DEFERRED INCOME TAXES
 
56,228

 
56,729

OTHER LONG-TERM LIABILITIES
 
2,000

 
2,150

TOTAL LIABILITIES
 
1,671,968

 
1,651,076

SHAREHOLDERS' EQUITY
 
 
 
 
Common stock
 
51,280

 
51,280

Other shareholders' equity
 
1,251,408

 
1,140,611

TOTAL SHAREHOLDERS' EQUITY
 
1,302,688

 
1,191,891

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
2,974,656

 
$
2,842,967

See accompanying Notes to Consolidated Condensed Financial Statements.
 
 
 
 

3



MOOG Inc.
Consolidated Condensed Statements of Earnings
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands, except per share data)
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
NET SALES
 
$
611,221

 
$
582,959

 
$
1,836,809

 
$
1,711,619

COST OF SALES
 
427,803

 
414,075

 
1,283,826

 
1,210,922

GROSS PROFIT
 
183,418

 
168,884

 
552,983

 
500,697

Research and development
 
28,198

 
25,723

 
84,285

 
77,352

Selling, general and administrative
 
93,668

 
89,663

 
287,163

 
263,008

Interest
 
8,566

 
8,831

 
25,748

 
27,012

Other
 
(373
)
 
(980
)
 
(310
)
 
(1,407
)
EARNINGS BEFORE INCOME TAXES
 
53,359

 
45,647

 
156,097

 
134,732

INCOME TAXES
 
14,488

 
11,809

 
45,432

 
36,872

NET EARNINGS
 
$
38,871

 
$
33,838

 
$
110,665

 
$
97,860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET EARNINGS PER SHARE
 
 
 
 
 
 
 
 
Basic
 
$
0.86

 
$
0.74

 
$
2.45

 
$
2.15

Diluted
 
$
0.85

 
$
0.73

 
$
2.42

 
$
2.13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
45,258,844

 
45,625,499

 
45,232,833

 
45,477,837

Diluted
 
45,707,738

 
46,187,026

 
45,723,097

 
46,050,856

See accompanying Notes to Consolidated Condensed Financial Statements.



4



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


 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
NET EARNINGS
 
$
38,871

 
$
33,838

 
$
110,665

 
$
97,860

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(21,759
)
 
8,308

 
(14,497
)
 
24,033

Retirement liability adjustment
 
3,262

 
1,880

 
8,784

 
5,845

Change in accumulated income (loss) on derivatives
 
208

 
13

 
295

 
(121
)

 
(18,289
)
 
10,201

 
(5,418
)
 
29,757

COMPREHENSIVE INCOME
 
$
20,582

 
$
44,039

 
$
105,247

 
$
127,617

See accompanying Notes to Consolidated Condensed Financial Statements.



5



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

 
 
Nine Months Ended
(dollars in thousands)
 
June 30,
2012
 
July 2,
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
110,665

 
$
97,860

Adjustments to reconcile net earnings to net cash provided
 
 
 
 
by operating activities:
 
 
 
 
Depreciation
 
48,574

 
47,953

Amortization
 
25,091

 
22,991

Provisions for non-cash losses on contracts, inventories and receivables
 
53,598

 
57,785

Equity-based compensation expense
 
5,540

 
5,919

Other
 
(5,671
)
 
2,240

Changes in assets and liabilities providing cash, excluding the
 
 
 
 
effects of acquisitions:
 
 
 
 
Receivables
 
(56,801
)
 
(51,566
)
Inventories
 
(33,427
)
 
(54,183
)
Accounts payable
 
(5,131
)
 
(5,090
)
Customer advances
 
14,377

 
27,196

Accrued expenses
 
(33,724
)
 
(32,193
)
Accrued income taxes
 
5,828

 
15,018

Pension assets and liabilities
 
19,795

 
(4,666
)
Other assets and liabilities
 
(5,207
)
 
(6,089
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
143,507

 
123,175

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Acquisitions of businesses, net of acquired cash
 
(25,673
)
 
(38,541
)
Purchase of property, plant and equipment
 
(79,011
)
 
(52,235
)
Other investing transactions
 
(5,377
)
 
195

NET CASH USED BY INVESTING ACTIVITIES
 
(110,061
)
 
(90,581
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net short term borrowings
 
94,956

 
6,092

Net repayments of revolving lines of credit
 
(97,506
)
 
(15,140
)
Net payments on long-term debt
 
(1,118
)
 
(7,806
)
Excess tax benefits from equity-based payment arrangements
 
368

 
135

Other financing transactions
 
(809
)
 
(5,081
)
NET CASH USED BY FINANCING ACTIVITIES
 
(4,109
)
 
(21,800
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
(3,566
)
 
4,036

INCREASE IN CASH AND CASH EQUIVALENTS
 
25,771

 
14,830

Cash and cash equivalents at beginning of period
 
113,679

 
112,421

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
139,450

 
$
127,251


 
 
 
 
CASH PAID FOR:
 
 
 
 
Interest
 
$
25,001

 
$
26,625

Income taxes, net of refunds
 
45,017

 
21,735

See accompanying Notes to Consolidated Condensed Financial Statements.

6

MOOG Inc.
Notes to Consolidated Condensed Financial Statements
Nine Months Ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 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 $4,809. 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 included 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

 
 
June 30,
2012
 
October 1,
2011
Raw materials and purchased parts
 
$
175,666

 
$
197,347

Work in progress
 
276,217

 
235,428

Finished goods
 
70,689

 
69,598

Total
 
$
522,572

 
$
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 June 30, 2012
Aircraft Controls
 
$
194,052

 
$

$
(3,865
)
 
$
431

 
$
190,618

Space and Defense Controls
 
121,416

 
5,374


 
(593
)
 
126,197

Industrial Systems
 
120,834

 


 
(2,673
)
 
118,161

Components
 
172,531

 
7,055

(147
)
 
862

 
180,301

Medical Devices
 
126,188

 


 
(636
)
 
125,552

Total
 
$
735,021

 
$
12,429

$
(4,012
)
 
$
(2,609
)
 
$
740,829


The components of acquired intangible assets are as follows:

 
 
 
 
June 30, 2012
 
October 1, 2011
 
 
Weighted - Average Life (years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Customer-related
 
9
 
$
165,585

 
$
(76,105
)
 
$
159,861

 
$
(64,420
)
Program-related
 
18
 
65,375

 
(12,443
)
 
64,887

 
(9,163
)
Technology-related
 
9
 
64,862

 
(33,743
)
 
61,276

 
(28,876
)
Marketing-related
 
9
 
24,113

 
(15,511
)
 
23,669

 
(13,828
)
Contract-related
 
3
 
3,263

 
(2,989
)
 
3,238

 
(2,156
)
Artistic-related
 
10
 
25

 
(25
)
 
25

 
(25
)
Acquired intangible assets
 
11
 
$
323,223

 
$
(140,816
)
 
$
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 $7,925 and $23,218 for the three and nine months ended June 30, 2012 and $7,252 and $21,207 for the three and nine months ended July 2, 2011. Based on acquired intangible assets recorded at June 30, 2012, amortization is expected to be approximately $30,901 in 2012, $27,348 in 2013, $24,486 in 2014, $21,473 in 2015 and $19,764 in 2016.                                         



8



Note 6 - Indebtedness

Short-term borrowings consist of:
 
 
 
 
 
June 30,
2012
 
October 1,
2011
Securitization program
$
94,200

 
$

Lines of credit
8,771

 
8,426

Other short-term debt
728

 
857

Short-term borrowings
$
103,699

 
$
9,283



On March 5, 2012, the Company entered into 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
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Warranty accrual at beginning of period
 
$
17,720

 
$
18,570

 
$
19,247

 
$
14,856

Additions from acquisitions
 

 
120

 
40

 
120

Warranties issued during current period
 
2,623

 
2,214

 
6,884

 
8,960

Adjustments to pre-existing warranties
 
160

 
6

 
(145
)
 
396

Reductions for settling warranties
 
(2,653
)
 
(1,508
)
 
(8,198
)
 
(5,151
)
Foreign currency translation
 
(237
)
 
145

 
(215
)
 
366

Warranty accrual at end of period
 
$
17,613

 
$
19,547

 
$
17,613

 
$
19,547



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 June 30, 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 $26,270 at June 30, 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 the first nine months of 2012 or 2011.

10




Activity in AOCI related to these derivatives is summarized below:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
Balance at beginning of period
 
$
(78
)
 
$
10

 
$
(165
)
 
$
144

Net deferral in AOCI of derivatives:
 
 
 
 
 
 
 
 
Net increase in fair value of derivatives
 
372

 
72

 
568

 
118

Tax effect
 
(173
)
 
(29
)
 
(245
)
 
(45
)
 
 
199

 
43

 
323

 
73

Net reclassification from AOCI into earnings:
 
 
 
 
 
 
 
 
Reclassification from AOCI into earnings
 
6

 
(49
)
 
(67
)
 
(304
)
Tax effect
 
3

 
19

 
39

 
110

 
 
9

 
(30
)
 
(28
)
 
(194
)
Balance at end of period
 
$
130

 
$
23

 
$
130

 
$
23



Activity and classification of derivatives are as follows:




Net deferral in AOCI of derivatives - effective portion



Three Months Ended

Nine Months Ended

Statement of earnings classification

June 30, 2012

July 2, 2011

June 30, 2012

July 2, 2011
Interest rate swaps
Interest expense

$

 
$
(25
)
 
$

 
$
(83
)
Foreign currency forwards
Cost of sales

372

 
97

 
568

 
201

Net gain


$
372

 
$
72

 
$
568

 
$
118


 
 
 
Net reclassification from AOCI into earnings - effective portion
 
 
 
Three Months Ended
 
Nine Months Ended

Statement of earnings classification
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
Interest rate swaps
Interest expense
 
$

 
$
(106
)
 
$
(67
)
 
$
(316
)
Foreign currency forwards
Cost of sales
 
(6
)
 
155

 
134

 
620

Net gain (loss)

 
$
(6
)
 
$
49

 
$
67

 
$
304



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 $163,803 at June 30, 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 losses on foreign currency forwards which are included in other income or expense and generally offset the gains from the foreign currency adjustments on the intercompany balances:

 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Net loss
 
$
(812
)
 
$
(158
)
 
$
(1,383
)
 
$
(833
)

Summary of derivatives

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

 
 
 
June 30,
2012
 
October 1,
2011
Derivatives designated as hedging instruments:
 
 
 
 
   Foreign currency forwards
Other current assets
 
$
308

 
$
25

   Foreign currency forwards
Other assets
 
52

 

 
 
 
$
360

 
$
25

   Foreign currency forwards
Other accrued liabilities
 
$
61

 
$
143

   Foreign currency forwards
Other long-term liabilities
 
25

 
81

   Interest rate swaps
Other accrued liabilities
 

 
102

 
 
 
$
86

 
$
326

Derivatives not designated as hedging instruments:
 
 
 
 
   Foreign currency forwards
Other current assets
 
$
1,948

 
$
1,524

 
 
 
$
1,948

 
$
1,524

   Foreign currency forwards
Other accrued liabilities
 
$
534

 
$
2,640

 

 
$
534

 
$
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 June 30, 2012:

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

 
$
2,256

 
$

 
$
2,256

Foreign currency forwards
 
Other assets
 

 
52

 

 
52

 
 
 
 
$

 
$
2,308

 
$

 
$
2,308

Foreign currency forwards
 
Other accrued liabilities
 
$

 
$
595

 
$

 
$
595

Foreign currency forwards
 
Other long-term liabilities
 

 
25

 

 
25

Acquisition contingent consideration
 
Other accrued liabilities
 

 

 
5,147

 
5,147

Acquisition contingent consideration
 
Other long-term liabilities
 

 

 
1,230

 
1,230

 
 
 
 
$

 
$
620

 
$
6,377

 
$
6,997


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
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Balance at beginning of period
 
$
5,943

 
$
2,416

 
$
1,990

 
$
3,112

Additions from acquisitions
 
371

 

 
4,809

 

Increase in discounted future cash flows recorded as interest expense
 
103

 
95

 
191

 
394

Decrease in earn out provisions recorded as other income
 
(40
)
 
(95
)
 
(613
)
 
(1,090
)
Balance at end of period
 
$
6,377

 
$
2,416

 
$
6,377

 
$
2,416


Our only financial instrument for which the carrying value differs from its fair value is long-term debt. At June 30, 2012, the fair value of long-term debt was $632,454 compared to its carrying value of $617,674. 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.




14




Note 10 - Employee Benefit Plans

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Service cost
 
$
5,837

 
$
5,642

 
$
17,511

 
$
16,925

Interest cost
 
7,446

 
7,171

 
22,338

 
21,513

Expected return on plan assets
 
(10,492
)
 
(9,772
)
 
(31,476
)
 
(29,317
)
Amortization of prior service cost
 
2

 
2

 
6

 
7

Amortization of actuarial loss
 
4,256

 
2,823

 
12,768

 
8,470

Pension expense for defined benefit plans
 
7,049

 
5,866

 
21,147

 
17,598

Pension expense for defined contribution plans
 
2,262

 
2,002

 
6,459

 
5,227

Total pension expense for U.S. plans
 
$
9,311

 
$
7,868

 
$
27,606

 
$
22,825


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

 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2012
 
July 2,
2011
 
June 30, 2012
 
July 2,
2011
Service cost
 
$
945

 
$
1,221

 
$
2,966

 
$
3,582

Interest cost
 
1,325

 
1,598

 
4,294

 
4,677

Expected return on plan assets
 
(889
)
 
(991
)
 
(2,814
)
 
(2,915
)
Amortization of prior service credit
 
(16
)
 
(15
)
 
(45
)
 
(44
)
Amortization of actuarial loss
 
207

 
393

 
642

 
1,156

Pension expense for defined benefit plans
 
1,572

 
2,206

 
5,043

 
6,456

Pension expense for defined contribution plans
 
1,168

 
1,286

 
3,584

 
3,535

Total pension expense for non-U.S. plans
 
$
2,740

 
$
3,492

 
$
8,627

 
$
9,991


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

 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Service cost
 
$
82

 
$
123

 
$
246

 
$
368

Interest cost
 
196

 
276

 
588

 
828

Amortization of transition obligation
 
99

 
99

 
297

 
296

Amortization of actuarial loss
 

 
149

 

 
446

Total periodic post-retirement benefit cost
 
$
377

 
$
647

 
$
1,131

 
$
1,938



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
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Balance at beginning of period
 
$
(228,606
)
 
$
(178,371
)
 
$
(234,128
)
 
$
(182,336
)
Net reclassification from AOCI into earnings:
 
 
 
 
 
 
 
 
Reclassification from AOCI into earnings
 
4,960

 
3,146

 
13,878

 
9,638

Tax effect
 
(1,698
)
 
(1,266
)
 
(5,094
)
 
(3,793
)

 
3,262

 
1,880

 
8,784

 
5,845

Balance at end of period
 
$
(225,344
)
 
$
(176,491
)
 
$
(225,344
)
 
$
(176,491
)


Actual contributions for the nine months ended June 30, 2012 and anticipated additional 2012 contributions to our defined benefit pension plans are as follows:

 
 
U.S. Plans
 
Non-U.S. Plans
 
Total
Actual
 
$
805

 
$
5,593

 
$
6,398

Anticipated
 
223

 
1,298

 
1,521

 
 
$
1,028

 
$
6,891

 
$
7,919


Note 11 - Income Taxes

The effective tax rates of 27.2% and 29.1% for the three and nine months ended June 30, 2012 and 25.9% and 27.4% for the three and nine months ended July 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 nine months ended June 30, 2012 are summarized as follows:

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

 
43,534,575

 
7,745,138

Conversion of Class B to Class A
 

 
31,997

 
(31,997
)
End of Period
 
51,280

 
43,566,572

 
7,713,141

 
 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
Beginning of period
 
412,370

 
 
 
 
Equity-based compensation expense
 
5,540

 
 
 
 
Issuance of treasury shares at more than cost
 
895

 
 
 
 
Adjustment to market - SECT, and other
 
3,505

 
 
 
 
End of period
 
422,310

 
 
 
 
 
 
 
 
 
 
 
RETAINED EARNINGS
 
 
 
 
 
 
Beginning of period
 
1,016,754

 
 
 
 
Net earnings
 
110,665

 
 
 
 
End of period
 
1,127,419

 
 
 
 
 
 
 
 
 
 
 
TREASURY STOCK
 
 
 
 
 
 
Beginning of period
 
(74,479
)
 
(2,393,039
)
 
(3,305,971
)
Issuance of treasury shares
 
681

 
127,775

 

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

End of period
 
(74,629
)
 
(2,285,395
)
 
(3,305,971
)
 
 
 
 
 
 
 
STOCK EMPLOYEE COMPENSATION TRUST (SECT)
 
 
 
 
 
 
Beginning of period
 
(13,090
)
 

 
(395,470
)
Issuance of shares
 
773

 

 
20,338

Purchase of shares
 
(1,876
)
 

 
(44,480
)
Adjustment to market - SECT
 
(3,137
)
 

 

End of period
 
(17,330
)
 

 
(419,612
)
 
 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
Beginning of period
 
(200,944
)
 

 
 
Other comprehensive loss
 
(5,418
)
 
 
 
 
End of period
 
(206,362
)
 
 
 
 
TOTAL SHAREHOLDERS' EQUITY
 
$
1,302,688

 
41,281,177

 
3,987,558


17



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

 
 
June 30,
2012
 
October 1,
2011
Cumulative foreign currency translation adjustment
 
$
18,852

 
$
33,349

Accumulated retirement liability adjustments
 
(225,344
)
 
(234,128
)
Accumulated gain (loss) on derivatives
 
130

 
(165
)
Accumulated other comprehensive loss
 
$
(206,362
)
 
$
(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
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Weighted-average shares outstanding - Basic
 
45,258,844

 
45,625,499

 
45,232,833

 
45,477,837

Dilutive effect of equity-based awards
 
448,894

 
561,527

 
490,264

 
573,019

Weighted-average shares outstanding - Diluted
 
45,707,738

 
46,187,026

 
45,723,097

 
46,050,856




18




Note 15 - Segment Information

Below are sales and operating profit by segment for the three and nine months ended June 30, 2012 and
July 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
 
Nine Months Ended
 
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Net sales:
 
 
 
 
 
 
 
 
Aircraft Controls
 
$
242,220

 
$
220,691

 
$
709,688

 
$
622,672

Space and Defense Controls
 
87,138

 
79,689

 
265,343

 
263,226

Industrial Systems
 
157,871

 
156,404

 
483,971

 
456,000

Components
 
90,335

 
87,940

 
274,125

 
264,639

Medical Devices
 
33,657

 
38,235

 
103,682

 
105,082

Net sales
 
$
611,221

 
$
582,959

 
$
1,836,809

 
$
1,711,619

Operating profit (loss) and margins:
 
 
 
 
 
 
 
 
Aircraft Controls
 
$
27,826

 
$
22,935

 
$
75,436

 
$
62,298


 
11.5
%
 
10.4
%
 
10.6
%
 
10.0
 %
Space and Defense Controls
 
9,892

 
8,751

 
32,538

 
37,649


 
11.4
%
 
11.0
%
 
12.3
%
 
14.3
 %
Industrial Systems
 
15,880

 
13,864

 
50,978

 
44,129


 
10.1
%
 
8.9
%
 
10.5
%
 
9.7
 %
Components
 
12,657

 
13,365

 
41,165

 
41,423


 
14.0
%
 
15.2
%
 
15.0
%
 
15.7
 %
Medical Devices
 
1,358

 
1,157

 
4,445

 
(1,838
)

 
4.0
%
 
3.0
%
 
4.3
%
 
(1.7
)%
Total operating profit
 
67,613

 
60,072

 
204,562

 
183,661


 
11.1
%
 
10.3
%
 
11.1
%
 
10.7
 %
Deductions from operating profit:
 
 
 
 
 
 
 
 
Interest expense
 
8,566

 
8,831

 
25,748

 
27,012

Equity-based compensation expense
 
750

 
744

 
5,540

 
5,919

Corporate expenses and other
 
4,938

 
4,850

 
17,177

 
15,998

Earnings before income taxes
 
$
53,359

 
$
45,647

 
$
156,097

 
$
134,732

















19



Note 16 - Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (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.

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 current 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.

21




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.

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 nine months ended June 30, 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 $5 million. Protokraft designs and manufactures 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.

On July 31, 2012, we completed a business combination in our Space and Defense Controls segment by acquiring In-Space Propulsion for $46 million. In-Space Propulsion has locations in New York, California, Ireland and the United Kingdom and is a developer and manufacturer of liquid propulsion systems and components for satellites and missile defense systems.

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
 
Nine Months Ended
(dollars in millions, except per share data)
June 30,
2012
July 2,
2011
$
Variance
%
Variance
 
June 30,
2012
July 2,
2011
$
Variance
%
Variance
Net sales
$
611.2

$
583.0

$
28.2

5
 %
 
$
1,836.8

$
1,711.6

$
125.2

7
 %
Gross margin
30.0
%
29.0
%
 
 
 
30.1
%
29.3
%
 
 
Research and development expenses
$
28.2

$
25.7

$
2.5

10
 %
 
$
84.3

$
77.4

$
6.9

9
 %
Selling, general and administrative expenses as a percentage of sales
15.3
%
15.4
%
 
 
 
15.6
%
15.4
%
 
 
Interest expense
$
8.6

$
8.8

$
(0.2
)
(2
)%
 
$
25.7

$
27.0

$
(1.3
)
(5
)%
Effective tax rate
27.2
%
25.9
%
 
 
 
29.1
%
27.4
%
 
 
Net earnings
$
38.9

$
33.8

$
5.1

15
 %
 
$
110.7

$
97.9

$
12.8

13
 %
Diluted earnings per share
$
0.85

$
0.73

$
0.12

16
 %
 
$
2.42

$
2.13

$
0.29

14
 %

Net sales increased in the third quarter and first nine months of 2012 compared to the same periods in 2011. Increases came from our Aircraft Controls, Space and Defense Controls, Industrial Systems and Components segments and were offset by declines in Medical Devices.

Gross margin increased in the third quarter and first nine months of 2012 compared to the same periods last year. We had stronger gross margins in Aircraft Controls, Industrial Systems and Medical Devices, while gross margins were fairly flat in Space and Defense Controls and Components.

Research and development expenses increased in the third quarter of 2012 due to increased activity on the Airbus A350 program. The increase for the first nine months of 2012 was mainly attributable to increased activity on the Airbus A350 program, partially offset by reimbursements negotiated on commercial transport programs during the first nine months of 2011.

Interest expense decreased mostly as a result of lower interest rates in both the third quarter and first nine months of 2012 compared to the same periods in 2011.

The effective tax rate for the third quarter increased due to a mix in foreign earnings. The effective tax rate for the first nine months of 2012 is higher than the first nine months 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 6% to $2.46 billion reflecting increases in our Aircraft Controls, Components, Space and Defense Controls and Industrial Systems segments and partially offset by slight decreases in our Medical Devices segment. We expect operating margins to increase 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.

2013 Outlook We expect sales in 2013 to increase between 6% and 8% to between $2.61 billion and $2.66 billion, reflecting both strength in most of our segments as well as concerns in the macro-economic picture within our Industrial Systems segment. We expect operating margins between 11.3% and 11.7%. We expect margin expansion in Aircraft Controls, Components and Medical Devices and a slight margin decrease in our Space and Defense Controls segment. We expect our Industrial Systems segment operating margin to be between 9.9% and 11.4%. We expect net earnings to increase between $161 and $170 million and diluted earnings per share to increase between 6% and 12% to between $3.50 and $3.70. Given the uncertainty of sequestration reductions (as noted in Economic Conditions and Market Trends) the preceding outlook excludes the effect for fiscal 2013.

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
 
Nine Months Ended
(dollars in millions)
June 30,
2012
July 2,
2011
$
Variance
%
Variance
 
June 30,
2012
July 2,
2011
$
Variance
%
Variance
Net sales - military aircraft
$
141.7

$
134.2

$
7.5

6
%
 
$
427.3

$
384.7

$
42.6

11
%
Net sales - commercial aircraft
100.5

86.5

14.0

16
%
 
282.4

238.0

44.4

19
%
 
$
242.2

$
220.7

$
21.5

10
%
 
$