MOOG INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended October 2, 2010 |
| OR | ||
| o | 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 |
(Exact Name of Registrant as Specified in its Charter)
| New York | 16-0757636 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| East Aurora, New York | 14052-0018 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code:
(716) 652-2000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Class A Common Stock, $1.00 Par Value | New York Stock Exchange | |
| Class B Common Stock, $1.00 Par Value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes
o
No
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulations 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
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
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 definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
þ
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
Act).
Yes
o
No
þ
The aggregate market value of the common stock outstanding and held by non-affiliates (as defined
in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price
of the common stock on the New York Stock Exchange on April 2, 2010, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $1,424 million.
The number of shares of common stock outstanding as of the close of business on November 23, 2010
was:
Class A 41,310,242; Class B 4,098,674.
Class A 41,310,242; Class B 4,098,674.
Portions of the 2010 Proxy Statement to Shareholders (“2010 Proxy”) are incorporated by reference
into Part III of this Form 10-K.
29
MOOG Inc.
FORM 10-K INDEX
Disclosure Regarding Forward-Looking Statements
Information included or incorporated by reference herein that does not consist of historical
facts, including statements accompanied by or containing words such as “may,” “will,” “should,”
“believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,”
“predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are
forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and are subject to several factors, risks and uncertainties, the
impact or occurrence of which could cause actual results to differ materially from the results
described in the forward-looking statements. Certain of these factors, risks and uncertainties are
discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and are set forth below:
| • | fluctuations in general business cycles for commercial aircraft, military aircraft, space and defense products, industrial capital goods and medical devices; | ||
| • | our dependence on government contracts that may not be fully funded or may be terminated; | ||
| • | our dependence on certain major customers, such as The Boeing Company and Lockheed Martin, for a significant percentage of our sales; | ||
| • | delays by our customers in the timing of introducing new products, which may affect our earnings and cash flow; | ||
| • | the possibility that the demand for our products may be reduced if we are unable to adapt to technological change; | ||
| • | intense competition, which may require us to lower prices or offer more favorable terms of sale; |
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| • | our indebtedness, which could limit our operational and financial flexibility; | ||
| • | the possibility that new product and research and development efforts may not be successful, which could reduce our sales and profits; | ||
| • | increased cash funding requirements for pension plans, which could occur in future years based on assumptions used for our defined benefit pension plans, including returns on plan assets and discount rates; | ||
| • | a write-off of all or part of our goodwill or intangible assets, which could adversely affect our operating results and net worth and cause us to violate covenants in our bank agreements; | ||
| • | the potential for substantial fines and penalties or suspension or debarment from future contracts in the event we do not comply with regulations relating to defense industry contracting; | ||
| • | the potential for cost overruns on development jobs and fixed-price contracts and the risk that actual results may differ from estimates used in contract accounting; | ||
| • | the possibility that our subcontractors may fail to perform their contractual obligations, which may adversely affect our contract performance and our ability to obtain future business; | ||
| • | our ability to successfully identify and consummate acquisitions, and integrate the acquired businesses and the risks associated with acquisitions, including that the acquired businesses do not perform in accordance with our expectations, and that we assume unknown liabilities in connection with acquired businesses for which we are not indemnified; | ||
| • | our dependence on our management team and key personnel; | ||
| • | the possibility of a catastrophic loss of one or more of our manufacturing facilities; | ||
| • | the possibility that future terror attacks, war or other civil disturbances could negatively impact our business; | ||
| • | that our operations in foreign countries could expose us to political risks and adverse changes in local, legal, tax and regulatory schemes; | ||
| • | the possibility that government regulation could limit our ability to sell our products outside the United States; | ||
| • | product quality or patient safety issues with respect to our medical devices business that could lead to product recalls, withdrawal from certain markets, delays in the introduction of new products, sanctions, litigation, declining sales or actions of regulatory bodies and government authorities; | ||
| • | the impact of product liability claims related to our products used in applications where failure can result in significant property damage, injury or death and in damage to our reputation; | ||
| • | changes in medical reimbursement rates of insurers to medical service providers, which could affect sales of our medical products; | ||
| • | the possibility that litigation results may be unfavorable to us; | ||
| • | our ability to adequately enforce our intellectual property rights and the possibility that third parties will assert intellectual property rights that prevent or restrict our ability to manufacture, sell, distribute or use our products or technology; | ||
| • | foreign currency fluctuations in those countries in which we do business and other risks associated with international operations; | ||
| • | the cost of compliance with environmental laws; | ||
| • | the risk of losses resulting from maintaining significant amounts of cash and cash equivalents at financial institutions that are in excess of amounts insured by governments; | ||
| • | the inability to modify, to refinance or to utilize amounts presently available to us under our credit facilities given uncertainties in the credit markets; | ||
| • | our ability to meet the covenants under our credit facilities since a breach of any of these covenants could result in a default under our credit agreements; and | ||
| • | our customers’ inability to continue operations or to pay us due to adverse economic conditions or their inability to access available credit. |
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The Registrant, Moog Inc., a New York corporation formed in 1951, is referred to in this Annual
Report on Form 10-K as “Moog” or in the nominative “we” or the possessive “our.”
Unless otherwise noted or the context otherwise requires, all references to years in this report
are to fiscal years.
Description of the Business.
Moog is a worldwide designer, manufacturer and integrator of high
performance precision motion and fluid controls and systems for a broad range of applications in
aerospace and defense, industrial and medical markets. We have five operating segments: Aircraft
Controls, Space and Defense Controls, Industrial Systems, Components and Medical Devices.
Additional information describing the business and comparative segment revenues, operating profits
and related financial information for 2010, 2009 and 2008 are provided in Note 17 of Item 8,
Financial Statements and Supplementary Data of this report.
Distribution.
Our sales and marketing organization consists of individuals possessing highly
specialized technical expertise. This expertise is required in order to effectively evaluate a
customer’s precision control requirements and to facilitate communication between the customer and
our engineering staff. Our sales staff is the primary contact with customers. Manufacturers’
representatives are used to cover certain domestic aerospace markets. Distributors are used
selectively to cover certain industrial and medical markets.
Industry and Competitive Conditions.
We experience considerable competition in our aerospace and
defense, industrial and medical markets. We believe that the principal points of competition in our
markets are product quality, price, design and engineering capabilities, product development,
conformity to customer specifications, timeliness of delivery, effectiveness of the distribution
organization and quality of support after the sale. We believe we compete effectively on all of
these bases. Principal competitors in our five operating segments include:
| • | Aircraft Controls: Parker Hannifin, Nabtesco, Goodrich, Liebherr, Curtiss-Wright, Woodward Governor and Hamilton Sundstrand. | ||
| • | Space and Defense Controls: Honeywell, Parker Hannifin, Vacco, Valvetech, Marotta, Sabca, Curtiss-Wright, ESW, Aerojet, Valcor, Aeroflex, Hamilton Sundstrand, Limitorque, Sargeant Industries, RVision, Directed Perception, ATA Engineering, Barry Controls, RUAG, Woodward Governor, Sierra-Nevada, Videotec and Lord Corp. | ||
| • | Industrial Systems: Bosch Rexroth, Danaher, Baumueller, Siemens, SSB and Hydraudyne. | ||
| • | Components: Danaher, Allied Motion, Ametek, Woodward MPC, Axsys, Schleifring, Airflyte, Smiths, Kearfott and Stemmann. | ||
| • | Medical Devices: B. Braun, Carefusion, Smiths Medical, Hospira, Alcon, Baxter International, CME, I-Flow, Covidien and Ross (Abbott). |
Government Contracts.
All U.S. Government contracts are subject to termination by the Government.
In 2010, sales under U.S. Government contracts represented 35% of total sales and were primarily
within Aircraft Controls, Space and Defense Controls and Components.
Backlog.
Substantially all backlog will be realized as sales in the next twelve months. See the
discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations of this report.
Raw Materials.
Materials, supplies and components are purchased from numerous suppliers. We believe
the loss of any one supplier, although potentially disruptive in the short-term, would not
materially affect our operations in the long-term.
Working Capital.
See the discussion on operating cycle in Note 1 of Item 8, Financial Statements
and Supplementary Data of this report.
Seasonality.
Our business is generally not seasonal; however, certain markets, such as wind energy,
do experience seasonal variations in sales levels.
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Patents
. We maintain a patent portfolio of issued or pending patents and patent applications
worldwide that generally includes the U.S., Europe, China, Japan and India. The portfolio includes
patents that relate to electrohydraulic, electromechanical, electronics, hydraulics, components and
methods of operation and manufacture as related to motion control and actuation systems. The
portfolio also includes patents for recently acquired products related to wind turbines, robotics,
surveillance/security, vibration control and medical devices. We do not consider any one or more of
these patents or patent applications to be material in relation to our business as a whole. The
patent portfolio related to certain medical devices is significant to our position in this market
as several of these products work exclusively together, and provide us future revenue opportunities.
Research Activities.
Research and development activity has been, and continues to be, significant
for us. Research and development expense was at least $100 million in each of the last three years.
Employees.
On October 2, 2010, we employed 10,117 full-time employees.
Customers.
Our principal customers are Original Equipment Manufacturers, or OEMs, and end users for
whom we provide aftermarket support. Aerospace and defense OEM customers collectively represented
approximately 48% of 2010 sales. The majority of these sales are to a small number of large
companies. Due to the long-term nature of many of the programs, many of our relationships with
aerospace and defense OEM customers are based on long-term agreements. Our OEM sales of industrial
controls and medical devices, which represented approximately 35% of 2010 sales, are to a wide
range of global customers and are normally based on lead times of 90 days or less. We also provide
aftermarket support, consisting of spare and replacement parts and repair and overhaul services,
for all of our product applications. Our major aftermarket customers are the U.S. Government and
commercial airlines. In 2010, aftermarket sales accounted for 17% of total sales.
Customers in our five operating segments include:
| • | Aircraft Controls: Boeing, Lockheed Martin, Airbus, BAE, Bombardier, Gulfstream, Honeywell, Northrop Grumman and the U.S. Government. | ||
| • | Space and Defense Controls: Lockheed Martin, Raytheon, Orbital Sciences, BAE, United Technologies-Pratt & Whitney Rocketdyne, Alliant Techsystems and General Dynamics. | ||
| • | Industrial Systems: RePower AG, United Power (GUP), FlightSafety, CAE, Arburg, Metso and Schlumberger. | ||
| • | Components: Respironics, Raytheon, Lockheed Martin, Philips Medical and the U.S. Government. | ||
| • | Medical Devices: B. Braun, Danone and Abbott. |
International Operations.
Our operations outside the United States are conducted through
wholly-owned foreign subsidiaries and are located predominantly in Europe and the Asia-Pacific
region. See Note 17 of Item 8, Financial Statements and Supplementary Data, of this report for
information regarding sales by geographic area and Exhibit 21 of Item 15, Exhibits and Financial
Statement Schedules, of this report for a list of subsidiaries. Our international operations are
subject to the usual risks inherent in international trade, including currency fluctuations, local
government contracting regulations, local governmental restrictions on foreign investment and
repatriation of profits, exchange controls, regulation of the import and distribution of foreign
goods, as well as changing economic and social conditions in countries in which our operations are
conducted.
Environmental Matters.
See the discussion in Note 18 of Item 8, Financial Statements and
Supplementary Data of this report.
Website Access to Information.
Our internet address is www.moog.com. We make our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable,
amendments to those reports, available on the investor information portion of our website. The
reports are free of charge and are available as soon as reasonably practicable after they are filed
with the Securities and Exchange Commission. We have posted our Corporate Governance guidelines,
Board committee charters and code of ethics to the investor information portion of our website.
This information is available in print to any shareholder upon request. All requests for these
documents should be made to Moog’s Manager of Investor Relations by calling 716-687-4225.
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Executive Officers of the Registrant.
Other than John B. Drenning, the principal occupations of our
officers for the past five years have been their employment with us. John B. Drenning’s principal
occupation is partner in the law firm of Hodgson Russ LLP.
On February 11, 2008, Jennifer Walter was named Controller and Principal Accounting Officer.
Previously, she was Director of Financial Planning and Analysis.
On November 28, 2007, Donald R. Fishback was named Vice President of Finance. Previously, he was
Controller and Principal Accounting Officer.
On November 28, 2007, John R. Scannell was named Vice President and Chief Financial Officer.
Previously, he was Vice President and Director of Contracts and Pricing, a position he held since
2006. Prior to that, he was the Program Director for the Boeing 787.
On January 10, 2006, Sasidhar Eranki was named Vice President and continues as Deputy General
Manager of the Aircraft Group and Director of Engineering.
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| Executive Officers | Age | Year First Elected Officer | ||||||
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Robert T. Brady
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Chairman of the Board; President; Chief Executive Officer;
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Director; Member, Executive Committee
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69 | 1967 | ||||||
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Richard A. Aubrecht
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Vice Chairman of the Board; Vice President - Strategy and Technology;
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Director; Member, Executive Committee
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66 | 1980 | ||||||
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Joe C. Green
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Executive Vice President; Chief Administrative Officer;
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Director; Member, Executive Committee
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69 | 1973 | ||||||
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Stephen A. Huckvale
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Vice President
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61 | 1990 | ||||||
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Martin J. Berardi
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Vice President
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54 | 2000 | ||||||
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Warren C. Johnson
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Vice President
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51 | 2000 | ||||||
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Jay K. Hennig
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Vice President
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50 | 2002 | ||||||
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Lawrence J. Ball
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Vice President
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56 | 2004 | ||||||
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Harald E. Seiffer
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Vice President
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51 | 2005 | ||||||
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Sasidhar Eranki
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Vice President
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56 | 2006 | ||||||
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John R. Scannell
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Vice President; Chief Financial Officer
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47 | 2006 | ||||||
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Donald R. Fishback
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Vice President - Finance
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54 | 1985 | ||||||
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Jennifer Walter
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Controller; Principal Accounting Officer
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39 | 2008 | ||||||
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Timothy P. Balkin
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Treasurer; Assistant Secretary
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51 | 2000 | ||||||
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John B. Drenning
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Secretary
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73 | 1989 | ||||||
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The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and
events, which may cause our operating results to fluctuate.
The markets we serve are sensitive to
fluctuations in general business cycles and domestic and foreign economic conditions and events.
For example, demand for our industrial systems products is dependent upon several factors,
including capital investment, product innovations, economic growth, cost-reduction efforts and
technology upgrades. In addition, the commercial airline industry is highly cyclical and sensitive
to fuel price increases, labor disputes and economic conditions. These factors could result in a
reduction in the amount of air travel. A reduction in air travel could reduce orders for new
aircraft for which we supply flight controls and for spare parts and services and reduce our sales.
A reduction in air travel may also result in our commercial airline customers being unable to pay
our invoices on a timely basis or at all.
We depend heavily on government contracts that may not be fully funded or may be terminated, and
the failure to receive funding or the termination of one or more of these contracts could reduce
our sales and increase our costs.
Sales to the U.S. Government and its prime contractors and
subcontractors represent a significant portion of our business. In 2010, sales under U.S.
Government contracts represented 35% of our total sales, primarily within Aircraft Controls, Space
and Defense Controls and Components. Sales to foreign governments represented 8% of our total
sales. We expect that the percentage of our revenues from government contracts will continue to be
substantial in the future. Government programs can be structured into a series of individual
contracts. The funding of these programs is generally subject to annual congressional
appropriations, and congressional priorities are subject to change. In addition, government
expenditures for defense programs may decline or these defense programs may be terminated. A
decline in government expenditures may result in a reduction in the volume of contracts awarded to
us. We have resources applied to specific government contracts and if any of those contracts were
terminated, we may incur substantial costs redeploying those resources.
If our subcontractors or suppliers fail to perform their contractual obligations, our prime
contract performance and our ability to obtain future business could be materially and adversely
impacted.
Many of our contracts involve subcontracts with other companies upon which we rely to
perform a portion of the services we must provide to our customers. There is a risk that we may
have disputes with our subcontractors, including disputes regarding the quality and timeliness of
work performed by the subcontractor, customer concerns about the subcontractor, our failure to
extend existing task orders or issue new task orders under a subcontract or our hiring of personnel
of a subcontractor. Failure by our subcontractors to satisfactorily provide on a timely basis the
agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our
ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies
could result in a customer terminating our contract for default. A default termination could expose
us to liability and substantially impair our ability to compete for future contracts and orders. In
addition, a delay in our ability to obtain components and equipment parts from our suppliers may
affect our ability to meet our customers’ needs and may have an adverse effect upon our
profitability.
We make estimates in accounting for long-term contracts, and changes in these estimates may have
significant impacts on our earnings.
We have long-term contracts with some of our customers. These
contracts are predominantly within Aircraft Controls and Space and Defense Controls. Revenue
representing 30% of 2010 sales was accounted for using the percentage of completion, cost-to-cost
method of accounting. Under this method, we recognize revenue as work progresses toward completion
as determined by the ratio of cumulative costs incurred to date to estimated total contract costs
at completion, multiplied by the total estimated contract revenue, less cumulative revenue
recognized in prior periods.
Changes in estimates affecting sales, costs and profits are recognized in the period in which the
change becomes known using the cumulative catch-up method of accounting, resulting in the
cumulative effect of changes reflected in the period. A significant change in an estimate on one or
more contracts could have a material effect on our results of operations. For contracts with
anticipated losses at completion, we establish a provision for the entire amount of the estimated
remaining loss and charge it against income in the period in which the loss becomes known. Amounts
representing performance incentives, penalties, contract claims or change orders are considered in
estimating revenues, costs and profits when they can be reliably estimated and realization is
considered probable.
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We enter into fixed-price contracts, which could subject us to losses if we have cost overruns.
In
2010, fixed-price contracts represented 82% of our sales that were accounted for using the
percentage of completion, cost-to-cost method of accounting. On fixed-price contracts, we agree to
perform the scope of work specified in the contract for a predetermined price. Depending on the
fixed price negotiated, these contracts may provide us with an opportunity to achieve higher
profits based on the relationship between our total contract costs and the contract’s fixed price.
However, we bear the risk that increased or unexpected costs may reduce our profit or cause us to
incur a loss on the contract, which could reduce our net sales and net earnings. Loss reserves are
most commonly associated with fixed-price contracts that involve the design and development of new
and unique controls or control systems to meet the customer’s specifications.
Contracting on government programs is subject to significant regulation, including rules related to
bidding, billing and accounting kickbacks and false claims, and any non-compliance could subject us
to fines and penalties or possible debarment.
Like all government contractors, we are subject to
risks associated with this contracting. These risks include the potential for substantial civil and
criminal fines and penalties. These fines and penalties could be imposed for failing to follow
procurement integrity and bidding rules, employing improper billing practices or otherwise failing
to follow cost accounting standards, receiving or paying kickbacks or filing false claims. We have
been, and expect to continue to be, subjected to audits and investigations by U.S. and foreign
government agencies and authorities. The failure to comply with the terms of our government
contracts could harm our business reputation. It could also result in our progress payments being
withheld or our suspension or debarment from future government contracts.
If we are unable to adapt to technological change, demand for our products may be reduced.
The
technologies related to our products have undergone, and in the future may undergo, significant
changes. To succeed in the future, we will need to continue to design, develop, manufacture,
assemble, test, market and support new products and enhancements on a timely and cost-effective
basis. Historically, our technology has been developed through customer-funded and internally
funded research and development and through business acquisitions. In addition, our competitors may
develop technologies and products that are more effective than those we develop or that render our
technology and products obsolete or uncompetitive. Furthermore, our products could become
unmarketable if new industry standards emerge. We may have to modify our products significantly in
the future to remain competitive.
Our new product and research and development efforts may not be successful, which would result in a
reduction in our sales and earnings.
In the past, we have incurred, and we expect to continue to
incur, expenses associated with research and development activities and the introduction of new
products. For instance, we are currently incurring substantial development costs in connection with
our work on the Airbus A350 XWB and Boeing 787. We may experience difficulties that could delay or
prevent the successful development of new products or product enhancements, and new products or
product enhancements may not be accepted by our customers. In addition, the research and
development expenses we incur may exceed our cost estimates, and new products we develop may not
generate sales sufficient to offset our costs. If any of these events occur, our sales and profits
could be adversely affected.
The loss of Boeing or Lockheed Martin as a customer or a significant reduction in sales to either
company could adversely impact our operating results.
We provide Boeing with controls for both
military and commercial applications, which, in total, were 10% of our 2010 sales. Sales to
Boeing’s commercial airplane group are generally made under a long-term supply agreement through
2021 for the Boeing 787 and 2012 for other commercial airplanes. The loss of Boeing or Lockheed
Martin as a customer or a significant reduction in sales to either company could significantly
reduce our sales and earnings.
We operate in highly competitive markets with competitors who may have greater resources than we
possess.
Many of our products are sold in highly competitive markets. Some of our competitors,
especially in our industrial and medical markets, are larger and more diversified and have greater
financial, marketing, production and research and development resources. As a result, they may be
better able to withstand the effects of periodic economic downturns. Our sales and operating
margins will be negatively impacted if our competitors:
| • | develop products that are superior to our products, | ||
| • | develop products of comparable quality and performance that are more competitively priced than our products, | ||
| • | develop methods of more efficiently and effectively providing products and services, or | ||
| • | adapt more quickly than we do to new technologies or evolving customer requirements. |
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We believe that the principal points of competition in our markets are product quality, price,
design and engineering capabilities, product development, conformity to customer specifications,
timeliness of delivery, effectiveness of the distribution organization and quality of support after
the sale. Maintaining and improving our competitive position will require continued investment in
manufacturing, engineering, quality standards, marketing, customer service and support and our
distribution networks. If we do not maintain sufficient resources to make these investments or are
not successful in maintaining our competitive position, our operations and financial performance
will suffer.
Significant changes in discount rates, rates of return on pension assets, mortality tables and
other factors could affect our earnings, equity and pension funding requirements.
Pension
obligations and the related costs are determined using actual results and actuarial valuations that
involve several assumptions. Our funding requirements are also based on these assumptions. The most
critical assumptions are the discount rate, the long-term expected return on assets and mortality.
Other assumptions include salary increases and retirement age. Some of these assumptions, such as
the discount rate and return on pension assets, are largely outside of our control. Changes in
these assumptions could affect our earnings, equity and funding requirements.
We are subject to financing and interest rate exposure risks that could adversely affect our
business and operating results.
Adverse changes in the availability, terms and cost of capital,
increases in interest rates or a reduction in credit rating or outlook could cause our cost of
doing business to increase, limit our ability to pursue acquisition opportunities and place us at a
competitive disadvantage. At October 2, 2010, 57% of our debt was at fixed interest rates with the
remaining 43% subject to variable interest rates.
We are subject to the risk of loss resulting from financial institutions or customers defaulting on
their obligations to us.
We maintain significant amounts of cash and cash equivalents at financial
institutions that are in excess of amounts insured by governments. The failure of these
institutions could cause a loss of our cash balances or the ability to access them when needed. The
inability of our customers to pay us due to adverse economic conditions or their inability to
access available credit could have an adverse effect on our financial condition and liquidity.
Our international operations pose currency and other risks that may adversely impact our sales and
earnings.
We have significant manufacturing and sales operations in foreign countries. In addition,
our domestic operations have sales to foreign customers. Our financial results may be adversely
affected by fluctuations in foreign currencies and by the translation of the financial statements
of our foreign subsidiaries from local currencies into U.S. dollars. The translation of our sales
in foreign currencies to the U.S. dollar had a $11 million positive impact on sales for 2010 using
average exchange rates for 2010 compared to average exchange rates for 2009 and a $49 million
negative impact on sales for 2009 using average exchange rates for 2009 compared to average
exchange rates for 2008.
A write-off of all or part of our goodwill or other intangible assets could adversely affect our
operating results and net worth and cause us to violate covenants in our bank credit facility.
Goodwill and other intangible assets are a substantial portion of our assets. At October 2, 2010,
goodwill was $705 million and other intangible assets were $206 million of our total assets of $2.7
billion. Our goodwill and other intangible assets may increase in the future since our strategy
includes growing through acquisitions. We may have to write off all or part of our goodwill or
other intangible assets if their value becomes impaired. Although this write-off would be a
non-cash charge, it could reduce our earnings and net worth significantly. A write-off of goodwill
or other intangible assets could also cause us to violate covenants in our bank credit facility
that require a minimum level of net worth. This could result in our inability to borrow under our
bank credit facility or obligation to refinance or renegotiate the terms of our bank indebtedness.
Our sales and earnings growth may be reduced if we cannot implement our acquisition strategy.
Acquisitions are a key part of our growth strategy. Our historical growth has depended, and our
future growth is likely to depend, in large part, on our ability to successfully implement our
acquisition strategy, and the successful integration of acquired businesses into our existing
operations. We intend to continue to seek additional acquisition opportunities in accordance with
our acquisition strategy, both to expand into new markets and to enhance our position in existing
markets throughout the world. If we are unable to successfully identify suitable candidates,
successfully acquire and integrate acquired businesses into our existing operations, our sales and
earnings growth would be reduced.
38
Table of Contents
We may incur losses and liabilities as a result of our acquisition strategy.
Growth by acquisition
involves risks that could adversely affect our financial condition and operating results,
including:
| • | diversion of management time and attention from our core business, | ||
| • | the potential exposure to unanticipated liabilities, | ||
| • | the potential that expected benefits or synergies are not realized and that operating costs increase, | ||
| • | the risks associated with incurring additional acquisition indebtedness, including that additional indebtedness could limit our cash flow availability for operations and our flexibility, | ||
| • | difficulties in integrating the operations and personnel of acquired companies, and | ||
| • | the potential loss of key employees, suppliers or customers of acquired businesses. |
In addition, any acquisition, once successfully integrated, could negatively impact our financial
performance if it does not perform as planned, does not increase earnings, or does not prove
otherwise to be beneficial to us.
Our future growth and continued success is dependent on our key personnel.
Our future success
depends to a significant degree upon the continued contributions of our management team and
technical personnel. The loss of members of our management team could have a material adverse
effect on our business. In addition, competition for qualified technical personnel in our
industries is intense, and we believe that our future growth and success will depend on our ability
to attract, train and retain such personnel.
Future terror attacks, war, or other civil disturbances could negatively impact our business.
Terror attacks, war or other disturbances could lead to economic instability and decreases in
demand for commercial products, which could negatively impact our business, financial condition and
results of operations. Terrorist attacks worldwide have caused instability from time to time in
global financial markets and the aviation industry. In 2010, 14% of our net sales was related to
commercial aircraft. The long-term effects of terrorist attacks on us are unknown. These attacks
and the U.S. Government’s continued efforts against terrorist organizations may lead to additional
armed hostilities or to further acts of terrorism and civil disturbance in the United States or
elsewhere, which may further contribute to economic instability.
Our operations in foreign countries expose us to political risks and adverse changes in local
legal, tax and regulatory schemes.
In 2010, 44% of our net sales was from customers outside of the
United States. We expect international operations and export sales to continue to contribute to our
earnings for the foreseeable future. Both the sales from international operations and export sales
are subject in varying degrees to risks inherent in doing business outside of the United States.
Such risks include, without limitation, the following:
| • | the possibility of unfavorable circumstances arising from host country laws or regulations, | ||
| • | partial or total expropriation, | ||
| • | potential negative consequences from changes to significant taxation policies, laws or regulations, | ||
| • | changes in tariff and trade barriers and import or export licensing requirements, and | ||
| • | political or economic instability, insurrection, civil disturbance or war. |
Government regulations could limit our ability to sell our products outside the United States and
otherwise adversely affect our business.
In 2010, 10% of our sales was subject to compliance with
the United States Export Administration regulations. Our failure to obtain the requisite licenses,
meet registration standards or comply with other government export regulations would hinder our
ability to generate revenues from the sale of our products outside the United States. Compliance
with these government regulations may also subject us to additional fees and operating costs. The
absence of comparable restrictions on competitors in other countries may adversely affect our
competitive position. In order to sell our products in European Union countries, we must satisfy
certain technical requirements. If we are unable to comply with those requirements with respect to
a significant quantity of our products, our sales in Europe would be restricted. Doing business
internationally also subjects us to numerous U.S. and foreign laws and regulations, including,
without limitation, regulations relating to import-export control, technology transfer
restrictions, foreign corrupt practices and anti-boycott provisions. Failure by us or our sales
representatives or consultants to comply with these laws and regulations could result in
administrative, civil or criminal liabilities and could, in the extreme case, result in suspension
or debarment from government contracts or suspension of our export privileges, which would have a
material adverse effect on us.
39
Table of Contents
Our facilities could be damaged by catastrophes which could reduce our production capacity and
result in a loss of customers.
We conduct our operations in facilities located throughout the
world. Any of these facilities could be damaged by fire, floods, earthquakes, power loss,
telecommunication and information systems failure or similar events. Our facilities in California,
Japan and the Philippines are particularly susceptible to earthquakes. These facilities accounted
for 14% of our manufacturing, assembly and test capacity in 2010. Although we carry property
insurance, including earthquake insurance and business interruption insurance, our inability to
meet customers’ schedules as a result of a catastrophe may result in a loss of customers or
significant additional costs such as penalty claims under customer contracts.
The failure or misuse of our products may damage our reputation, necessitate a product recall or
result in claims against us that exceed our insurance coverage, thereby requiring us to pay
significant damages.
Defects in the design and manufacture of our products may necessitate a
product recall. We include complex system design and components in our products that could contain
errors or defects, particularly when we incorporate new technology into our products. If any of our
products are defective, we could be required to redesign or recall those products or pay
substantial damages or warranty claims. Such an event could result in significant expenses, disrupt
sales and affect our reputation and that of our products. We are also exposed to product liability
claims. Many of our products are used in applications where their failure or misuse could result in
significant property loss and serious personal injury or death. We carry product liability
insurance consistent with industry norms. However, these insurance coverages may not be sufficient
to fully cover the payment of any potential claim. A product recall or a product liability claim
not covered by insurance could have a material adverse effect on our business, financial condition
and results of operations.
Our operations are subject to environmental laws, and complying with those laws may cause us to
incur significant costs.
Our operations and facilities are subject to numerous stringent
environmental laws and regulations. Although we believe that we are in material compliance with
these laws and regulations, future changes in these laws, regulations, or interpretations of them,
or changes in the nature of our operations may require us to make significant capital expenditures
to ensure compliance. We have been and are currently involved in environmental remediation
activities, the cost of which may become significant depending on the discovery of additional
environmental exposures at sites that we currently own or operate and at sites that we formerly
owned or operated, or at sites to which we have sent hazardous substances or wastes for treatment,
recycling or disposal.
None
40
Table of Contents
On October 2, 2010, we occupied 4,730,000 square feet of space in the United States and countries
throughout the world, distributed as follows:
| Square Feet | ||||||||||||
| Owned | Leased | Total | ||||||||||
|
Aircraft Controls
|
1,214,000 | 621,000 | 1,835,000 | |||||||||
|
|
||||||||||||
|
Space and Defense Controls
|
451,000 | 179,000 | 630,000 | |||||||||
|
|
||||||||||||
|
Industrial Systems
|
599,000 | 592,000 | 1,191,000 | |||||||||
|
|
||||||||||||
|
Components
|
613,000 | 70,000 | 683,000 | |||||||||
|
|
||||||||||||
|
Medical Devices
|
284,000 | 87,000 | 371,000 | |||||||||
|
|
||||||||||||
|
Corporate Headquarters
|
- | 20,000 | 20,000 | |||||||||
|
|
||||||||||||
|
Total
|
3,161,000 | 1,569,000 | 4,730,000 | |||||||||
|
|
||||||||||||
Aircraft Controls has principal manufacturing facilities located in New York, England, the
Philippines, California and Utah. Space and Defense Controls has principal manufacturing facilities
located in New York, Ohio, Georgia, Illinois, Utah, California and Germany. Industrial Systems has
principal manufacturing facilities located in Germany, China, New York, Italy, India, Luxembourg,
The Netherlands, England, Ireland and Japan. Components has principal manufacturing facilities
located in Virginia, North Carolina, Pennsylvania, Canada and England. Medical Devices has
principal manufacturing facilities in Costa Rica, New York, Utah and Lithuania. Our corporate
headquarters is located in East Aurora, New York.
We believe that our properties have been adequately maintained and are generally in good condition.
Operating leases for properties expire at various times from 2011 through 2034. Upon the expiration
of our current leases, we believe that we will be able to either secure renewal terms or enter into
leases for alternative locations at market terms.
From time to time, we are named as a defendant in legal actions. We are not a party to any pending
legal proceedings that management believes will result in a material adverse effect on our
financial condition or results of operations.
41
Table of Contents
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our two classes of common shares, Class A common stock and Class B common stock, are traded on the
New York Stock Exchange (NYSE) under the ticker symbols MOG.A and MOG.B. The following chart sets
forth, for the periods indicated, the high and low sales prices of the Class A common stock and
Class B common stock on the NYSE.
| Quarterly Stock Prices | ||||||||||||||||
| Class A | Class B | |||||||||||||||
| Fiscal Year Ended | High | Low | High | Low | ||||||||||||
|
|
||||||||||||||||
|
October 2, 2010
|
||||||||||||||||
|
|
||||||||||||||||
|
1st Quarter
|
$ | 30.09 | $ | 22.49 | $ | 30.00 | $ | 24.69 | ||||||||
|
|
||||||||||||||||
|
2nd Quarter
|
40.21 | 29.34 | 38.00 | 29.39 | ||||||||||||
|
|
||||||||||||||||
|
3rd Quarter
|
39.77 | 30.18 | 39.70 | 30.51 | ||||||||||||
|
|
||||||||||||||||
|
4th Quarter
|
37.71 | 29.95 | 37.50 | 30.16 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
October 3, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
1st Quarter
|
$ | 43.36 | $ | 24.00 | $ | 44.86 | $ | 23.91 | ||||||||
|
|
||||||||||||||||
|
2nd Quarter
|
39.58 | 17.90 | 38.58 | 18.39 | ||||||||||||
|
|
||||||||||||||||
|
3rd Quarter
|
28.57 | 21.50 | 28.39 | 22.98 | ||||||||||||
|
|
||||||||||||||||
|
4th Quarter
|
33.17 | 22.93 | 32.59 | 22.98 | ||||||||||||
|
|
||||||||||||||||
The number of shareholders of record of Class A common stock and Class B common stock was 1,023
and 452, respectively, as of November 19, 2010.
We did not pay cash dividends on our Class A common stock or Class B common stock in 2009 or 2010
and have no plans to do so in the foreseeable future.
The following table summarizes our purchases of our common stock for the quarter ended October 2,
2010.
| Issuer Purchases of Equity Securities | ||||||||||||||||
| (d) Maximum | ||||||||||||||||
| (c) Total number | Number (or Approx. | |||||||||||||||
| of Shares | Dollar Value) of | |||||||||||||||
| (a) Total | Purchased as | Shares that May Yet | ||||||||||||||
| Number | (b) Average | Part of Publicly | Be Purchased | |||||||||||||
| of Shares | Price Paid | Announced Plans | Under Plans | |||||||||||||
| Period | Purchased (1) | Per Share | or Programs (2) | or Programs (2) | ||||||||||||
|
|
||||||||||||||||
|
July 4 - July 31, 2010
|
- | $ | - | - | 766,400 | |||||||||||
|
|
||||||||||||||||
|
August 1 - August 31, 2010
|
- | - | - | 766,400 | ||||||||||||
|
|
||||||||||||||||
|
September 1 - October 2, 2010
|
14,768 | 35.85 | - | 766,400 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
14,768 | $ | 35.85 | - | 766,400 | |||||||||||
| (1) | Purchases are from the Moog Inc. Retirement Savings Plan. | |
| (2) | In October 2008, the Board of Directors authorized a share repurchase program. The program permits the purchase of up to 1,000,000 Class A or Class B common shares in open market or privately negotiated transactions at the discretion of management. |
42
Table of Contents
Performance Graph
The following graph and table show the performance of the Company’s Class A common stock compared
to the NYSE Composite-Total Return Index and the S&P Aerospace and Defense Index for a $100
investment made on September 30, 2005, including the reinvestment of any dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Moog Inc., the NYSE Composite Index
and the S&P Aerospace & Defense Index
and the S&P Aerospace & Defense Index
| 9/05 | 9/06 | 9/07 | 9/08 | 9/09 | 9/10 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Moog Inc. Class A Common Stock
|
$ | 100.00 | $ | 117.41 | $ | 148.85 | $ | 145.26 | $ | 99.93 | $ | 120.29 | ||||||||||||
|
|
||||||||||||||||||||||||
|
NYSE
Composite - Total Return Index
|
100.00 | 113.44 | 137.34 | 105.60 | 99.83 | 107.63 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
S&P Aerospace & Defense Index
|
100.00 | 121.20 | 161.07 | 120.12 | 114.21 | 129.89 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
43
Table of Contents
For a more detailed discussion of 2008 through 2010, refer to Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, of this report and Item 8, Financial
Statements and Supplementary Data, of this report.
| (dollars in thousands, except per share data) | 2010 (1) | 2009(1)(2) | 2008(3)(4) | 2007(4) | 2006(4)(5) | |||||||||||||||
|
|
||||||||||||||||||||
|
RESULTS FROM OPERATIONS
|
||||||||||||||||||||
|
Net sales
|
$ | 2,114,252 | $ | 1,848,918 | $ | 1,902,666 | $ | 1,558,099 | $ | 1,306,494 | ||||||||||
|
|
||||||||||||||||||||
|
Net earnings
|
108,094 | 85,045 | 119,068 | 100,936 | 81,346 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net earnings per share
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic
|
$ | 2.38 | $ | 2.00 | $ | 2.79 | $ | 2.38 | $ | 2.01 | ||||||||||
|
|
||||||||||||||||||||
|
Diluted
|
$ | 2.36 | $ | 1.98 | $ | 2.75 | $ | 2.34 | $ | 1.97 | ||||||||||
|
|
||||||||||||||||||||
|
Weighted-average shares outstanding
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic
|
45,363,738 | 42,598,321 | 42,604,268 | 42,429,711 | 40,558,717 | |||||||||||||||
|
|
||||||||||||||||||||
|
Diluted
|
45,709,020 | 42,906,495 | 43,256,888 | 43,149,481 | 41,247,689 | |||||||||||||||
|
|
||||||||||||||||||||
|
FINANCIAL POSITION
|
||||||||||||||||||||
|
Total assets
|
$ | 2,712,134 | $ | 2,634,317 | $ | 2,227,247 | $ | 2,006,179 | $ | 1,607,654 | ||||||||||
|
|
||||||||||||||||||||
|
Working capital
|
812,805 | 764,137 | 713,292 | 616,623 | 420,495 | |||||||||||||||
|
|
||||||||||||||||||||
|
Indebtedness
- senior
|
386,103 | 454,456 | 270,988 | 417,434 | 186,451 | |||||||||||||||
|
|
||||||||||||||||||||
|
Indebtedness
- senior subordinated
|
378,613 | 378,630 | 400,072 | 200,089 | 200,107 | |||||||||||||||
|
|
||||||||||||||||||||
|
Shareholders’ equity
|
1,120,956 | 1,065,033 | 994,410 | 877,212 | 762,856 | |||||||||||||||
|
|
||||||||||||||||||||
|
Shareholders’ equity per common share
outstanding
|
24.70 | 23.53 | 23.30 | 20.63 | 18.04 | |||||||||||||||
|
|
||||||||||||||||||||
|
SUPPLEMENTAL FINANCIAL DATA
|
||||||||||||||||||||
|
Capital expenditures
|
$ | 65,949 | $ | 81,826 | $ | 91,833 | $ | 96,988 | $ | 83,555 | ||||||||||
|
|
||||||||||||||||||||
|
Depreciation and amortization
|
91,216 | 76,384 | 63,376 | 52,093 | 47,077 | |||||||||||||||
|
|
||||||||||||||||||||
|
Research and development
|
102,600 | 100,022 | 109,599 | 102,603 | 68,886 | |||||||||||||||
|
|
||||||||||||||||||||
|
Twelve-month backlog
|
1,181,303 | 1,097,760 | 861,694 | 774,548 | 645,032 | |||||||||||||||
|
|
||||||||||||||||||||
|
RATIOS
|
||||||||||||||||||||
|
Net return on sales
|
5.1% | 4.6% | 6.3% | 6.5% | 6.2% | |||||||||||||||
|
|
||||||||||||||||||||
|
Return on shareholders’ equity
|
9.8% | 8.3% | 12.7% | 12.3% | 12.9% | |||||||||||||||
|
|
||||||||||||||||||||
|
Current ratio
|
2.70 | 2.71 | 2.89 | 2.93 | 2.37 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net debt to capitalization (6)
|
36.8% | 41.4% | 37.0% | 37.8% | 30.1% | |||||||||||||||
| (1) | Includes the effects of acquisitions. See Note 2 of the Consolidated Financial Statements at Item 8 of this report. | |
| (2) | Includes the sale of Class A common stock on October 2, 2009. See Note 13 of the Consolidated Financial Statements at Item 8 of this report. | |
| (3) | Includes the effects of the issuance of senior subordinated notes. | |
| (4) | Includes the effects of applicable acquisitions. In 2008, we acquired two businesses, one each in our Space and Defense Controls and Components Segments . In 2007, we acquired four businesses, two in our Components segment and one each in our Medical Devices and Industrial Systems segments. In 2006, we acquired three businesses, two in our Medical Devices segment and one that had applications for both our Space and Defense Controls and Industrial Systems segments. | |
| (5) | Includes sale of Class A common stock on February 21, 2006. | |
| (6) | Net debt is total debt less cash and cash equivalents. Capitalization is the sum of net debt and shareholders’ equity. |
44
Table of Contents
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 injection
molding machines, pilot training simulators, wind energy, 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, including facilities in New York, Virginia, California, North
Carolina, Utah, Ohio, Georgia, Pennsylvania, Illinois and in 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 30% 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, | ||
| • | entering and developing new markets, and | ||
| • | striving for continuing cost improvements. |
Challenges facing us include adjusting to global economic conditions, improving shareholder value
through increased profitability while experiencing 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, manufacturing and restructuring initiatives and using low cost manufacturing
facilities without compromising quality.
45
Table of Contents
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 and such amounts are reflected in the respective captions on the balance sheet. The
purchase price described for each acquisition below is net of any cash acquired and includes debt
issued or assumed.
In 2010, we completed four business combinations within three of our segments. We completed one
acquisition in our Aircraft Controls segment for $11 million. This acquisition complements our
military aftermarket business. We completed two acquisitions in our Space and Defense Controls
segment for a total of $23 million. One business specializes in turret design, fire control systems
and vehicle electronics and the other expands our capabilities in the security and surveillance
market. We completed one acquisition in our Industrial Systems segment for $1 million.
In 2009, we completed eight business combinations within four of our segments. We completed two
acquisitions in our Aircraft Controls segment, both of which are located in the U.K. for a total of
$137 million. These acquisitions complement our flight control actuation business and expand our
business in ground-based air navigation systems. We acquired one business in our Space and Defense
Controls segment for $45 million that expands our capabilities in the security and surveillance
markets. We completed three acquisitions in our Industrial Systems segment, two of which specialize
in systems and blade controls of turbines for the wind energy market, for a total of $110 million
which includes $28 million for a 40% ownership paid in 2008 for one of the acquired companies. We
also completed two acquisitions in our Medical Devices segment for a total purchase price of $37
million. Those acquisitions expand our portfolio to now include syringe style pumps, proprietary
medical devices and contract manufacturing of disposables as well as microbiology, toxicology and
sterilization services.
See the discussion in Note 2 of Item 8, Financial Statements and Supplementary Data of this report
for further information on our acquisitions.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these consolidated financial statements requires
us to make estimates, assumptions and judgments that affect the amounts reported. These estimates,
assumptions and judgments are affected by our application of accounting policies, which are
discussed in Note 1 of Item 8, Financial Statements and Supplementary Data, of this report. The
critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.
Revenue Recognition on Long-Term Contracts
Revenue representing 30% of 2010 sales was accounted for using the percentage of completion,
cost-to-cost method of accounting. This method of revenue recognition is predominately used within
the Aircraft Controls and Space and Defense Controls segments due to the contractual nature of the
business activities, with the exception of their respective aftermarket activities. The contractual
arrangements are either firm fixed-price or cost-plus contracts and are with the U.S. Government or
its prime subcontractors, foreign governments or commercial aircraft manufacturers, including
Boeing and Airbus. The nature of the contractual arrangements includes customers’ requirements for
delivery of hardware as well as funded nonrecurring development work in anticipation of follow-on
production orders.
We recognize revenue on contracts in the current period using the percentage of completion,
cost-to-cost method of accounting as work progresses toward completion as determined by the ratio
of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by
the total estimated contract revenue, less cumulative revenue recognized in prior periods. Changes
in estimates affecting sales, costs and profits are recognized in the period in which the change
becomes known using the cumulative catch-up method of accounting, resulting in the cumulative
effect of changes reflected in the period. Estimates are reviewed and updated quarterly for
substantially all contracts. A significant change in an estimate on one or more contracts could
have a material effect on our results of operations.
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Occasionally, it is appropriate to combine or segment contracts. Contracts are combined in those
limited circumstances when they are negotiated as a package in the same economic environment with
an overall profit margin objective and constitute, in essence, an agreement to do a single project.
In such cases, we recognize revenue and costs over the performance period of the combined contracts
as if they were one. Contracts are segmented in limited circumstances if the customer had the right
to accept separate elements of the contract and the total amount of the proposals on the separate
components approximated the amount of the proposal on the entire project. For segmented contracts,
we recognize revenue and costs as if they were separate contracts over the performance periods of
the individual elements or phases.
Contract costs include only allocable, allowable and reasonable costs, as determined in accordance
with the Federal Acquisition Regulations and the related Cost Accounting Standards for applicable
U.S. Government contracts, and are included in cost of sales when incurred. The nature of these
costs includes development engineering costs and product manufacturing costs such as direct
material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded
as a result of the revenue recognized less costs incurred in any reporting period. Amounts
representing performance incentives, penalties, contract claims or change orders are considered in
estimating revenues, costs and profits when they can be reliably estimated and realization is
considered probable. Revenue recognized on contracts for unresolved claims or unapproved contract
change orders was not material in 2010, 2009 or 2008.
Contract Loss Reserves
At October 2, 2010, we had contract loss reserves of $41 million. For contracts with anticipated
losses at completion, a provision for the entire amount of the estimated remaining loss is charged
against income in the period in which the loss becomes known. Contract losses are determined
considering all direct and indirect contract costs, exclusive of any selling, general or
administrative cost allocations that are treated as period expenses. Loss reserves are more common
on firm fixed-price contracts that involve, to varying degrees, the design and development of new
and unique controls or control systems to meet the customers’ specifications.
In connection with the acquisition of the Wolverhampton flight control business, we established
contract loss reserves of $29 million on the opening balance sheet. A portion of these loss
reserves relates to early stage development programs such as the Boeing 787, the F-35 Joint Strike
Fighter and the Airbus A380. The contract loss reserves related to these programs will be used as the
programs progress. Also, upcoming work for these programs is expected to shift to
our low cost manufacturing facility in the Philippines. We anticipate that this shift in work will
reduce the need for additional contract loss reserves related to future contracts under these programs.
The balance of the contract loss reserves established at acquisition was $12 million at October 2,
2010.
Reserves for Inventory Valuation
At October 2, 2010, we had net inventories of $461 million, or 36% of current assets. Reserves for
inventory were $86 million, or 16% of gross inventories. Inventories are stated at the
lower-of-cost-or-market with cost determined primarily on the first-in, first-out method of
valuation.
We record valuation reserves to provide for slow-moving or obsolete inventory by using both a
formula-based method that increases the valuation reserve as the inventory ages and, additionally,
a specific identification method. We consider overall inventory levels in relation to firm customer
backlog in addition to forecasted demand including aftermarket sales. Changes in these and other
factors such as low demand and technological obsolescence could cause us to increase our reserves
for inventory valuation, which would negatively impact our gross margin. As we record provisions
within cost of sales to increase inventory valuation reserves, we establish a new, lower cost basis
for the inventory.
Reviews for Impairment of Goodwill
At October 2, 2010, we had $705 million of goodwill, or 26% of total assets. We test goodwill for
impairment at least annually, during our fourth quarter, and whenever events occur or circumstances
change that indicate a potential impairment. These events or circumstances could include a
significant adverse change in the business climate, poor indicators of operating performance or the
sale or disposition of a significant portion of a reporting unit.
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We test goodwill for impairment at the reporting unit level. Certain of our reporting units are our
operating segments while others are one level below our operating segments. We identify our
reporting units by assessing whether the components of our operating segments constitute businesses
for which discrete financial information is available and segment management regularly reviews the
operating results of those components.
Testing goodwill for impairment requires us to determine the amount of goodwill associated with
reporting units, estimate fair values of those reporting units and determine their carrying values.
We use the discounted cash flow method to estimate the fair value of each of our reporting units.
We believe this method is the most appropriate as it is based on the investment returns of our
reporting units and is a generally accepted and common method of business valuation. This method
incorporates various assumptions, the most significant being projected revenue growth rates,
operating profit margins and cash flows, the terminal growth rate and the discount rate. Management
projects revenue growth rates, operating margins and cash flows based on each reporting unit’s
current business, expected developments and operational strategies over a five-year period. In
estimating the terminal growth rate, we consider our historical and projected results, as well as
the economic environment in which our reporting units operate.
We performed our annual test during the fourth quarter of 2010. We used a 4% terminal growth rate,
which is below the historical growth rate of our reporting units. We then discounted our projected
cash flows using discount rates that ranged from 11% to 12.5% for our various reporting units.
These discount rates reflect management’s assumptions of marketplace participants’ cost of capital
and risk assumptions, both specific to the reporting unit and overall in the economy. We evaluate
the reasonableness of the resulting fair values of our reporting units by comparing the aggregate
fair value to our market capitalization and assessing the reasonableness of any resulting premium.
The determination of these amounts is subjective and requires significant estimates. Changes in
these estimates and assumptions could materially affect the results of our reviews for impairment
of goodwill.
Based on our tests, the fair value of each reporting unit exceeded its carrying amount in 2010,
2009 and 2008. Therefore, goodwill was not impaired as of any of our testing dates. In our annual
review of goodwill for impairment in the fourth quarter of 2010, the fair value of each reporting
unit exceeded its carrying value by over 10%.
The most significant change in assumptions from
our prior year annual impairment test was the
discount rates, which declined for all of our reporting units except for Medical Devices. The
decreases in our discount rates reflected improved economic conditions and a credit environment
that has improved since 2009. Our Industrial Systems Europe and Industrial Systems Pacific
reporting units had the largest decreases in their discount rates, also reflecting the risk
associated with estimating cash flows for the wind energy businesses acquired in 2009.
While any individual assumption could reasonably differ from those that we used, we believe the
overall fair values of our reporting units are reasonable as the values are derived from a mix of
reasonable assumptions. However, had we used discount rates that were 100 basis points higher than
those we assumed or terminal growth rates that were 100 basis points lower than those we assumed,
the fair value of each reporting unit would have exceeded its carrying value by over 10% except for
our largest Aircraft Controls reporting unit and the Medical Devices reporting unit. The fair
value for all reporting units would have exceeded carrying value for either a 100 basis point
increase in discount rates or a 100 basis point reduction in terminal growth rates and there would
be no goodwill impairment.
Purchase Price Allocations for Business Combinations
During 2010, we completed four business combinations for a total purchase price of $35 million.
Under purchase accounting, we recorded assets and liabilities at fair value as of the acquisition
dates. We identified and ascribed value to programs, customer relationships, patents and
technology, trade names, backlog and contracts and estimated the useful lives over which these
intangible assets would be amortized. Valuations of these assets were performed largely using
discounted cash flow models. These valuations support the conclusion that identifiable intangible
assets had a value of $10 million. The resulting goodwill was
$20 million.
During 2010, we made adjustments to purchase price allocations for several of our 2009
acquisitions. This resulted in a $12 million decrease in goodwill, a $7 million decrease in
accounts payable, contract loss reserves and other liabilities, a $4 million increase in inventory
and a $3 million increase in intangible assets.
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Ascribing value to intangible assets requires estimates used in projecting relevant future cash
flows, in addition to estimating useful lives of such assets. Using different assumptions could
have a material effect on our current and future amortization expense.
Pension Assumptions
We maintain various defined benefit pension plans covering employees at certain locations. Pension
expense for all defined benefit plans for 2010 was $22 million. Pension obligations and the related
costs are determined using actuarial valuations that involve several assumptions. The most critical
assumptions are the discount rate, mortality rate and the long-term expected return on assets.
Other assumptions include salary increases and retirement age.
The discount rate is used to state expected future cash flows at present value. Using a higher
discount rate decreases the present value of pension obligations and reduces pension expense. We
used the Mercer Pension Discount Yield Curve to determine the discount rate for our U.S. plans. The
discount rate is determined by discounting the plan’s expected future benefit payments using a
yield curve developed from high quality bonds that are rated Aa or better by Moody’s as of the
measurement date. The yield curve calculation matches the notional cash inflows of the
hypothetical bond portfolio with the expected benefit payments to arrive at the discount rate. In
determining expense for 2010 for our largest U.S. plan, we used a 6.0% discount rate, compared to 7.3% for
2009. We will use a 5.3% discount rate to determine our expense in 2011 for this plan. This
70 basis point decrease in the discount rate will increase our pension expense by $6 million in
2011.
The mortality assumption utilizes standard mortality tables that are adjusted to provide for
improvements in future mortality. In determining expense for 2010 for our largest plan, we used
the RP2000 No Collar Mortality Table for males and females with projections to 2007, which was the
same assumption used for 2009. We will use the RP 2000 No Collar Mortality Table for males and
females with projections to 2017 to determine our expense for 2011. The change in this assumption
will increase our pension expense by $2 million in 2011.
The long-term expected return on assets assumption reflects the average rate of earnings expected
on funds invested or to be invested to provide for the benefits included in the projected benefit
obligation. In determining the long-term expected return on assets assumption, we consider our
current and target asset allocations. We consider the relative weighting of plan assets, the
historical performance of total plan assets and individual asset classes and economic and other
indicators of future performance. Asset management objectives include maintaining an adequate
level of diversification to reduce interest rate and market risk and to provide adequate liquidity
to meet immediate and future benefit payment requirements. In determining expense for 2010 for our
largest plan, we used an 8.9% return on assets assumption, the same as we used in 2009. A 50 basis
point decrease in the long-term expected return on assets assumption would increase our annual
pension expense by $2 million.
Deferred Tax Asset Valuation Allowances
At October 2, 2010, we had gross deferred tax assets of $213 million and a deferred tax asset
valuation allowance of $7 million. The deferred tax assets principally relate to benefit accruals,
inventory obsolescence and contract loss reserves. The deferred tax assets include $14 million
related to tax benefit carryforwards for which $7 million deferred tax asset valuation allowances
are recorded.
We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit
that we believe is more likely than not to be realized. We consider recent earnings projections,
allowable tax carryforward periods, tax planning strategies and historical earnings performance to
determine the amount of the valuation allowance. Changes in these factors could cause us to adjust
our valuation allowance, which would impact our income tax expense when we determine that these
factors have changed.
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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net sales
|
$ | 2,114 | $ | 1,849 | $ | 1,903 | ||||||
|
|
||||||||||||
|
Gross margin
|
29.0% | 29.1% | 32.0% | |||||||||
|
|
||||||||||||
|
Research and development expenses
|
$ | 103 | $ | 100 | $ | 110 | ||||||
|
|
||||||||||||
|
Selling, general and administrative expenses as a percentage of sales
|
14.8% | 15.2% | 15.5% | |||||||||
|
|
||||||||||||
|
Restructuring expense
|
$ | 5 | $ | 15 | $ | - | ||||||
|
|
||||||||||||
|
Interest expense
|
$ | 39 | $ | 39 | $ | 38 | ||||||
|
|
||||||||||||
|
Effective tax rate
|
27.7% | 23.1% | 29.1% | |||||||||
|
|
||||||||||||
|
Net earnings
|
$ | 108 | $ | 85 | $ | 119 | ||||||
|
|
||||||||||||
Our fiscal year ends on the Saturday that is closest to September 30. The consolidated
financial statements include 52 weeks for the year ended October 2, 2010, 53 weeks for the year
ended October 3, 2009 and 52 weeks for the year ended September 27, 2008. While management believes
this affects the comparability of financial results presented, the impact has not been determined.
Net sales increased $265 million, or 14%, in 2010, which was predominantly a result of $200 million
of incremental sales from recent acquisitions, particularly in Aircraft Controls and Industrial
Systems.
Net sales decreased $54 million, or 3%, in 2009. During 2009, our sales were negatively impacted by
the global recession, most significantly in Industrial Systems. Sales that were denominated in
foreign currencies that generally weakened against the U.S. dollar also contributed to the
decrease. Partially offsetting those decreases were $122 million of incremental sales from 2009
acquisitions.
Our gross margin in 2010 was comparable to 2009, reflecting the positive impact of the sales mix in
our legacy product lines being offset by the impact of increased sales of lower gross margin
products attributable to the recent acquisitions of wind energy and high lift actuation businesses.
Our gross margin declined in 2009 compared to 2008 primarily as a result of lower sales and an
adverse product mix. A lower proportion of our sales came from industrial controls, which generally
carry a higher gross margin than many of our other products.
Research and development expenses increased modestly in 2010 compared to 2009. Increased
expenditures for the Airbus A350 program and the impact from acquisitions were partially offset as
development activity continued to decline on the Boeing 787. Research and development expenses were
lower in 2009 compared to 2008. The lower levels were primarily within Industrial Systems in
response to slowing sales demand and in Aircraft Controls. The reduced expenses in Aircraft
Controls were due to the Boeing 787 program, partially offset by increases for the A350 program.
Selling, general and administrative expenses as a percentage of sales have decreased over the past
two years. The decrease is primarily a result of the impact of recent acquisitions that have lower
selling, general and administrative cost structures than most of our other product lines.
In 2009, we initiated the restructuring plans to better align our cost base with the lower level of
sales and operating margins associated with the global economic recession. The restructuring
actions taken resulted in workforce reductions, primarily in the U.S., the Philippines and Europe.
During 2009, we incurred $15 million of severance costs, of which $10 million was in Industrial
Systems and $5 million was in Aircraft Controls. We incurred an additional $5 million of
restructuring charges for severance in 2010. We expect that payment of these restructuring costs
will be complete by the end of 2011.
The effective tax rate for 2010 and 2008 was higher than 2009, which had an unusually low tax rate.
During 2009, we benefited from a $5 million foreign tax credit from the repatriation of $31 million
of cash to the U.S. from our Japanese subsidiary, a benefit
related to our 2008 tax year as a result of the reinstatement of the U.S. research and development
tax credit under the TARP legislation and the benefit of the effect of our equity earnings in LTi
REEnergy which were recognized in operating profit on an after-tax basis.
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Net earnings increased 27% in 2010 while diluted earnings per share increased 19%, reflecting
additional shares outstanding from a stock offering completed at the end of 2009. In 2009, net
earnings decreased 29% and diluted earnings per share decreased 28% compared to 2008 as a result of
the decline in sales and the $15 million charge for restructuring activities.
2011 Outlook
- We expect sales in 2011 to increase $127 million, or 6%, to $2.2 billion reflecting
increases in all of our segments except for Components. We expect operating margins to improve to
10.7% in 2011 compared to 10.2% in 2010. We expect operating margins to increase in Medical
Devices, Industrial Systems and Aircraft Controls and decrease in Space and Defense Controls and
Components. We expect net earnings to increase to $124 million and diluted earnings per share to
increase by 14% to $2.70.
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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, manpower or profit. Operating profit is reconciled to earnings before income
taxes in Note17 of Item 8, Financial Statements and Supplementary Data of this report.
Aircraft Controls
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net sales - military aircraft
|
$ | 458 | $ | 419 | $ | 395 | ||||||
|
|
||||||||||||
|
Net sales - commercial aircraft
|
262 | 214 | 271 | |||||||||
|
|
||||||||||||
|
Net sales - navigation aids
|
37 | 30 | 7 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
$ | 757 | $ | 663 | $ | 673 | ||||||
|
|
||||||||||||
|
Operating profit
|
$ | 76 | $ | 52 | $ | 55 | ||||||
|
|
||||||||||||
|
Operating margin
|
10.1% | 7.9% | 8.2% | |||||||||
|
|
||||||||||||
|
Backlog
|
$ | 567 | $ | 508 | $ | 372 | ||||||
|
|
||||||||||||
Net sales in Aircraft Controls increased $93 million, or 14%, in 2010. The acquisition of the
high lift actuation business located in Wolverhampton, U.K. at the end of 2009 contributed $94
million. Military aircraft sales increased $38 million as the Wolverhampton operation contributed
$42 million of incremental sales. Sales increased $21 million on the V-22 Osprey as production
levels continued to increase on that program. Sales increased $18 million in military aftermarket,
due in part to the Wolverhampton acquisition. These increases were offset by a $23 million decrease
on the F-35 program as it shifts from the development phase into the production phase. Commercial
aircraft sales increased $48 million as $51 million of incremental sales from Wolverhampton more
than offset the decrease of $12 million in business jets. Navigation aids increased $7 million as a
result of the incremental sales from the 2009 Fernau acquisition offset by decreases due to delays
in the award of certain military programs.
Net sales in Aircraft Controls decreased slightly in 2009. There was a shift from commercial
aircraft to military aircraft sales. Military aircraft sales increased $22 million. Military
aftermarket sales increased $16 million, while sales increased $7 million on the Indian Light
Combat Aircraft and $4 million on the V-22 Osprey production program. Commercial aircraft sales
decreased $57 million from 2008, mainly due to $25 million in lower sales to Boeing, a $24 million
decrease in sales on business jets and a $7 million decline in aftermarket sales. Navigation aids
sales increased $23 million in 2009 primarily as a result of $15 million of incremental sales from
the Fernau acquisition.
Our operating margin was higher in 2010 as a result of lower research and development spending as a
percentage of sales in 2010. In addition, during 2009, we incurred $5 million of restructuring
charges and recorded $4 million of inventory and other charges on certain business jet programs.
Our operating margin for Aircraft Controls decreased slightly in 2009. The decrease was primarily
the result of $7 million of higher additions to contract loss reserves, the restructuring charges
and charges on certain business jet programs. Partially offsetting those higher costs were better
margins as sales shifted from commercial to military aircraft and lower research and development
spending.
The higher level of twelve-month backlog for Aircraft Controls at October 2, 2010 reflects strong
military aircraft orders. Backlog increased at October 3, 2009 as a result of the 2009 acquisitions
of the Wolverhampton operation and Fernau and strong military orders. Partially offsetting those
increases was a decline in commercial orders.
2011 Outlook for Aircraft Controls
- We expect sales in Aircraft Controls to increase 5% to $797
million in 2011. Military aircraft sales are expected to increase 1% to $461 million. We expect a
sales increase in military aftermarket, which offsets small decreases on various programs.
Commercial aircraft sales are expected to increase 13% to $297 million with increases in
all product lines, including Boeing 787, aftermarket and business jets. Navigation aids are
expected to increase $2 million. We expect our operating margin to be 10.4% in 2011, a slight
improvement from 10.1% in 2010.
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Space and Defense Controls
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net sales
|
$ | 325 | $ | 275 | $ | 253 | ||||||
|
|
||||||||||||
|
Operating profit
|
$ | 36 | $ | 40 | $ | 29 | ||||||
|
|
||||||||||||
|
Operating margin
|
11.0% | 14.6% | 11.6% | |||||||||
|
|
||||||||||||
|
Backlog
|
$ | 213 | $ | 202 | $ | 153 | ||||||
|
|
||||||||||||
Net sales in Space and Defense Controls increased $51 million, or 19%, in 2010 compared to
2009. Sales of tactical missiles increased $16 million, primarily related to replenishment
requirements for both the Hellfire and TOW. Sales of launch vehicles increased $14 million,
principally from the Taurus program, which the Administration considers commercial. Activity on the
Driver’s Vision Enhancer (DVE) program increased sales by $14 million, offsetting declines of other
defense controls programs. Our acquisitions of Pieper in 2010 and Videolarm midway through 2009
contributed $11 million of incremental sales in security and surveillance. Sales of satellite
controls were also strong, increasing by $9 million. Sales in our NASA programs increased by $2
million, but were impacted by the uncertainty and delays by the Administration’s re-definition of
the Constellation program.
Net sales in Space and Defense Controls increased $22 million, or 8%, in 2009 compared to 2008 due
to the CSA Engineering and Videolarm acquisitions, which contributed $21 million in incremental
sales. Sales of controls for military and commercial satellites increased $6 million and sales of
launch vehicles also increased $6 million. Sales of tactical missiles, primarily Hellfire and TOW,
increased $5 million. Offsetting those increases was a decrease in sales of defense controls of $10
million as a result of a lower activity on the DVE program. Sales for our NASA programs also
decreased $6 million as there were delays in contract awards for the Constellation program.
Our operating margin for Space and Defense Controls decreased in 2010. The decrease primarily
relates to a larger proportion of sales coming from lower margin cost-plus development work and $1
million of restructuring charges incurred in 2010. Our operating margin increased in 2009 as a
result of the impact of higher sales volume in 2009 and a $4 million loss reserve recorded in 2008
for thruster valves used on satellites.
Twelve-month backlog for Space and Defense Controls increased to $213 million at October 2, 2010
primarily as a result of increased orders for the DVE program. Backlog increased to $202 million at
October 3, 2009 as a result of increased orders for satellite programs, launch vehicles and
tactical missiles.
2011 Outlook for Space and Defense Controls
- We expect sales in Space and Defense Controls to
increase $22 million, or 7%, to $348 million in 2011. We expect sales increases in tactical
missiles and in security and surveillance partly from the recent Pieper acquisition, which will
offset a decline in satellites. We expect our operating margin in 2011 to decrease to 10.7% from
11.0% in 2010, primarily as a result of product mix.
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Industrial Systems
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net sales
|
$ | 546 | $ | 455 | $ | 532 | ||||||
|
|
||||||||||||
|
Operating profit
|
$ | 48 | $ | 31 | $ | 73 | ||||||
|
|
||||||||||||
|
Operating margin
|
8.8% | 6.8% | 13.8% | |||||||||
|
|
||||||||||||
|
Backlog
|
$ | 233 | $ | 196 | $ | 161 | ||||||
|
|
||||||||||||
Net sales in Industrial Systems increased $91 million, or 20%, in 2010. The increase was
primarily a result of incremental sales from acquisitions, but we also began to see a recovery from
the recession in our legacy markets in the latter half of the year. Acquisitions accounted for $82
million of increased sales, primarily in the wind energy market. Sales also increased $19 million
in plastics making machinery. Those increases were offset by lower sales in other major markets
such as motion simulation, which was down $12 million, and power generation, which was down $9
million.
Net sales in Industrial Systems decreased $77 million,
or 15%, in 2009. The global recession
significantly impacted our industrial business in most of the major markets we serve. In addition,
weaker foreign currencies, in particular the euro, compared to the U.S. dollar had a negative
impact on sales, representing over one-quarter of the sales decrease. Sales were lower in all of
our major markets except for wind energy and power generation. Sales for plastic making machinery
decreased $40 million. Sales of controls for metal forming and presses decreased $25 million. Sales
for motion simulators decreased $15 million. Sales of controls for steel mills decreased $13
million. Offsetting those sales declines were increases of $69 million in the wind energy business
from the LTi REEnergy and Insensys acquisitions and $4 million in power generation.
Our operating margin for Industrial Systems increased in 2010 compared to 2009. This increase was
the result of higher sales volume in 2010 and lower restructuring charges recorded in 2010 compared
to 2009. Offsetting those increases was the impact of $7 million of equity earnings recorded in
2009 for LTi REEnergy before we acquired full ownership. Our operating margin for Industrial
Systems declined in 2009 due to lower sales volume and $10 million of restructuring charges.
The higher level of twelve-month backlog for Industrial Systems at October 2, 2010 reflects the
recovery in a variety of markets from the lower level as of October 3, 2009 that resulted from the
global economic recession. The higher level of backlog at October 3, 2009 compared to September 27,
2008 relates to the LTi REEnergy and Insensys acquisitions, partially offset by lower demand due to
the recession.
2011 Outlook for Industrial Systems
- We expect sales in Industrial Systems to increase
11% to $606 million in 2011. We expect sales increases in our core markets, with increases in the
test equipment, motion simulators, power generation and metal forming presses markets more than
offsetting a decline in plastics making machinery. We also expect sales to increase for wind
energy. We expect that our operating margin will increase to 10.4% in 2011 from 8.8% in 2010 as a
result of the higher sales volume in core markets.
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Components
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net sales
|
$ | 360 | $ | 346 | $ | 341 | ||||||
|
|
||||||||||||
|
Operating profit
|
$ | 60 | $ | 56 | $ | 61 | ||||||
|
|
||||||||||||
|
Operating margin
|
16.7% | 16.1% | 17.8% | |||||||||
|
|
||||||||||||
|
Backlog
|
$ | 153 | $ | 183 | $ | 167 | ||||||
|
|
||||||||||||
Net sales in Components increased $14 million, or 4%, in 2010. Aircraft sales increased $19
million, all on military programs. The largest increase within military aircraft was for de-icing
systems on both the Black Hawk helicopter and V-22 tilt rotor aircraft. Industrial sales increased
$9 million, primarily for slip rings for wind turbines. These increases were partially offset as
marine sales decreased $12 million, mostly for equipment used on undersea robots.
Net sales in Components increased slightly in 2009 despite a $10 million negative impact on sales
related to weaker foreign currencies in 2009 compared to 2008. Aircraft sales increased $18
million, primarily on the Guardian and Multi-Spectral Targeting System programs. Sales of space and
defense controls increased $14 million for components supplied on the Abrams Tank, the Stryker
Mobile Gun System, space vehicles and ground-based radar systems. Marine sales decreased $4 million
as this market is closely impacted by activity in offshore drilling and oil prices. Medical sales
decreased $7 million, largely in sales to Respironics for sleep apnea equipment. Industrial sales
decreased $16 million, largely a result of reduced demand for industrial automation equipment and
slip rings for closed circuit TV surveillance due to the recession.
Our operating margin increased in 2010 compared to 2009 as a result of the higher sales volume and
the sales mix. Our operating margin declined in 2009 as a result of a sales mix shift away from
high margin industrial automation equipment and marine products.
The lower level of twelve-month backlog at October 2, 2010 primarily relates to slowing orders for
space and defense controls and military aircraft programs. The higher level of backlog at October
3, 2009 primarily relates to increased orders for defense controls and military aircraft programs.
2011 Outlook for Components
- We expect sales in Components to decrease by $10 million in 2011. We
expect sales will decrease $22 million in aircraft and $4 million in space and defense controls as
several major military aircraft and military vehicle programs are winding down. Partially
offsetting those declines are expected sales increases of $7 million from industrial markets,
primarily from slip rings for wind turbines, $5 million in the marine market and $5 million in the
medical market. We expect our operating margin in 2011 to be 15.2%, lower than the16.7% we achieved
in 2010 due to the lower sales volume and product mix.
55
Table of Contents
Medical Devices
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net sales
|
$ | 127 | $ | 111 | $ | 103 | ||||||
|
|
||||||||||||
|
Operating (loss) profit
|
$ | (4 | ) | $ | (7 | ) | $ | 9 | ||||
|
|
||||||||||||
|
Operating margin
|
(3.2% | ) | (6.7% | ) | 8.8% | |||||||
|
|
||||||||||||
|
Backlog
|
$ | 15 | $ | 11 | $ | 8 | ||||||
|
|
||||||||||||
Net sales in Medical Devices increased $16 million, or 14%, in 2010 compared to 2009. Sales of
administration sets increased $7 million, or 17%, and acquisitions contributed $4 million of
incremental sales.
Net sales in Medical Devices increased $8 million, or 7%, in 2009. The acquisitions of Aitecs and
Ethox contributed $21 million of incremental sales. Sales of administration sets also increased $4
million, or 11%. Offsetting those sales increases was a decrease of $10 million in sales of pumps
and a $9 million decrease in sales of sensors and handpieces, largely a result of reduced spending
associated with the recession.
Our operating margin for Medical Devices was below break-even in 2010. We were negatively impacted
by greater than expected start up costs for a new production facility in Costa Rica, a high level
of product development costs that should provide future sales growth and the build up of a direct
sales force. Our operating margin was even lower in 2009 compared to 2010 as a result of lower
sales volume excluding the impact of acquisitions, a shift in product mix and one-time costs
incurred in 2009, which included $2 million of costs for a voluntary software modification for
certain of our enteral feeding pumps and $1 million of first year purchase accounting adjustments
for the Aitecs and Ethox acquisitions.
Unlike our other segments, twelve-month backlog for Medical Devices is not substantial relative to
sales reflecting the shorter order-to-shipment cycle for this line of business.
2011 Outlook for Medical Devices
- We expect sales in Medical Devices to increase $13
million, or 11%, to $140 million in 2011. We expect sales increases from new product offerings,
including increases of $9 million in pumps and $5 million in administration sets. We expect our
operating margin to be 2.1%, a significant improvement from 2010 as a result of the sales volume
increases and cost improvements.
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Table of Contents
FINANCIAL CONDITION AND LIQUIDITY
| (dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Net cash provided (used) by:
|
||||||||||||
|
|
||||||||||||
|
Operating activities
|
$ | 195 | $ | 118 | $ | 108 | ||||||
|
|
||||||||||||
|
Investing activities
|
(98 | ) | (325 | ) | (149 | ) | ||||||
|
|
||||||||||||
|
Financing activities
|
(66 | ) | 201 | 42 | ||||||||
|
|
||||||||||||
Our available borrowing capacity and our cash flow from operations provide us with the
financial resources needed to run our operations, reinvest in our business and make strategic
acquisitions.
Operating activities
Net cash provided by operating activities increased $77 million in 2010. This increase is primarily
due to increased earnings and non-cash expenses as well as a smaller increase in working capital
requirements. Net cash provided by operating activities increased $10 million in 2009 despite
lower earnings. This increase relates primarily to slowing growth in working capital requirements,
especially in receivables. Partially offsetting these increases were larger uses of cash for
various items such as higher pension contributions.
Investing activities
Net cash used by investing activities in 2010 includes $66 million for capital expenditures and $30
million for four acquisitions, two in Space and Defense Controls and one each in Aircraft Controls
and Industrial Systems. Net cash used by investing activities of $325 million in 2009 includes $261
million for the completion of eight acquisitions and $82 million for capital expenditures. Those
amounts were partially offset by the redemption of $20 million of supplemental retirement plan
investments that were used to purchase $21 million par value of our 6.25% and 7.25% senior
subordinated notes. Net cash used by investing activities of $149 million in 2008 consisted
principally of $92 million for capital expenditures, a $28 million investment in 40% of
LTi REEnergy and $22 million for acquisitions.
While our capital expenditures were lower in 2010 than the previous two years we expect to continue
to invest in major program initiatives and facility expansions. We expect our 2011 capital
expenditures to approximate $90 million.
Financing activities
Net cash used by financing activities in 2010 primarily reflects pay downs on our U.S. credit
facility and the payment of a note issued for the LTi REEnergy acquisition. Net cash provided by
financing activities in 2009 is primarily related to borrowings on our U.S. credit facility to fund
most of the acquisitions and net proceeds of $75 million received from the sale of 2,675,000 shares
of Class A common stock at $29.50 per share. Those amounts were partially offset by the redemption
of $21 million par value of our senior subordinated notes, pay downs of $17 million on notes
payable and $7 million used for our share repurchase program. Net cash provided by financing activities in 2008 primarily reflects $196 million of net proceeds from the sale of 7.25% senior subordinated notes, which was used to repay indebtedness under our U.S. credit facility.
57
Table of Contents
CAPITAL STRUCTURE AND RESOURCES
We maintain bank credit facilities to fund our short and long-term capital requirements, including
for acquisitions. From time to time, we also sell equity and debt securities to fund acquisitions
or take advantage of favorable market conditions.
Our largest credit facility is our U.S. credit facility, which matures on March 14, 2013. It
consists of a $750 million revolver and had an outstanding balance of $371 million at October 2,
2010. Interest on the majority of the outstanding credit facility borrowings is based on LIBOR plus
the applicable margin, which was 200 basis points at October 2, 2010. The credit facility is
secured by substantially all of our U.S. assets.
The U.S. credit facility contains various covenants. The covenant for minimum net worth, defined as
total shareholders’ equity adjusted to maintain the amounts of accumulated other comprehensive loss
at the level in existence as of September 30, 2006, is $600 million. The covenant for minimum
interest coverage ratio, defined as the ratio of EBITDA to interest expense for the most recent
four quarters, is 3.0. The covenant for the maximum leverage ratio, defined as the ratio of net
debt, including letters of credit, to EBITDA for the most recent four quarters, is 4.0. The
covenant for maximum senior leverage ratio, defined as the ratio of net senior debt to consolidated
EBITDA for the most recent four quarters is 2.75. The covenant for maximum capital expenditures is
$100 million annually. We are in compliance with all covenants. EBITDA is defined in the loan
agreement as (i) the sum of net income, interest expense, income taxes, depreciation expense,
amortization expense, other non-cash items reducing consolidated net income and non-cash
equity-based compensation expenses minus (ii) other non-cash items increasing consolidated net
income. The definition of EBITDA allows for the exclusion of up to $17 million of restructuring
charges incurred in calendar year 2009.
We are required to obtain the consent of lenders of the U.S. credit facility before raising
significant additional debt financing. In recent years, we have demonstrated our ability to secure
consents to access debt markets. We have also been successful in accessing equity markets, as
demonstrated most recently by our October 2, 2009 sale of 2,675,000 shares of Class A common stock
at $29.50 per share. We believe that we will be able to obtain additional debt or equity financing
as needed.
At October 2, 2010, we had $387 million of unused borrowing capacity, including $369 million from
the U.S. credit facility after considering standby letters of credit.
Net debt to capitalization was 37% at October 2, 2010 and 41% at October 3, 2009. The decrease in
net debt to capitalization is primarily due to debt reductions funded by our positive cash flow and
net earnings.
We believe that our cash on hand, cash flows from operations and available borrowings under short
and long-term lines of credit will continue to be sufficient to meet our operating needs.
Off Balance Sheet Arrangements
We do not have any material off balance sheet arrangements that have or are reasonably likely to
have a material future effect on our results of operations or financial condition.
58
Table of Contents
Contractual Obligations and Commercial Commitments
Our significant contractual obligations and commercial commitments at October 2, 2010 are as
follows:
| (dollars in millions) | Payments due by period | |||||||||||||||||||
| 2012- | 2014- | After | ||||||||||||||||||
| Contractual Obligations | Total | 2011 | 2013 | 2015 | 2015 | |||||||||||||||
|
|
||||||||||||||||||||
|
Long-term debt
|
$ | 763 | $ | 5 | $ | 377 | $ | 188 | $ | 193 | ||||||||||
|
|
||||||||||||||||||||
|
Interest on long-term debt
|
159 | 26 | 52 | 43 | 38 | |||||||||||||||
|
|
||||||||||||||||||||
|
Operating leases
|
84 | 19 | 29 | 16 | 20 | |||||||||||||||
|
|
||||||||||||||||||||
|
Purchase obligations
|
458 | 352 | 69 | 8 | 29 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual obligations
|
$ | 1,464 | $ | 402 | $ | 527 | $ | 255 | $ | 280 | ||||||||||
|
|
||||||||||||||||||||
In addition to the obligations in the table above, we have $11 million recorded for
unrecognized tax benefits in current liabilities, which includes $2 million of related accrued
interest. We are unable to determine if and when any of those amounts will be settled, nor can we
estimate any potential changes to the unrecognized tax benefits.
Interest on long-term debt consists of payments on fixed-rate debt, primarily our senior
subordinated notes.
Total contractual obligations exclude pension obligations. In 2011, we anticipate making
contributions of $39 million to defined benefit pension plans.
| (dollars in millions) | Commitments expiring by period | |||||||||||||||||||
| 2012- | 2014- | After | ||||||||||||||||||
| Other Commercial Commitments | Total | 2011 | 2013 | 2015 | 2015 | |||||||||||||||
|
Standby letters of credit
|
$ | 10 | $ | 9 | $ | 1 | $ | - | $ | - | ||||||||||
59
Table of Contents
ECONOMIC CONDITIONS AND MARKET TRENDS
We operate within the aerospace and defense, industrial and medical markets. Our aerospace and
defense markets are affected by market conditions and program funding levels, while our industrial
markets are influenced by general capital investment trends. Our medical markets are influenced by
economic conditions, population demographics, medical advances and patient demand. A common factor
throughout our markets is the continuing demand for technologically advanced products.
Aerospace and Defense
Approximately 62% of our 2010 sales were generated in aerospace and defense markets. The military
aircraft market is dependent on military spending for development and production programs.
Production programs are typically long-term in nature, offering predictability as to capacity needs
and future revenues. We maintain positions on numerous high priority programs, including the F-35
Joint Strike Fighter, F/A-18E/F Super Hornet and V-22 Osprey. The large installed base of our
products leads to attractive aftermarket sales and service opportunities. Aftermarket revenues are
expected to continue to grow due to a number of scheduled military retrofit programs and increased
flight hours resulting from increased military commitments.
The commercial OEM market has historically exhibited cyclical swings and sensitivity to economic
conditions. The aftermarket is driven by usage of the existing aircraft fleet, the age of the
installed fleet and is currently being impacted by fleet re-sizing programs for passenger and cargo
aircraft. Changes in aircraft utilization rates affect the need for maintenance and spare parts and
impact aftermarket sales. Boeing and Airbus have historically adjusted production in line with air
traffic volume.
The military and government space market is primarily dependent on the authorized levels of funding
for satellite communications. Government spending on military satellites has risen in recent years
as the military’s need for improved intelligence gathering has increased. The commercial space
market is comprised of large satellite customers, traditionally telecommunications companies.
Trends for this market, as well as for commercial launch vehicles, follow the telecommunications
companies’ need for increased capacity and the satellite replacement lifecycle of 7-10 years. Our
position on NASA programs are impacted by the uncertainty and delays resulting from the
Administration’s re-definition of those programs; however, they hold the potential to be long-run
production programs.
The tactical missile, missile defense and defense controls markets are dependent on many of the
same market conditions as military aircraft, including overall military spending and program
funding levels. Our homeland security product line is dependent on government funding at federal
and local levels, as well as private sector demand.
Industrial
Approximately 30% of our 2010 sales were generated in industrial markets. The industrial markets we
serve are influenced by several factors, including capital investment, product innovation, economic
growth, cost-reduction efforts and technology upgrades. We are experiencing challenges from current
global economic conditions. This includes reacting to the demands for industrial automation
equipment and steel and automotive manufacturing. Those markets were impacted by the global
recession in 2009 and have now begun to recover in 2010.
Medical
Approximately 8% of our 2010 sales were generated in medical markets. The medical markets we serve
are influenced by economic conditions, hospital and outpatient clinic spending on equipment,
population demographics, medical advances, patient demands and the need for precision control
components and systems. Advances in medical technology and medical treatments have had the effect
of extending the average life span, in turn resulting in greater need for medical services. These
same technology and treatment advances also drive increased demand from the general population as a
means to improve quality of life. Greater access to medical insurance, whether through government
funded health care plans or private insurance, also increases the demand for medical services.
60
Table of Contents
Foreign Currencies
We are affected by the movement of foreign currencies compared to the U.S. dollar, particularly in
Industrial Systems. About one-third of our 2010 sales were denominated in foreign currencies.
During 2010, average foreign currency rates generally strengthened against the U.S. dollar compared
to 2009. The translation of the results of our foreign subsidiaries in U.S. dollars increased sales
by $11 million compared to the same period one year ago. During 2009, average foreign currency
rates generally weakened against the U.S. dollar compared to 2008. The translation of the results
of our foreign subsidiaries into U.S. dollars decreased sales by $49 million compared to 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (FASB) issued new standards on consolidation
as codified in Accounting Standards Codification (ASC) 810-10. The new standard amends the
consolidation guidance applicable to variable interest entities and affects the overall
consolidation analysis. The new standard is effective for fiscal years beginning after November 15,
2009. This statement will be effective for us in 2011. The adoption of this standard is not
expected to have a material impact on our consolidated financial statements.
In October 2009, the FASB issued new standards for allocating revenue to multiple deliverables in a
contract as codified in ASC 605-25. The new standard is effective for us at the beginning of 2011,
with early adoption permitted. The new standard allows entities to allocate consideration in a
multiple element arrangement in a manner that better reflects the transaction economics. When
vendor specific objective evidence or third party evidence for deliverables in an arrangement
cannot be determined, entities will be allowed to develop their best estimate of the selling price
for each deliverable and allocate arrangement consideration using the relative selling price
method. Additionally, use of the residual method has been eliminated. The adoption of this standard
is not expected to have a material impact on our consolidated financial statements.
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.” ASU Topic 820 requires new disclosures about transfers into and out of Levels 1 and
2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010 and for interim periods within
those fiscal years. This standard is effective for us beginning in 2011 for Level 1 and 2
disclosures and in 2012 for Level 3. Other than requiring additional disclosures, the adoption of
this new guidance will not have a material impact on our consolidated financial statements.
In April 2010, the FASB issued ASU 2010-17, “Milestone Method of Revenue Recognition.” This ASU
allows entities to make a policy election to use the milestone method of revenue recognition and
provides guidance on defining a milestone and the criteria that should be met to applying the
milestone method. The scope of this ASU is limited to the transactions involving milestones related
to research and development deliverables. This standard will be effective for us in 2011. The
adoption of this standard is not expected to have a material impact on our consolidated financial
statements.
In August 2010, the FASB issued new disclosure requirements about the credit quality of financing
receivables and allowance for credit losses, as codified in ASC 310. The objective of the new
standard is to facilitate a financial statement users’ evaluation of the nature of the credit risk
inherent in an entity’s portfolio, how that risk is analyzed and assessed in arriving at the
allowance for credit losses and explanations for changes in the allowance for credit losses. In
addition, the amendment requires entities to disclose credit quality indicators, past due
information and modification to financing receivables. The new standard is effective for interim
and annual periods ending on or after December 15, 2010. We will adopt this standard in 2011. We do
not expect the adoption of this standard to have a material impact on our consolidated financial
statements.
See also Note 1 of the Consolidated Financial Statements at Item 8 of this report.
61
Table of Contents
In the normal course of business, we have exposures to interest rate risk from our long-term debt
and foreign exchange rate risk related to our foreign operations and foreign currency transactions.
To manage these risks, we may enter into derivative instruments such as interest rate swaps and
foreign currency forward contracts. We do not hold or issue financial instruments for trading
purposes. In 2010, our derivative instruments consisted of interest rate swaps designated as cash
flow hedges and foreign currency forwards.
At October 2, 2010, we had $328 million of borrowings subject to variable interest rates. During
2010, our average borrowings subject to variable interest rates were $326 million and, therefore,
if interest rates had been one percentage point higher during 2010, our interest expense would have
been $3 million higher. At October 2, 2010, we had a $50 million notional amount of outstanding
interest rate swaps, which mature in the first quarter of 2012. Based on the applicable margin, the
interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at
3.1% through their maturities in 2012, at which time the interest will revert back to a variable
rate based on LIBOR.
We also enter into forward contracts to reduce fluctuations in foreign currency cash flows related
to third party purchases, intercompany product shipments and to reduce exposure on intercompany
balances that are denominated in foreign currencies. We have foreign currency forwards with
notional amounts of $194 million outstanding at October 2, 2010 that mature at various times
through the first quarter of 2012.
Although the majority of our sales, expenses and cash flows are transacted in U.S. dollars, we have
exposure to changes in foreign currency exchange rates such as the euro, British pound and Japanese
yen. If average annual foreign exchange rates collectively weakened against the U.S. dollar by 10%,
our pre-tax earnings in 2010 would have decreased by $8 million from foreign currency translation
offset by a $10 million increase from changes in operating margins as a result of foreign currency
transactions for products sourced outside of the U.S.
62
Table of Contents
Item 8.
Financial Statements and Supplementary Data.
MOOG
inc.
Consolidated Statements of Earnings
| Fiscal Years Ended | ||||||||||||
| October 2, | October 3, | September 27, | ||||||||||
| (dollars in thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
NET SALES
|
$ | 2,114,252 | $ | 1,848,918 | $ | 1,902,666 | ||||||
|
|
||||||||||||
|
COST OF SALES
|
1,501,641 | 1,311,618 | 1,293,452 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
GROSS PROFIT
|
612,611 | 537,300 | 609,214 | |||||||||
|
|
||||||||||||
|
Research and development
|
102,600 | 100,022 | 109,599 | |||||||||
|
|
||||||||||||
|
Selling, general and administrative
|
313,408 | 281,173 | 294,936 | |||||||||
|
|
||||||||||||
|
Restructuring
|
5,125 | 15,067 | - | |||||||||
|
|
||||||||||||
|
Interest
|
38,742 | 39,321 | 37,739 | |||||||||
|
|
||||||||||||
|
Other and equity in earnings of LTi
|
3,300 | (8,844 | ) | (1,095 | ) | |||||||
|
|
||||||||||||
|
EARNINGS BEFORE INCOME TAXES
|
149,436 | 110,561 | 168,035 | |||||||||
|
|
||||||||||||
|
INCOME TAXES
|
41,342 | 25,516 | 48,967 | |||||||||
|
|
||||||||||||
|
NET EARNINGS
|
$ | 108,094 | $ | 85,045 | $ | 119,068 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
NET EARNINGS PER SHARE
|
||||||||||||
|
|
||||||||||||
|
Basic
|
$ | 2.38 | $ | 2.00 | $ | 2.79 | ||||||
|
|
||||||||||||
|
Diluted
|
$ | 2.36 | $ | 1.98 | $ | 2.75 | ||||||
|
|
||||||||||||
|
AVERAGE COMMON SHARES OUTSTANDING
|
||||||||||||
|
|
||||||||||||
|
Basic
|
45,363,738 | 42,598,321 | 42,604,268 | |||||||||
|
|
||||||||||||
|
Diluted
|
45,709,020 | 42,906,495 | 43,256,888 | |||||||||
|
|
||||||||||||
See accompanying Notes to Consolidated Financial Statements.
63
Table of Contents
MOOG
inc.
Consolidated Balance Sheets
| October 2, | October 3, | |||||||
| (dollars in thousands, except per share data) | 2010 | 2009 | ||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 112,421 | $ | 81,493 | ||||
|
Receivables
|
619,861 | 547,571 | ||||||
|
Inventories
|
460,857 | 484,261 | ||||||
|
Deferred income taxes
|
75,367 | 73,673 | ||||||
|
Prepaid expenses and other current assets
|
23,773 | 23,400 | ||||||
|
TOTAL CURRENT ASSETS
|
1,292,279 | 1,210,398 | ||||||
|
PROPERTY, PLANT AND EQUIPMENT, net
|
486,944 | 481,726 | ||||||
|
GOODWILL
|
704,816 | 698,459 | ||||||
|
INTANGIBLE ASSETS, net of accumulated amortization of $92,326 in 2010 and $64,805 in 2009
|
205,874 | 220,311 | ||||||
|
OTHER ASSETS
|
22,221 | 23,423 | ||||||
|
TOTAL ASSETS
|
$ | 2,712,134 | $ | 2,634,317 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Notes payable
|
$ | 1,991 | $ | 16,971 | ||||
|
Current installments of long-term debt
|
5,405 | 1,541 | ||||||
|
Accounts payable
|
154,321 | 125,257 | ||||||
|
Accrued salaries, wages and commissions
|
103,628 | 91,302 | ||||||
|
Customer advances
|
74,703 | 66,811 | ||||||
|
Contract loss reserves
|
40,810 | 50,190 | ||||||
|
Other accrued liabilities
|
98,616 | 94,189 | ||||||
|
TOTAL CURRENT LIABILITIES
|
479,474 | 446,261 | ||||||
|
LONG-TERM DEBT, excluding current installments
|
||||||||
|
Senior debt
|
378,707 | 435,944 | ||||||
|
Senior subordinated notes
|
378,613 | 378,630 | ||||||
|
LONG-TERM PENSION AND RETIREMENT OBLIGATIONS
|
281,830 | 225,747 | ||||||
|
DEFERRED INCOME TAXES
|
69,541 | 76,910 | ||||||
|
OTHER LONG-TERM LIABILITIES
|
3,013 | 5,792 | ||||||
|
TOTAL LIABILITIES
|
1,591,178 | 1,569,284 | ||||||
|
COMMITMENTS AND CONTINGENCIES (Note 18)
|
- | - | ||||||
|
SHAREHOLDERS’ EQUITY
|
||||||||
|
Common stock - par value $1.00
|
||||||||
|
Class A - Authorized 100,000,000 shares
|
43,486 | 43,472 | ||||||
|
Issued 43,485,417 and outstanding 41,263,782 share at October 2, 2010
|
||||||||
|
Issued 43,471,373 and outstanding 41,167,674 shares at October 3, 2009
|
||||||||
|
Class B - Authorized 20,000,000 shares. Convertible to Class A on a one-for-one basis
|
7,794 | 7,808 | ||||||
|
Issued 7,794,296 and outstanding 4,113,823 share at October 2, 2010
|
||||||||
|
Issued 7,808,340 and outstanding 4,103,817 shares at October 3, 2009
|
||||||||
|
Additional paid-in capital
|
389,376 | 381,099 | ||||||
|
Retained earnings
|
880,733 | 772,639 | ||||||
|
Treasury shares
|
(47,724 | ) | (47,733 | ) | ||||
|
Stock Employee Compensation Trust
|
(13,381 | ) | (11,426 | ) | ||||
|
Accumulated other comprehensive loss
|
(139,328 | ) | (80,826 | ) | ||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
1,120,956 | 1,065,033 | ||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 2,712,134 | $ | 2,634,317 | ||||
|
See accompanying Notes to Consolidated Financial Statements.
|
||||||||
64
Table of Contents
MOOG
inc.
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Shareholders’ Equity
| Fiscal Years Ended | ||||||||||||
| October 2, | October 3, | September 27, | ||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
COMMON STOCK
|
||||||||||||
|
Beginning of year
|
$ | 51,280 | $ | 48,605 | $ | 48,605 | ||||||
|
Sale of Class A Common Stock
|
- | 2,675 | - | |||||||||
|
End of year
|
51,280 | 51,280 | 48,605 | |||||||||
|
ADDITIONAL PAID-IN CAPITAL
|
||||||||||||
|
Beginning of year
|
381,099 | 311,159 | 301,778 | |||||||||
|
Sale of Class A Common Stock, net of issuance costs
|
- | 72,042 | - | |||||||||
|
Issuance of treasury shares at more than cost
|
433 | 163 | 3,906 | |||||||||
|
Equity-based compensation expense
|
5,445 | 5,682 | 4,551 | |||||||||
|
Adjustment to market - SECT, and other
|
2,399 | (7,947 | ) | 924 | ||||||||
|
End of year
|
389,376 | 381,099 | 311,159 | |||||||||
|
RETAINED EARNINGS
|
||||||||||||
|
Beginning of year
|
772,639 | 688,585 | 570,063 | |||||||||
|
Net earnings
|
108,094 | 85,045 | 119,068 | |||||||||
|
Adjustment
to adopt defined benefit pension plan standard,
net of income taxes of $529 |
- | (991 | ) | - | ||||||||
|
Adjustment for adoption of income tax standard
|
- | - | (546 | ) | ||||||||
|
End of year
|
880,733 | 772,639 | 688,585 | |||||||||
|
TREASURY SHARES AT COST*
|
||||||||||||
|
Beginning of year
|
(47,733 | ) | (40,607 | ) | (39,873 | ) | ||||||
|
Class A shares issued related to options (2010 - 101,825;
2009 - 48,938; 2008 - 363,784) |
543 | 261 | 1,940 | |||||||||
|
Class A shares purchased (2010 - 19,761;
2009 - 244,688; 2008 - 59,908) |
(534 | ) | (7,387 | ) | (2,674 | ) | ||||||
|
End of year
|
(47,724 | ) | (47,733 | ) | (40,607 | ) | ||||||
|
STOCK EMPLOYEE COMPENSATION TRUST (SECT)**
|
||||||||||||
|
Beginning of year
|
(11,426 | ) | (22,179 | ) | (15,928 | ) | ||||||
|
Sale of SECT stock to RSP Plan (2010 - 60,366 Class B shares;
2009 - 205,028 Class B shares; 2008 - 21,527 Class B shares) |
1,732 | 5,593 | 942 | |||||||||
|
Purchase of SECT stock (2010 - 36,316 Class B shares;
2009 - 96,160 Class B shares; 2008 - 167,111 Class B shares) |
(1,296 | ) | (2,832 | ) | (7,530 | ) | ||||||
|
Adjustment to market - SECT
|
(2,391 | ) | 7,992 | 337 | ||||||||
|
End of year
|
(13,381 | ) | (11,426 | ) | (22,179 | ) | ||||||
|
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
|
||||||||||||
|
Beginning of year
|
(80,826 | ) | 8,847 | 12,567 | ||||||||
|
Other comprehensive loss
|
(58,502 | ) | (89,815 | ) | (3,720 | ) | ||||||
|
Adjustment to adopt defined benefit pension plan standard, net of
income taxes of $81 in 2009 |
- | 142 | - | |||||||||
|
End of year
|
(139,328 | ) | (80,826 | ) | 8,847 | |||||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
$ | 1,120,956 | $ | 1,065,033 | $ | 994,410 | ||||||
|
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
|
Net earnings
|
$ | 108,094 | $ | 85,045 | $ | 119,068 | ||||||
|
Other comprehensive income (loss) :
|
||||||||||||
|
Foreign currency translation adjustment
|
(858 | ) | (1,073 | ) | (2,854 | ) | ||||||
|
Retirement liability adjustment
|
(57,977 | ) | (89,062 | ) | (357 | ) | ||||||
|
Accumulated income (loss) on derivatives adjustment
|
333 | 320 | (509 | ) | ||||||||
|
COMPREHENSIVE INCOME (LOSS)
|
$ | 49,592 | $ | (4,770 | ) | $ | 115,348 | |||||
| * | Class A Common Stock in treasury: 2,221,635 shares at October 2, 2010; 2,303,699 shares at October 3, 2009; 2,107,949 shares at September 27, 2008. | |
| Class B Common Stock in treasury: 3,305,971 shares at October 2, 2010; October 3, 2009; September 27, 2008. | ||
| ** | Class B Common Stock in SECT: 374,502 shares at October 2, 2010; 398,552 shares at October 3, 2009; 507,420 shares at September 27, 2008. | |
| The shares in the SECT are not considered outstanding for purposes of calculating earnings per share. However, in accordance with the Trust agreement, the SECT trustee votes all shares held by the SECT on all matters submitted to shareholders. |
See accompanying Notes to Consolidated Financial Statements.
65
Table of Contents
MOOG
inc.
Consolidated Statements of Cash Flows
| Fiscal Years Ended | ||||||||||||
| October 2, | October 3, | September 27, | ||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net earnings
|
$ | 108,094 | $ | 85,045 | $ | 119,068 | ||||||
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
61,112 | 54,762 | 48,065 | |||||||||
|
Amortization
|
30,104 | 21,622 | 15,311 | |||||||||
|
Provisions
for non-cash losses on contracts, inventories and receivables
|
54,204 | 43,166 | 36,563 | |||||||||
|
Deferred income taxes
|
11,314 | 13,330 | (5,698 | ) | ||||||||
|
Equity-based compensation expense
|
5,445 | 5,682 | 4,551 | |||||||||
|
Equity in earnings of LTi
|
- | (6,717 | ) | (874 | ) | |||||||
|
Other
|
1,633 | (5,210 | ) | 2,381 | ||||||||
|
Changes in assets and liabilities providing (using) cash, excluding the effects of
acquisitions:
|
||||||||||||
|
Receivables
|
(70,076 | ) | 25,576 | (79,302 | ) | |||||||
|
Inventories
|
10,220 | 984 | (62,439 | ) | ||||||||
|
Other assets
|
1,074 | (5,043 | ) | (3,190 | ) | |||||||
|
Accounts payable and accrued liabilities
|
(7,295 | ) | (79,236 | ) | 16,653 | |||||||
|
Other liabilities
|
(18,136 | ) | (28,675 | ) | 10,122 | |||||||
|
Customer advances
|
7,563 | (7,394 | ) | 6,681 | ||||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
195,256 | 117,892 | 107,892 | |||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Acquisitions of businesses, net of cash acquired
|
(29,843 | ) | (261,193 | ) | (22,383 | ) | ||||||
|
Investment in LTi
|
- | - | (28,288 | ) | ||||||||
|
Purchase of property, plant and equipment
|
(65,949 | ) | (81,688 | ) | (91,761 | ) | ||||||
|
Supplemental retirement plan investment redemption
|
- | 19,981 | - | |||||||||
|
Other
|
(2,285 | ) | (1,843 | ) | (6,448 | ) | ||||||
|
NET CASH USED BY INVESTING ACTIVITIES
|
(98,077 | ) | (324,743 | ) | (148,880 | ) | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Repayments of notes payable
|
(15,830 | ) | (16,996 | ) | (709 | ) | ||||||
|
Proceeds from revolving lines of credit
|
543,319 | 1,173,249 | 450,705 | |||||||||
|
Payments on revolving lines of credit
|
(591,505 | ) | (1,003,659 | ) | (599,705 | ) | ||||||
|
Payments on long-term debt, other than senior subordinated notes
|
(2,795 | ) | (2,331 | ) | (1,933 | ) | ||||||
|
Proceeds from senior subordinated notes, net of issuance costs
|
- | - | 196,393 | |||||||||
|
Payments on senior subordinated notes
|
- | (19,981 | ) | - | ||||||||
|
Proceeds from sale of Class A common stock, net of issuance costs
|
- | 74,717 | - | |||||||||
|
Proceeds from sale of treasury stock
|
976 | 424 | 5,846 | |||||||||
|
Purchase of outstanding shares for treasury
|
(534 | ) | (7,387 | ) | (2,674 | ) | ||||||
|
Proceeds from sale of stock held by Stock Employee Compensation Trust
|
1,732 | 5,593 | 942 | |||||||||
|
Purchase of stock held by Stock Employee Compensation Trust
|
(1,296 | ) | (2,832 | ) | (7,530 | ) | ||||||
|
Excess tax benefits from equity-based payment arrangements
|
6 | 43 | 1,137 | |||||||||
|
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
|
(65,927 | ) | 200,840 | 42,472 | ||||||||
|
Effect of exchange rate changes on cash
|
(324 | ) | 690 | 1,474 | ||||||||
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
30,928 | (5,321 | ) | 2,958 | ||||||||
|
Cash and cash equivalents at beginning of year
|
81,493 | 86,814 | 83,856 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 112,421 | $ | 81,493 | $ | 86,814 | ||||||
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
||||||||||||
|
Cash paid for:
|
||||||||||||
|
Interest
|
$ | 37,492 | $ | 39,119 | $ | 35,402 | ||||||
|
Income taxes, net of refunds
|
23,744 | 24,630 | 50,555 | |||||||||
|
Non-cash investing and financing activities:
|
||||||||||||
|
Unsecured notes issued as partial consideration for acquisitions
|
$ | 2,350 | $ | 13,451 | $ | 5,000 | ||||||
|
Equipment acquired through financing
|
- | 138 | 72 | |||||||||
|
See accompanying Notes to Consolidated Financial Statements.
|
||||||||||||
66
Table of Contents
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
Consolidation:
The consolidated financial statements include the accounts of Moog Inc. and all of
our U.S. and foreign subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
Fiscal Year:
Our fiscal year ends on the Saturday that is closest to September 30. The consolidated
financial statements include 52 weeks for the year ended October 2, 2010, 53 weeks for the year
ended October 3, 2009 and 52 weeks for the year ended September 27, 2008. While management believes
this affects the comparability of financial statements presented, the impact has not been
determined.
Operating Cycle:
Consistent with industry practice, aerospace and defense related inventories,
unbilled recoverable costs and profits on long-term contract receivables, customer advances and
contract loss reserves include amounts relating to contracts having long production and procurement
cycles, portions of which are not expected to be realized or settled within one year.
Foreign Currency Translation:
Assets and liabilities of subsidiaries that prepare financial
statements in currencies other than the U.S. dollar are translated using rates of exchange as of
the balance sheet date and the statements of earnings are translated at the average rates of
exchange for each reporting period.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.
Revenue Recognition:
We recognize revenue using either the percentage of completion method for
contracts or as units are delivered or services are performed.
Percentage of completion method for contracts
: Revenue representing 30% of 2010 sales was accounted
for using the percentage of completion, cost-to-cost method of accounting. This method of revenue
recognition is predominately used within the Aircraft Controls and Space and Defense Controls
segments due to the contractual nature of the business activities, with the exception of their
respective aftermarket activities. The contractual arrangements are either firm fixed-price or
cost-plus contracts and are primarily with the U.S. Government or its prime subcontractors, foreign
governments or commercial aircraft manufacturers, including Boeing and Airbus. The nature of the
contractual arrangements includes customers’ requirements for delivery of hardware as well as
funded nonrecurring development work in anticipation of follow-on production orders.
Revenue on contracts using the percentage of completion, cost-to-cost method of accounting is
recognized as work progresses toward completion as determined by the ratio of cumulative costs
incurred to date to estimated total contract costs at completion, multiplied by the total estimated
contract revenue, less cumulative revenue recognized in prior periods. Changes in estimates
affecting sales, costs and profits are recognized in the period in which the change becomes known
using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes
reflected in the period. Estimates are reviewed and updated quarterly for substantially all
contracts. A significant change in an estimate on one or more contracts could have a material
effect on our results of operations.
Occasionally, it is appropriate to combine or segment contracts. Contracts are combined in those
limited circumstances when they are negotiated as a package in the same economic environment with
an overall profit margin objective and constitute, in essence, an agreement to do a single project.
In such cases, revenue and costs are recognized over the performance period of the combined
contracts as if they were one. Contracts are segmented in limited circumstances if the customer had
the right to accept separate elements of the contract and the total amount of the proposals on the
separate components approximated the amount of the proposal on the entire project. For segmented
contracts, revenue and costs are recognized as if they were separate contracts over the performance
periods of the individual elements or phases.
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Table of Contents
Contract costs include only allocable, allowable and reasonable costs, as determined in accordance
with the Federal Acquisition Regulations and the related Cost Accounting Standards for applicable
U.S. Government contracts, and are included in cost of sales when incurred. The nature of these
costs includes development engineering costs and product manufacturing costs including direct
material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded
as a result of the revenue recognized less costs incurred in any reporting period. Amounts
representing performance incentives, penalties, contract claims or change orders are considered in
estimating revenues, costs and profits when they can be reliably estimated and realization is
considered probable. Revenue recognized on contracts for unresolved claims or unapproved contract
change orders was not material for 2010, 2009 and 2008.
For contracts with anticipated losses at completion, a provision for the entire amount of the
estimated remaining loss is charged against income in the period in which the loss becomes known.
Contract losses are determined considering all direct and indirect contract costs, exclusive of any
selling, general or administrative cost allocations that are treated as period expenses. Loss
reserves are more common on firm fixed-price contracts that involve, to varying degrees, the design
and development of new and unique controls or control systems to meet the customers’
specifications.
As units are delivered or services are performed
: In 2010, 70% of our sales were recognized as
units were delivered or as service obligations were satisfied. Revenue is recognized when the risks
and rewards of ownership and title to the product are transferred to the customer. When engineering
or similar services are performed, revenue is recognized upon completion of the obligation
including any delivery of engineering drawings or technical data. This method of revenue
recognition is predominately used within the Industrial Systems, Components and Medical Devices
segments, as well as with aftermarket activity. Profits are recorded as costs are relieved from
inventory and charged to cost of sales and as revenue is recognized. Inventory costs include all
product manufacturing costs such as direct material, direct labor, other direct costs and indirect
overhead cost allocations.
Shipping and Handling Costs:
Shipping and handling costs are included in cost of sales.
Research and Development:
Research and development costs are expensed as incurred and include
salaries, benefits, consulting, material costs and depreciation.
Bid and Proposal Costs:
Bid and proposal costs are expensed as incurred and classified as selling,
general and administrative expenses.
Earnings Per Share:
Basic and diluted weighted-average shares outstanding are as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Basic weighted-average shares outstanding
|
45,363,738 | 42,598,321 | 42,604,268 | |||||||||
|
Dilutive effect of equity-based awards
|
345,282 | 308,174 | 652,620 | |||||||||
|
Diluted weighted-average shares outstanding
|
45,709,020 | 42,906,495 | 43,256,888 | |||||||||
Equity-Based Compensation:
Equity-based compensation expense is included in selling, general
and administrative expenses.
Cash and Cash Equivalents:
All highly liquid investments with an original maturity of three months
or less are considered cash equivalents.
Allowance for Doubtful Accounts:
The allowance for doubtful accounts is based on our assessment of
the collectibility of customer accounts. The allowance is determined by considering factors such as
historical experience, credit quality, age of the accounts receivable balances and current economic
conditions that may affect a customer’s ability to pay.
Inventories:
Inventories are stated at the lower-of-cost-or-market with cost determined on the
first-in, first-out (FIFO) method of valuation.
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Table of Contents
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Plant and
equipment are depreciated principally using the straight-line method over the estimated useful
lives of the assets, generally 40 years for buildings, 15 years for building improvements, 12 years
for furniture and fixtures, 10 years for machinery and equipment, 8 years for tooling and test
equipment and 3 to 4 years for computer hardware. Leasehold improvements are amortized on a
straight-line basis over the term of the lease or the estimated useful life of the asset, whichever
is shorter.
Goodwill:
We test goodwill for impairment at the reporting unit level on an annual basis or more
frequently if an event occurs or circumstances change that indicate that the fair value of a
reporting unit could be below its carrying amount. The impairment test consists of comparing the
fair value of a reporting unit, determined using discounted cash flows, with its carrying amount
including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value,
comparing the implied fair value of goodwill with its carrying amount. An impairment loss would be
recognized for the carrying amount of goodwill in excess of its implied fair value. There were no
impairment charges recorded in 2010, 2009 or 2008.
Acquired Intangible Assets:
Acquired identifiable intangible assets are recorded at cost and are
amortized over their estimated useful lives. There were no identifiable intangible assets with
indefinite lives at October 2, 2010.
Impairment of Long-Lived Assets:
Long-lived assets, including acquired identifiable intangible
assets, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of those assets may not be recoverable. We use undiscounted cash flows to determine
whether impairment exists and measure any impairment loss using discounted cash flows. There were
no impairment charges recorded in 2010, 2009 or 2008.
Product Warranties:
In the ordinary course of business, we warrant our products against defect 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:
|
|
||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Warranty accrual at beginning of year
|
$ | 14,675 | $ | 10,015 | $ | 7,123 | ||||||
|
|
||||||||||||
|
Additions from acquisitions
|
213 | 4,436 | 100 | |||||||||
|
|
||||||||||||
|
Warranties issued during current year
|
6,729 | 7,456 | 7,998 | |||||||||
|
|
||||||||||||
|
Adjustments to pre-existing warranties
|
186 | 780 | (27 | ) | ||||||||
|
|
||||||||||||
|
Reductions for settling warranties
|
(6,831 | ) | (8,048 | ) | (5,533 | ) | ||||||
|
|
||||||||||||
|
Foreign currency translation
|
(116 | ) | 36 | 354 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Warranty accrual at end of year
|
$ | 14,856 | $ | 14,675 | $ | 10,015 | ||||||
|
|
||||||||||||
Financial Instruments:
Our financial instruments consist primarily of cash and cash
equivalents, receivables, notes payable, accounts payable, long-term debt, interest rate swaps and
foreign currency forwards. The carrying values for our financial instruments approximate fair value
with the exception at times of long-term debt. See Note 7 for fair value of long-term debt. We do
not hold or issue financial instruments for trading purposes.
We carry derivative instruments on the balance sheet at fair value, determined by reference to
quoted market prices. The accounting for changes in the fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging relationship and, if
so, the reason for holding it. Our use of derivative instruments is generally limited to cash flow
hedges of certain interest rate risks and minimizing foreign currency exposure on foreign currency
transactions, which are typically designated in hedging relationships, and intercompany balances,
which are not designated as hedging instruments. Cash flows resulting from forward contracts are
accounted for as hedges of identifiable transactions or events and classified in the same category
as the cash flows from the items being hedged.
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Table of Contents
Recent Accounting Pronouncements:
In December 2007, the FASB issued new standards for business
combinations as codified in ASC 805-10. The objective of the new standard is to improve the
relevance, representational faithfulness and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its effects. It
establishes principles and requirements for the acquirer to recognize and measure the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, the goodwill
acquired or a gain from a bargain purchase. It also provides disclosure requirements to enable
users of the financial statements to evaluate the nature and financial effects of the business
combination. The new standard applies prospectively to 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, 2008. We adopted this standard at the beginning of 2010.
In December 2007, the FASB issued new standards for consolidation as codified in ASC 810-10. The
objective of the new standard is to improve the relevance, comparability and transparency of the
financial information that a reporting entity provides in its consolidated financial statements by
establishing additional accounting and reporting standards. The new standard is effective for
fiscal years beginning on or after December 15, 2008. We adopted this standard at the beginning of
2010.
In April 2008, the FASB issued new standards on intangible assets as codified in ASC 350-30. The
new standard amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset. The objective is to
improve the consistency between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset. The new standard applies to all
intangible assets, whether acquired in a business combination or otherwise. It is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years and applied prospectively to intangible assets acquired after the
effective date. We adopted this standard at the beginning of 2010.
In December 2008, the FASB issued new standards on defined benefit pension plans as codified in ASC
715-20. The new standard provides guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan. Required disclosures address: how investment
allocation decisions are made; the major categories of plan assets; the inputs and valuation
techniques used to measure the fair value of plan assets; the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period; and significant
concentrations of risk within plan assets. The new standard is effective for fiscal years ending
after December 15, 2009 and is not required for earlier periods presented for comparative purposes.
This statement is effective for us in 2010. See Note 11, Employee Benefit Plans, for related
disclosures.
In April 2009, the FASB issued new standards on identifiable assets and liabilities assumed in a
business combination as codified in ASC 805-20. The new standard amends the provisions related to
the initial recognition and measurement, subsequent measurement and disclosure of assets and
liabilities arising from contingencies in a business combination. The new standard carries forward
the requirements in current standards for acquired contingencies, thereby requiring that such
contingencies be recognized at fair value on the acquisition date if fair value can be reasonably
estimated during the allocation period. Otherwise, entities would typically account for the
acquired contingencies in accordance with standards codified in ASC 450-10. The new standard is
effective prospectively to 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, 2008. We adopted
this standard at the beginning of 2010.
In February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition and Disclosure
Requirements,” which amends ASC 855, “Subsequent Events,” to address certain implementation issues
related to an entity’s requirement to perform and disclose subsequent events procedures. ASU
2010-09 requires SEC filers to evaluate subsequent events through the date the financial statements
are issued and exempts SEC filers from disclosing the date through which subsequent events have
been evaluated. The ASU was effective immediately upon issuance. The adoption of ASU 2010-09 did
not have a material impact on our consolidated financial statements.
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Table of Contents
All of our acquisitions are accounted for under the purchase method and, accordingly, the operating
results for the acquired companies are included in the consolidated statements of earnings from the
respective dates of acquisition. Under purchase accounting, we record assets and liabilities at
fair value and such amounts are reflected in the respective captions on the balance sheet. All of
the following acquisitions, with the exception of LTi REEnergy GmbH, resulted in goodwill being
recorded as a result of the respective purchase price allocations.
In 2010, we completed four business combinations within three of our segments. We completed one
acquisition in our Aircraft Controls segment for $8,100 in cash, issuance of a $1,200 unsecured
note and contingent consideration with an initial fair value of $1,400. This acquisition
complements our military aftermarket business. We acquired two businesses in our Space and Defense
Controls segment for $20,273, net of cash acquired, issuance of a $1,000 unsecured note and
contingent consideration with an initial fair value of $1,600. One business specializes in turret
design, fire control systems and vehicle electronics and the other expands our capabilities in the
security and surveillance market. We completed one acquisition in our Industrial Systems segment
for $1,050 in cash and issuance of a $150 unsecured note. Combined sales of these acquisitions for the 2009 calendar year were approximately $34,000.
The purchase price allocations for the
2010 acquisitions are substantially complete. Those allocations are subject to subsequent
adjustment as we obtain additional information for our estimates during the respective measurement
periods.
In 2009, we completed eight business combinations within four of our segments. We completed two
acquisitions in our Aircraft Controls segment, both of which are located in the U.K., for a total
purchase price of $136,584. We acquired the flight control actuation business of GE Aviation
Systems which complements our flight control actuation business and Fernau Avionics Limited that
expands our business in ground-based air navigation systems. Combined sales of these acquisitions for the 2008 calendar year were approximately $122,500. We acquired one business, Videolarm
Inc., based in Georgia, in our Space and Defense Controls segment for $44,853 that expands our
capabilities in the security and surveillance markets. Sales for the 2008 calendar year were approximately $19,500. We completed three acquisitions in our
Industrial Systems segment for a total of $109,617, which includes $28,288 for a 40% ownership paid
in 2008 for one of the acquired companies. LTi REEnergy GmbH, with operations in Germany and China,
and Insensys Ltd., a UK-based company, both specialize in systems and blade controls of turbines
for the wind energy market. Berkeley Process Control, Inc., based in California, manufactures
motion control software and hardware. Prior to acquiring 100% ownership in LTi REEnergy, we
accounted for our investment using the equity method of accounting. Our 40% share of the net
earnings for 2009 and 2008 was $6,717 and $874, respectively. Combined sales for the twelve months preceding these acquisitions were approximately $154,300. We also completed two acquisitions in
our Medical Devices segment for a total purchase price of $36,510, which includes $6,814 of assumed
debt. Aitecs Medical UAB, a Lithuanian-based manufacturer, expands our portfolio to include
syringe style pumps and Ethox International, based in New York, produces proprietary medical
devices and contract manufacturing of disposables as well as microbiology, toxicology and
sterilization services. Combined sales of these acquisitions for the 2008 calendar year were approximately $36,000. Our purchase price allocations for the 2009 acquisitions are complete.
Receivables consist of:
|
|
||||||||
| October 2, | October 3, | |||||||
|
|
||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Accounts receivable
|
$ | 311,966 | $ | 265,271 | ||||
|
|
||||||||
|
Long-term contract receivables:
|
||||||||
|
|
||||||||
|
Amounts billed
|
95,465 | 53,458 | ||||||
|
|
||||||||
|
Unbilled recoverable costs and accrued profits
|
203,373 | 222,133 | ||||||
|
|
||||||||
|
|
||||||||
|
Total long-term contract receivables
|
298,838 | 275,591 | ||||||
|
|
||||||||
|
Other
|
13,870 | 10,723 | ||||||
|
|
||||||||
|
|
||||||||
|
Total receivables
|
624,674 | 551,585 | ||||||
|
|
||||||||
|
Less allowance for doubtful accounts
|
(4,813 | ) | (4,014 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Receivables
|
$ | 619,861 | $ | 547,571 | ||||
|
|
||||||||
71
Table of Contents
Long-term contract receivables are primarily associated with prime contractors and
subcontractors in connection with U.S. Government contracts, commercial aircraft and satellite
manufacturers. Amounts billed under long-term contracts to the U.S. Government were $18,179 at
October 2, 2010 and $18,485 at October 3, 2009. Unbilled recoverable costs and accrued profits
under long-term contracts to be billed to the U.S. Government were $7,638 at October 2, 2010 and
$11,595 at October 3, 2009. Unbilled recoverable costs and accrued profits principally represent
revenues recognized on contracts that were not billable on the balance sheet date. These amounts
will be billed in accordance with contract terms, generally as certain milestones are reached or
upon shipment. Approximately two-thirds of unbilled amounts are expected to be collected within one
year. In situations where billings exceed revenues recognized, the excess is included in
customer advances.
There are no material amounts of claims or unapproved change orders included in the balance sheet.
Balances billed but not paid by customers under retainage provisions are not material.
Concentrations of credit risk on receivables are limited to those from significant customers that
are believed to be financially sound. Receivables from Boeing were $122,345 at October 2, 2010 and
$93,497 at October 3, 2009. We perform periodic credit evaluations of our customers’ financial
condition and generally do not require collateral.
Inventories, net of reserves, consist of:
|
|
||||||||
| October 2, | October 3, | |||||||
|
|
||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Raw materials and purchased parts
|
$ | 179,375 | $ | 206,414 | ||||
|
|
||||||||
|
Work in progress
|
221,128 | 214,021 | ||||||
|
|
||||||||
|
Finished goods
|
60,354 | 63,826 | ||||||
|
|
||||||||
|
|
||||||||
|
Inventories
|
$ | 460,857 | $ | 484,261 | ||||
|
|
||||||||
Property, plant and equipment consists of:
|
|
||||||||
| October 2, | October 3, | |||||||
|
|
||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Land
|
$ | 26,779 | $ | 26,445 | ||||
|
|
||||||||
|
Buildings and improvements
|
320,165 | 303,652 | ||||||
|
|
||||||||
|
Machinery and equipment
|
597,916 | 597,055 | ||||||
|
|
||||||||
|
|
||||||||
|
Property, plant and equipment, at cost
|
944,860 | 927,152 | ||||||
|
|
||||||||
|
Less accumulated depreciation and amortization
|
(457,916 | ) | (445,426 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Property, plant and equipment
|
$ | 486,944 | $ | 481,726 | ||||
|
|
||||||||
Assets under capital leases included in property, plant and equipment are summarized as
follows:
|
|
||||||||
| October 2, | October 3, | |||||||
|
|
||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Assets under capital leases, at cost
|
$ | 3,925 | $ | 4,148 | ||||
|
|
||||||||
|
Less accumulated amortization
|
(1,334 | ) | (752 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Net assets under capital leases
|
$ | 2,591 | $ | 3,396 | ||||
|
|
||||||||
72
Table of Contents
The changes in the carrying amount of goodwill for 2010, 2009 and 2008 are as follows:
|
|
||||||||||||||||||||||||
| Space and | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Aircraft | Defense | Industrial | Medical | |||||||||||||||||||||
| Controls | Controls | Systems | Components | Devices | Total | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at September 29, 2007
|
$ | 103,898 | $ | 67,546 | $ | 101,465 | $ | 153,442 | $ | 112,082 | $ | 538,433 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Acquisitions
|
- | 12,082 | - | 8,333 | - | 20,415 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Adjustments to prior year acquisitions
|
- | 2,162 | 138 | 197 | (117 | ) | 2,380 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Foreign currency translation
|
27 | - | 735 | (1,255 | ) | - | (493 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at September 27, 2008
|
103,925 | 81,790 | 102,338 | 160,717 | 111,965 | 560,735 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Acquisitions
|
74,219 | 25,012 | 21,027 | - | 15,024 | 135,282 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Foreign currency translation
|
2,550 | - | 790 | (1,358 | ) | 460 | 2,442 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at October 3, 2009
|
180,694 | 106,802 | 124,155 | 159,359 | 127,449 | 698,459 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Acquisitions
|
4,917 | 14,201 | 577 | - | - | 19,695 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Adjustments to prior year acquisitions
|
(11,903 | ) | - | - | - | (82 | ) | (11,985 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Foreign currency translation
|
(201 | ) | 620 | (2,612 | ) | 1,537 | (697 | ) | (1,353 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at October 2, 2010
|
$ | 173,507 | $ | 121,623 | $ | 122,120 | $ | 160,896 | $ | 126,670 | $ | 704,816 | ||||||||||||
Adjustments to prior year acquisitions in 2010 relate primarily to a business combination
completed in the last week of 2009. We revised our estimates of the purchase price allocation based
on obtaining additional information related to certain assets and liabilities acquired.
The components of acquired intangible assets are as follows:
|
|
||||||||||||||||||||
| October 2, 2010 | October 3, 2009 | |||||||||||||||||||
| Weighted- | Gross | Gross | ||||||||||||||||||
| Average | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
| Life (Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
|
|
||||||||||||||||||||
|
Customer-related
|
10 | $ | 148,722 | $ | (49,781 | ) | $ | 142,555 | $ | (34,748 | ) | |||||||||
|
|
||||||||||||||||||||
|
Program-related
|
18 | 63,796 | (5,275 | ) | 61,599 | (1,475 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Technology-related
|
9 | 54,743 | (22,117 | ) | 50,698 | (15,955 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Marketing-related
|
9 | 22,256 | (11,548 | ) | 22,616 | (10,109 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Contract-related
|
3 | 3,312 | (1,104 | ) | 3,000 | - | ||||||||||||||
|
|
||||||||||||||||||||
|
Artistic-related
|
10 | 25 | (22 | ) | 25 | (20 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Acquired intangible assets
|
11 | $ | 292,854 | $ | (89,847 | ) | $ | 280,493 | $ | (62,307 | ) | |||||||||
All acquired intangible assets other than goodwill are amortized. Customer-related intangible
assets primarily consist of customer relationships. Program-related intangibles assets consist of
long-term programs. Technology-related intangible assets primarily consist of technology, patents,
intellectual property and software. 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 $28,280 in 2010, $19,734 in 2009 and $14,017 in
2008. Based on acquired intangible assets recorded at October 2, 2010, amortization is estimated to
be $27,800 in 2011, $26,886 in 2012, $23,177 in 2013, $20,820 in 2014 and $17,999 in 2015.
73
Table of Contents
Long-term debt consists of:
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
U.S. revolving credit facility
|
$ | 371,179 | $ | 422,090 | ||||
|
|
||||||||
|
Other revolving credit facilities and term loans
|
11,914 | 13,866 | ||||||
|
|
||||||||
|
Obligations under capital leases
|
1,019 | 1,529 | ||||||
|
|
||||||||
|
|
||||||||
|
Senior debt
|
384,112 | 437,485 | ||||||
|
|
||||||||
|
6 1/4% senior subordinated notes
|
187,038 | 187,055 | ||||||
|
|
||||||||
|
7 1/4% senior subordinated notes
|
191,575 | 191,575 | ||||||
|
|
||||||||
|
|
||||||||
|
Total long-term debt
|
762,725 | 816,115 | ||||||
|
|
||||||||
|
Less current installments
|
(5,405 | ) | (1,541 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Long-term debt
|
$ | 757,320 | $ | 814,574 | ||||
Our U.S. revolving credit facility consists of a $750,000 revolver, which matures on March 14,
2013. The credit facility is secured by substantially all of our U.S. assets. The loan agreement
contains various covenants which, among others, specify minimum consolidated net worth and interest
coverage and maximum leverage and capital expenditures. We are in compliance with all covenants.
Interest on the majority of the outstanding credit facility borrowings is 2.4% and is based on
LIBOR plus the applicable margin, which was 200 basis points at October 2, 2010. Interest on the
remaining outstanding credit facility borrowings is 4.3% and is based on prime plus the applicable
margin, which was 125 basis points at October 2, 2010.
In addition to our U.S. revolving credit facility, we maintain short-term credit facilities with
banks throughout the world. These credit facilities are principally demand lines subject to
revision by the banks. At October 2, 2010, we had $387,114 of unused borrowing capacity, including
$369,100 from the U.S. credit facility. Commitment fees are charged on some of these arrangements
and on the U.S. credit facility based on a percentage of the unused amounts available and are not
material.
Other revolving credit facilities and term loans at October 2,
2010 consist of financing provided by various banks and lenders to certain subsidiaries. These
loans are being repaid through 2023 and carry interest rates ranging from 2% to
6%.
We have outstanding $187,000 aggregate principal amount of 6
1
/
4
% senior subordinated notes due
January 15, 2015, a portion of which were sold at amounts in excess of par. Interest is paid
semiannually on January 15 and July 15 of each year. We also have outstanding $191,575 aggregate
principal amount of 7
1
/
4
% senior subordinated notes due June 15, 2018. Interest is paid semiannually
on June 15 and December 15 of each year. We purchased $13,000 of the 6
1
/
4
% senior subordinated notes
and $8,425 of the 7
1
/
4
% senior subordinated notes in 2009, which resulted in a recognized gain of
$1,444. Both the 6
1
/
4
% and 7
1
/
4
% senior subordinated notes are unsecured, general
obligations,
subordinated in right of payment to all existing and future senior indebtedness and contain normal
incurrence-based covenants.
Maturities of long-term debt are $5,405 in 2011, $2,448 in 2012, $374,806 in 2013, $243 in 2014 and
$187,262 in 2015 and $192,561 thereafter.
At October 2, 2010, we had pledged assets with a net book value of $1,297,897 as security for
long-term debt.
Our only financial instrument for which the carrying value at times differs from its fair value is
long-term debt. At October 2, 2010, the fair value of long-term debt was $768,423 compared to its
carrying value of $762,725. The fair value of long-term debt was estimated based on quoted market
prices.
74
Table of Contents
We principally use derivative financial instruments to manage interest rate risk associated with
long-term debt and foreign exchange risk related to foreign operations and foreign currency
transactions. We enter into derivative financial instruments with a number of major financial
institutions to minimize counterparty credit risk.
Derivatives designated as hedging instruments
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable and
fixed interest rates. The interest rate swaps are designated as hedges of the amount of future cash
flows related to interest payments on variable-rate debt that, in combination with the interest
payments on the debt, convert a portion of the variable-rate debt to fixed-rate debt. At October 2,
2010, we had interest rate swaps with notional amounts totaling $50,000. The interest rate swaps
effectively convert this amount of variable-rate debt to fixed-rate debt at 3.1%, including the
applicable margin of 200 basis points as of October 2, 2010. The interest will revert back to
variable rates based on LIBOR plus the applicable margin upon the maturity of the interest rate
swaps in 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 $12,372 at
October 2, 2010. These contracts mature at various times through the first quarter of 2012.
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 2010, 2009 or 2008.
Activity in Accumulated Other Comprehensive Income (Loss) (AOCI) related to these derivatives is
summarized below:
| Pre-tax | Income | After-tax | ||||||||||
| Amount | Tax | Amount | ||||||||||
|
|
||||||||||||
|
Balance at September 27, 2008
|
$ | (818 | ) | $ | 309 | (509 | ) | |||||
|
|
||||||||||||
|
Net (decrease) in fair value of derivatives
|
(826 | ) | 279 | (547 | ) | |||||||
|
|
||||||||||||
|
Net reclassification from AOCI into earnings
|
1,382 | (515 | ) | 867 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance at October 3, 2009
|
(262 | ) | 73 | (189 | ) | |||||||
|
|
||||||||||||
|
Net increase in fair value of derivatives
|
193 | (82 | ) | 111 | ||||||||
|
|
||||||||||||
|
Net reclassification from AOCI into earnings
|
292 | (70 | ) | 222 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance at October 2, 2010
|
$ | 223 | $ | (79 | ) | $ | 144 | |||||
|
|
||||||||||||
Activity and classification of derivatives are as follows:
| Classification of net gain (loss) | Net reclassification from AOCI into | Net deferral in AOCI of derivatives | ||||||||||||||||
| recognized in earnings | earnings (effective portion) | (effective portion) | ||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Interest rate swaps
|
Interest expense | $ | (615 | ) | $ | (1,876 | ) | $ | (768 | ) | $ | (1,312 | ) | |||||
|
|
||||||||||||||||||
|
Foreign currency forwards
|
Net sales | - | (70 | ) | - | (39 | ) | |||||||||||
|
|
||||||||||||||||||
|
Foreign currency forwards
|
Cost of sales | 323 | 519 | 961 | 525 | |||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Net gain (loss)
|
$ | (292 | ) | $ | (1,427 | ) | $ | 193 | $ | (826 | ) | |||||||
|
|
||||||||||||||||||
75
Table of Contents
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 have
foreign currency forwards with notional amounts of $178,434 at October 2, 2010. The foreign
currency forwards are recorded in the balance sheet at fair value and resulting gains or losses are
recorded in the statements of earnings. We recorded a net gain of $310 in 2010 on the foreign
currency forwards. The net gain is included in other income or expense and generally offset the
gains or losses from the foreign currency adjustments on the intercompany balances.
Summary of derivatives
The fair value and classification of derivatives is summarized as follows:
| October 2, | October 3, | |||||||||
| 2010 | 2009 | |||||||||
|
|
||||||||||
|
|
||||||||||
|
Derivatives designated as
hedging instruments:
|
||||||||||
|
|
||||||||||
|
Foreign currency forwards
|
Other current assets | $ | 498 | $ | 305 | |||||
|
|
||||||||||
|
Foreign currency forwards
|
Other assets | 92 | - | |||||||
|
|
||||||||||
|
|
||||||||||
|
|
$ | 590 | $ | 305 | ||||||
|
|
||||||||||
|
|
||||||||||
|
Foreign currency forwards
|
Other accrued liabilities | $ | - | $ | 211 | |||||
|
|
||||||||||
|
Foreign currency forwards
|
Other long-term liabilities | - | 102 | |||||||
|
|
||||||||||
|
Interest rate swaps
|
Other accrued liabilities | 381 | 735 | |||||||
|
|
||||||||||
|
Interest rate swaps
|
Other long-term liabilities | 63 | - | |||||||
|
|
||||||||||
|
|
||||||||||
|
|
$ | 444 | $ | 1,048 | ||||||
|
|
||||||||||
|
|
||||||||||
|
Derivatives not designated as
hedging instruments:
|
||||||||||
|
|
||||||||||
|
Foreign currency forwards
|
Other current assets | $ | 3,101 | $ | 1,728 | |||||
|
|
||||||||||
|
Foreign currency forwards
|
Other assets | 74 | - | |||||||
|
|
||||||||||
|
|
||||||||||
|
|
$ | 3,175 | $ | 1,728 | ||||||
|
|
||||||||||
|
|
||||||||||
|
Foreign currency forwards
|
Other accrued liabilities | $ | 2,346 | $ | 1,607 | |||||
|
|
||||||||||
|
Foreign currency forwards
|
Other long-term liabilities | 61 | - | |||||||
|
|
||||||||||
|
|
||||||||||
|
|
$ | 2,407 | $ | 1,607 | ||||||
|
|
||||||||||
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.
76
Table of Contents
The following table presents the fair values and classification of our financial assets and
liabilities measured on a recurring basis as of October 2, 2010:
| Classification | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Foreign currency forwards
|
Other current assets | $ | - | $ | 3,599 | $ | - | $ | 3,599 | |||||||||
|
|
||||||||||||||||||
|
Foreign currency forwards
|
Other assets | - | 166 | - | 166 | |||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
|
$ | - | $ | 3,765 | $ | - | $ | 3,765 | ||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Foreign currency forwards
|
Other accrued liabilities | $ | - | $ | 2,346 | $ | - | $ | 2,346 | |||||||||
|
|
||||||||||||||||||
|
Foreign currency forwards
|
Other long-term liabilities | - | 61 | - | 61 | |||||||||||||
|
|
||||||||||||||||||
|
Interest rate swaps
|
Other accrued liabilities | - | 381 | - | 381 | |||||||||||||
|
|
||||||||||||||||||
|
Interest rate swaps
|
Other long-term liabilities | - | 63 | - | 63 | |||||||||||||
|
|
||||||||||||||||||
|
Acquisition contingent consideration
|
Other accrued liabilities | - | - | 1,224 | 1,224 | |||||||||||||
|
|
||||||||||||||||||
|
Acquisition contingent consideration
|
Other long-term liabilities | - | - | 1,888 | 1,888 | |||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
|
$ | - | $ | 2,851 | $ | 3,112 | $ | 5,963 | ||||||||||
|
|
||||||||||||||||||
During 2010, we recorded liabilities of $3,000 related to contingent purchase price
consideration for acquisitions. As of October 2, 2010, the fair value of those liabilities was
$3,112 and the resulting increase was recorded in the statements of earnings.
In 2009, we initiated restructuring plans to better align our cost structure with lower sales
activity associated with the global recession. The restructuring actions taken are largely complete
and have resulted in workforce reductions, primarily in the U.S., the Philippines and Europe.
Restructuring expense by segment is as follows:
| 2010 | 2009 | |||||||
|
|
||||||||
|
|
||||||||
|
Aircraft Controls
|
$ | 2,423 | $ | 4,940 | ||||
|
|
||||||||
|
Space and Defense Controls
|
1,106 | 59 | ||||||
|
|
||||||||
|
Industrial Systems
|
717 | 9,695 | ||||||
|
|
||||||||
|
Components
|
512 | 84 | ||||||
|
|
||||||||
|
Medical Devices
|
367 | 289 | ||||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 5,125 | $ | 15,067 | ||||
|
|
||||||||
Restructuring activity is as follows:
| 2010 | 2009 | |||||||
|
|
||||||||
|
|
||||||||
|
Balance at beginning of period
|
$ | 14,332 | $ | - | ||||
|
|
||||||||
|
Charged to expense
|
5,125 | 15,067 | ||||||
|
|
||||||||
|
Cash payments
|
(14,855 | ) | (3,892 | ) | ||||
|
|
||||||||
|
Reserves for acquired businesses
|
(791 | ) | 2,750 | |||||
|
|
||||||||
|
Foreign currency translation
|
(422 | ) | 407 | |||||
|
|
||||||||
|
|
||||||||
|
Balance at end of period
|
$ | 3,389 | $ | 14,332 | ||||
|
|
||||||||
Payments related to these severance benefits are expected to be paid in full by the end of
2011.
77
Table of Contents
We maintain multiple employee benefit plans, covering employees at certain locations.
Effective January 1, 2008, our qualified U.S. defined benefit pension plan was amended to freeze
enrollment of new entrants. All new employees hired on or after January 1, 2008 are not eligible to
participate in the pension plan and, instead, we make contributions for those employees to an
employee-directed investment fund in the Moog Inc. Retirement Savings Plan (RSP). The Company’s
contributions are based on a percentage of the employee’s eligible compensation and age. These
contributions are in addition to the employer match on voluntary employee contributions.
We gave all current employees participating in the pension plan as of January 1, 2008 the option to
either remain in the pension plan and continue to accrue benefits or to elect to stop accruing
future benefits in the pension plan as of April 1, 2008 and instead receive the new Company
contribution in the RSP. The employee elections became effective April 1, 2008.
As a result of the employee elections, there was an 18% reduction in expected future service to
be considered in calculating future benefits under the pension plan. We recognized a $70
curtailment loss in 2008 and remeasured both our obligation and plan assets.
As a result of workforce reductions, we recognized curtailments in two of our non-U.S.
pension plans in 2009. The reductions in expected future service for the two plans were 21% and
28%. We recognized a $53 curtailment loss in 2009 and remeasured both the obligation and plan
assets for both plans. In addition, we recognized a settlement loss of $283 in another non-U.S.
plan as a result of workforce reductions.
The RSP includes an Employee Stock Ownership Plan. As one of the investment alternatives,
participants in the RSP can acquire our stock at market value. We match 25% of the first 2% of
eligible compensation contributed to any investment selection. Shares are allocated and
compensation expense is recognized as the employer share match is earned. At October 2, 2010,
the participants in the RSP owned 848,767 Class A shares and 1,972,877 Class B shares.
78
Table of Contents
The changes in projected benefit obligations and plan assets and the funded status of the U.S. and
non-U.S. defined benefit plans for 2010 and 2009 are as follows:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Change in projected benefit obligation:
|
||||||||||||||||
|
|
||||||||||||||||
|
Projected benefit obligation at prior year measurement date
|
$ | 459,853 | $ | 359,354 | $ | 108,623 | $ | 107,204 | ||||||||
|
|
||||||||||||||||
|
Service cost
|
18,718 | 13,976 | 3,139 | 3,485 | ||||||||||||
|
|
||||||||||||||||
|
Interest cost
|
27,067 | 25,529 | 5,868 | 5,747 | ||||||||||||
|
|
||||||||||||||||
|
Contributions by plan participants
|
- | - | 724 | 728 | ||||||||||||
|
|
||||||||||||||||
|
Actuarial losses (gains)
|
65,897 | 74,490 | 27,802 | (2,951 | ) | |||||||||||
|
|
||||||||||||||||
|
Measurement date changes
|
- | 3,292 | - | 736 | ||||||||||||
|
|
||||||||||||||||
|
Foreign currency exchange impact
|
- | - | (1,674 | ) | (2,548 | ) | ||||||||||
|
|
||||||||||||||||
|
Benefits paid from plan assets
|
(14,699 | ) | (15,957 | ) | (1,179 | ) | (842 | ) | ||||||||
|
|
||||||||||||||||
|
Benefits paid by Moog
|
(826 | ) | (831 | ) | (2,312 | ) | (1,727 | ) | ||||||||
|
|
||||||||||||||||
|
Plan settlements
|
- | - | - | (977 | ) | |||||||||||
|
|
||||||||||||||||
|
Curtailments
|
- | - | - | (362 | ) | |||||||||||
|
|
||||||||||||||||
|
Acquisition
|
- | - | - | 130 | ||||||||||||
|
|
||||||||||||||||
|
Other
|
- | - | 31 | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Projected benefit obligation at measurement date
|
$ | 556,010 | $ | 459,853 | $ | 141,022 | $ | 108,623 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Change in plan assets:
|
||||||||||||||||
|
|
||||||||||||||||
|
Fair value of assets at prior year measurement date
|
$ | 314,341 | $ | 336,684 | $ | 62,143 | $ | 56,074 | ||||||||
|
|
||||||||||||||||
|
Actual return on plan assets
|
29,448 | (39,169 | ) | 6,937 | 2,817 | |||||||||||
|
|
||||||||||||||||
|
Employer contributions
|
40,826 | 30,123 | 3,747 | 6,302 | ||||||||||||
|
|
||||||||||||||||
|
Contributions by plan participants
|
- | - | 3,035 | 728 | ||||||||||||
|
|
||||||||||||||||
|
Benefits paid
|
(15,525 | ) | (15,957 | ) | (3,490 | ) | (842 | ) | ||||||||
|
|
||||||||||||||||
|
Plan settlements
|
- | - | - | (977 | ) | |||||||||||
|
|
||||||||||||||||
|
Measurement date changes
|
- | 2,660 | - | (104 | ) | |||||||||||
|
|
||||||||||||||||
|
Foreign currency exchange impact
|
- | - | 107 | (1,855 | ) | |||||||||||
|
|
||||||||||||||||
|
Other
|
- | - | (60 | ) | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Fair value of assets at measurement date
|
$ | 369,090 | $ | 314,341 | $ | 72,419 | $ | 62,143 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Funded status and amount recognized in assets and liabilities
|
$ | (186,920 | ) | $ | (145,512 | ) | $ | (68,603 | ) | $ | (46,480 | ) | ||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amount recognized in assets and liabilities:
|
||||||||||||||||
|
|
||||||||||||||||
|
Other assets - non-current
|
$ | - | $ | 94 | $ | - | $ | 4,960 | ||||||||
|
|
||||||||||||||||
|
Accrued and long-term pension liabilities
|
(186,920 | ) | (145,606 | ) | (68,603 | ) | (51,440 | ) | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amount recognized in assets and liabilities
|
$ | (186,920 | ) | $ | (145,512 | ) | $ | (68,603 | ) | $ | (46,480 | ) | ||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amount recognized in accumulated other comprehensive loss, before taxes:
|
||||||||||||||||
|
|
||||||||||||||||
|
Prior service cost (credit)
|
$ | 61 | $ | 264 | $ | (400 | ) | $ | (425 | ) | ||||||
|
|
||||||||||||||||
|
Actuarial losses
|
253,431 | 186,586 | 27,060 | 2,000 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amount recognized in accumulated other comprehensive loss, before taxes
|
$ | 253,492 | $ | 186,850 | $ | 26,660 | $ | 1,575 | ||||||||
|
|
||||||||||||||||
79
Table of Contents
Our stock included in plan assets consisted of 149,022 shares of Class A common stock and
1,001,034 shares of Class B common stock. Our funding policy is to contribute at least the amount
required by law in the respective countries.
The total accumulated benefit obligation as of the measurement date for all defined benefit pension
plans was $620,036 in 2010 and $510,944 in 2009. At the measurement date in 2010, our plans had
fair values of plan assets totaling $441,509. At the measurement date in 2010, four of our plans
had fair values of plan assets totaling $32,777, which exceeded their accumulated benefit
obligations of $27,043. The following table provides aggregate information for the other pension plans, which have projected benefit obligations in excess of plan assets:
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
|
||||||||
|
Projected benefit obligation
|
$ | 661,120 | $ | 546,116 | ||||
|
|
||||||||
|
Accumulated benefit obligation
|
592,993 | 490,742 | ||||||
|
|
||||||||
|
Fair value of plan assets
|
408,732 | 349,069 | ||||||
|
|
||||||||
Weighted-average assumptions used to determine benefit obligations as of the measurement dates
and weighted-average assumptions used to determine net periodic benefit cost for 2010, 2009 and
2008 are as follows:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Assumptions for net periodic benefit cost:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Discount rate
|
6.0 | % | 7.3 | % | 6.2 | % | 5.8 | % | 6.0 | % | 5.3 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Return on assets
|
8.9 | % | 8.9 | % | 8.9 | % | 6.0 | % | 6.5 | % | 6.2 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Rate of compensation increase
|
4.1 | % | 5.3 | % | 4.1 | % | 3.3 | % | 3.5 | % | 3.4 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Assumptions for benefit obligations:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Discount rate
|
5.2 | % | 6.0 | % | 7.3 | % | 4.6 | % | 5.8 | % | 6.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Rate of compensation increase
|
3.8 | % | 4.1 | % | 4.1 | % | 2.6 | % | 3.3 | % | 3.5 | % | ||||||||||||
|
|
||||||||||||||||||||||||
Pension plan investment policies and strategies are developed on a plan specific basis, which
varies by country. At October 2, 2010, the U.S. plans represented 84% of consolidated pension
assets, while the non-U.S. plans represented 16% of consolidated pension assets, the largest
concentration being in the U.K. (6%). The overall objective for the long-term expected return on
both domestic and international plan assets is to earn a rate of return over time to meet
anticipated benefit payments in accordance with plan provisions. The long-term investment objective
of both the domestic and international retirement plans is to maintain the economic value of plan
assets and future contributions by producing positive rates of investment return after subtracting
inflation, benefit payments and expenses. Each of the plan’s strategic asset allocations is based
on this long-term perspective and short-term fluctuations are viewed with appropriate perspective.
The U.S. qualified defined benefit plan’s assets are invested for long-term investment results. To
accommodate the long-term investment horizon while providing appropriate liquidity, the plan
maintains a liquid cash reserve of one-month to three-months of benefit distributions. Its assets
are broadly diversified to help alleviate the risk of adverse returns in any one security or
investment class. The international plans’ assets are invested in both low-risk and high-risk
investments in order to achieve the long-term investment
strategy objective. Investment risks for both domestic and international plans are considered
within the context of the entire plan, rather than on a security-by-security basis.
The U.S. qualified defined benefit plan and certain international plans have investment committees
that are responsible for formulating investment policies, developing manager guidelines and
objectives and approving and managing qualified advisors and investment managers. The guidelines
established for each of the plans define permitted investments within each asset class and apply
certain restrictions such as limits on concentrated holdings in order to meet overall investment
objectives.
80
Table of Contents
Pension obligations and the related costs are determined using actuarial valuations that
involve several assumptions. The return on assets assumption reflects the average rate of return
expected on funds invested or to be invested to provide for the benefits included in the projected
benefit obligation. In determining the return on assets assumption, we consider the relative
weighting of plan assets, the historical performance of total plan assets and individual asset
classes and economic and other indicators of future performance. Asset management objectives
include maintaining an adequate level of diversification to reduce interest rate and market risk
and to provide adequate liquidity to meet immediate and future benefit payment requirements.
In
determining our U.S. pension expense for 2010, we assumed an average
rate of return on U.S. pension assets of approximately 8.9% measured
over a planning horizon with reasonable and acceptable levls of risk. The
rate of return assumed an average of 80% in equity securities and 20%
in fixed income securities. In determining our Non-U.S. pension
expense for 2010, we assumed an average rate of return on Non-U.S.
pension assets of approximately 6% measured over a planning horizon
with reasonable and acceptable levels of risk. The rate of return
assumed an average asset allocation of 40% in equity securities and
60% in fixed income securities.
The weighted average asset allocations by asset category for the pension plans as of October 2,
2010 are as follows:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
| Target | Actual | Actual | Target | Actual | Actual | |||||||||||||||||||
|
Asset Category:
|
||||||||||||||||||||||||
|
Equity
|
50% - 85% | % | 76 | % | 77 | % | 40% - 60 | % | 43 | % | 45 | % | ||||||||||||
|
Debt
|
15% - 30% | % | 16 | % | 22 | % | 40% - 60 | % | 54 | % | 53 | % | ||||||||||||
|
Real estate and other
|
0% - 20 | % | 8 | % | 1 | % | 0% - 10 | % | 3 | % | 2 | % | ||||||||||||
The following table presents the consolidated plan assets using the fair value hierarchy as of
October 2, 2010. 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
described in Note 9 – Fair Value.
| U.S. Plans | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
|
Shares of registered investment companies:
|
||||||||||||||||||||||||
|
International equity
|
$ | 48,483 | $ | - | $ | - | $ | 48,483 | ||||||||||||||||
|
Large growth stocks
|
39,170 | - | - | 39,170 | ||||||||||||||||||||
|
Emerging markets
|
20,599 | - | - | 20,599 | ||||||||||||||||||||
|
Common stock and other:
|
||||||||||||||||||||||||
|
International equity
|
33,166 | - | - | 33,166 | ||||||||||||||||||||
|
Large value stocks
|
19,572 | - | - | 19,572 | ||||||||||||||||||||
|
Large core stocks
|
19,752 | - | - | 19,752 | ||||||||||||||||||||
|
Large growth stocks
|
7,198 | - | - | 7,198 | ||||||||||||||||||||
|
Other
|
11,568 | - | - | 11,568 | ||||||||||||||||||||
|
Fixed income funds:
|
||||||||||||||||||||||||
|
Intermediate-term core fixed income
|
58,384 | - | - | 58,384 | ||||||||||||||||||||
|
Employer securities
|
41,329 | - | - | 41,329 | ||||||||||||||||||||
|
Interest in common collective trust
|
- | 25,884 | - | 25,884 | ||||||||||||||||||||
|
Money market funds
|
35,843 | - | - | 35,843 | ||||||||||||||||||||
|
Cash and cash equivalents
|
1,964 | 278 | - | 2,242 | ||||||||||||||||||||
|
Limited partnerships
|
- | - | 5,900 | 5,900 | ||||||||||||||||||||
|
Fair value
|
$ | 337,028 | $ | 26,162 | $ | 5,900 | $ | 369,090 | ||||||||||||||||
81
Table of Contents
| Non-U.S. Plans | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
|
Shares of registered investment companies
|
$ | - | $ | 21,420 | $ | - | $ | 21,420 | ||||||||||||||||
|
Domestic equity
|
2,573 | 305 | - | 2,878 | ||||||||||||||||||||
|
International equity
|
7,740 | - | - | 7,740 | ||||||||||||||||||||
|
Fixed income funds
|
- | 19,836 | - | 19,836 | ||||||||||||||||||||
|
Cash and cash equivalents
|
3,900 | - | - | 3,900 | ||||||||||||||||||||
|
Insurance contracts and other
|
- | 435 | 16,210 | 16,645 | ||||||||||||||||||||
|
Fair value
|
$ | 14,213 | $ | 41,996 | $ | 16,210 | $ | 72,419 | ||||||||||||||||
The following is a roll forward of the consolidated plan assets classified as Level 3 within
the fair value hierarchy:
| U.S. Plans | Non-U.S. Plans | Total | ||||||||||
|
Balance at beginning of year
|
$ | 2,076 | $ | 11,408 | $ | 13,484 | ||||||
|
Return on assets
|
367 | 3,323 | 3,690 | |||||||||
|
Purchases, sales, issuances and settlements, net
|
3,457 | 1,479 | 4,936 | |||||||||
|
Balance at end of year
|
$ | 5,900 | $ | 16,210 | $ | 22,110 | ||||||
The following is a description of the valuation methodologies used for pension plan assets
measured at fair value. There have been no significant changes in the methodologies used at
October 2, 2010 and October 3, 2009, respectively. Cash and cash equivalents consist of direct cash
holdings and institutional short-term investment vehicles. Direct cash holdings are valued at cost,
which approximates fair value. Institutional short-term investment vehicles are valued daily.
Common stocks traded on national exchanges are valued at the last reported sales price. Shares of
registered investment companies are valued at net asset value of shares held by the plan at year
end. Investments in U.S. treasury obligations are valued by a pricing service based upon closing
market prices at year end. Investments denominated in foreign currencies are translated into U.S.
dollars using the last reported exchange rate. Fixed income funds, which primarily consist of
corporate and government bonds, are valued using methods, such as dealer quotes, available
trade information, spreads, bids and offers provided by a pricing vendor. Investments in limited
partnerships are valued based on the net asset value of our share in the fair value of the
investments at year end. Shares held in common collective trust funds are reported at the net unit
value of units held by the trust at year end. The unit value is determined by the total value of
fund assets divided by the total number of units of the fund owned. Investments in insurance
contracts are valued at the surrender value, which is reported by the insurance carrier at year
end. Securities or other assets for which market quotations are not readily available or for which
market quotations do not represent the value at the time of pricing (including certain illiquid
securities) are fair valued in accordance with procedures established under the supervision and
responsibility of the Custodian of that investment.
Such procedures may include the use of independent pricing services or affiliated advisor pricing,
which use prices based upon yields or prices of securities of comparable quality, coupon, maturity
and type, indications as to values from dealers, operating data and general market conditions.
The preceding methods may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, although we believe the
valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments
could result in a different fair value measurement at the reporting date.
82
Table of Contents
Pension expense for all plans for 2010, 2009 and 2008, including costs for various defined
contribution plans, was as follows:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Service cost
|
$ | 18,718 | $ | 13,977 | $ | 16,287 | $ | 3,139 | $ | 3,485 | $ | 3,940 | ||||||||||||
|
Interest cost
|
27,067 | 25,529 | 23,623 | 5,868 | 5,747 | 5,806 | ||||||||||||||||||
|
Expected return on plan assets
|
(35,344 | ) | (31,924 | ) | (30,122 | ) | (3,605 | ) | (3,480 | ) | (3,637 | ) | ||||||||||||
|
Amortization of prior service cost (credit)
|
203 | 295 | 973 | (54 | ) | (44 | ) | (40 | ) | |||||||||||||||
|
Amortization of actuarial loss
|
4,949 | 844 | 3,090 | 521 | 466 | 324 | ||||||||||||||||||
|
Settlement loss
|
- | - | - | 91 | 283 | - | ||||||||||||||||||
|
Curtailment loss
|
- | - | 70 | - | 53 | - | ||||||||||||||||||
|
Pension expense for defined benefit plans
|
15,593 | 8,721 | 13,921 | 5,960 | 6,510 | 6,393 | ||||||||||||||||||
|
Pension expense for defined
contribution plans
|
6,571 | 6,417 | 3,029 | 6,053 | 1,915 | 2,054 | ||||||||||||||||||
|
Total pension expense
|
$ | 22,164 | $ | 15,138 | $ | 16,950 | $ | 12,013 | $ | 8,425 | $ | 8,447 | ||||||||||||
The estimated net prior service cost and net actuarial loss that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost for pension plans in 2011 are
$68 and $12,813, respectively.
Benefits expected to be paid to the participants of the U.S. plans are $19,200 in 2011, $20,985 in
2012, $22,483 in 2013, $24,545 in 2014, $26,477 in 2015 and $172,151 for the five years thereafter.
Benefits expected to be paid to the participants of the non-U.S. plans are $4,145 in 2011, $3,839
in 2012, $4,270 in 2013, $4,722 in 2014, $6,056 in 2015 and $32,912 for the five years thereafter.
We presently anticipate contributing approximately $32,000 to the U.S. plans and $6,500 to the
non-U.S. plans in 2011.
We provide postretirement health care benefits to certain domestic retirees, who were hired prior
to October 1, 1989. There are no plan assets. The transition obligation is being expensed over 20
years through 2013. The changes in the accumulated benefit obligation of this unfunded plan for
2010 and 2009 are shown in the following table:
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
Change in Accumulated Postretirement Benefit Obligation (APBO):
|
||||||||
|
APBO at prior year measurement date
|
$ | 25,077 | $ | 20,139 | ||||
|
Service cost
|
571 | 417 | ||||||
|
Interest cost
|
1,345 | 1,366 | ||||||
|
Contributions by plan participants
|
1,360 | 1,358 | ||||||
|
Benefits paid
|
(2,680 | ) | (3,245 | ) | ||||
|
Measurement date changes
|
- | 149 | ||||||
|
Actuarial (gains) losses
|
(1,953 | ) | 4,756 | |||||
|
Retiree drug subsidy receipts
|
140 | 137 | ||||||
|
APBO at measurement date
|
$ | 23,860 | $ | 25,077 | ||||
|
Funded status
|
$ | (23,860 | ) | $ | (25,077 | ) | ||
|
Accrued postretirement benefit liability
|
$ | (23,860 | ) | $ | (25,077 | ) | ||
|
Amount recognized in accumulated other comprehensive loss, before taxes:
|
||||||||
|
Transition obligation
|
$ | 1,150 | $ | 1,544 | ||||
|
Prior service cost
|
- | 215 | ||||||
|
Actuarial losses
|
7,151 | 9,946 | ||||||
|
Amount recognized in accumulated other comprehensive loss, before taxes
|
$ | 8,301 | $ | 11,705 | ||||
83
Table of Contents
The cost of the postretirement benefit plan is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Service cost
|
$ | 571 | $ | 417 | $ | 428 | ||||||
|
Interest cost
|
1,345 | 1,366 | 1,249 | |||||||||
|
Amortization of transition obligation
|
394 | 394 | 394 | |||||||||
|
Amortization of prior service cost
|
215 | 267 | 286 | |||||||||
|
Amortization of actuarial loss
|
842 | 385 | 447 | |||||||||
|
Net periodic postretirement benefit cost
|
$ | 3,367 | $ | 2,829 | $ | 2,804 | ||||||
The estimated transition obligation, prior service cost and actuarial loss that will be
amortized from accumulated other comprehensive loss into net periodic postretirement benefit cost
in 2011 are $394, $0 and $595, respectively.
As of the measurement date, the assumed discount rate used in the accounting for the postretirement
benefit obligation was 4.8% in 2010, 5.5% in 2009 and 7.0% in 2008. As of the measurement date, the
assumed discount rate used in the accounting for the net periodic postretirement benefit cost was
5.5% in 2010, 7.0% in 2009 and 6.3% in 2008.
For measurement purposes, an 8.0%, 6.9% and 8.7% annual per capita rate of increase of medical and
drug costs before age 65, medical costs after age 65 and drug costs after age 65, respectively,
were assumed for 2011, all gradually decreasing to 4.5% for 2028 and years thereafter. A one
percentage point increase in this rate would increase our accumulated postretirement benefit
obligation as of the measurement date in 2010 by $1,191, while a one percentage point decrease in
this rate would decrease our accumulated postretirement benefit obligation by $1,089. A one
percentage point increase or decrease in this rate would not have a material effect on the total
service cost and interest cost components of the net periodic postretirement benefit cost.
Employee and management profit sharing reflects a discretionary payment based on our financial
performance. Profit share expense was $21,100, $8,500 and $20,050 in 2010, 2009 and 2008,
respectively.
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The reconciliation of the provision for income taxes to the amount computed by applying the U.S.
federal statutory tax rate to earnings before income taxes is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Earnings before income taxes:
|
||||||||||||
|
Domestic
|
$ | 82,654 | $ | 57,320 | $ | 76,714 | ||||||
|
Foreign
|
66,955 | 51,640 | 92,400 | |||||||||
|
Eliminations
|
(173 | ) | 1,601 | (1,079 | ) | |||||||
|
Total
|
$ | 149,436 | $ | 110,561 | $ | 168,035 | ||||||
|
Computed expected tax expense
|
$ | 52,303 | $ | 38,696 | $ | 58,812 | ||||||
|
Increase (decrease) in income taxes resulting from:
|
||||||||||||
|
Foreign tax rates
|
(9,711 | ) | (6,301 | ) | (2,306 | ) | ||||||
|
Foreign and R&D tax credits
|
(3,185 | ) | (9,510 | ) | (6,971 | ) | ||||||
|
Export and manufacturing incentives
|
(840 | ) | (1,190 | ) | (1,400 | ) | ||||||
|
State taxes, net of federal benefit
|
2,274 | 1,989 | 1,850 | |||||||||
|
Change in valuation allowance for deferred taxes
|
634 | 1,630 | (336 | ) | ||||||||
|
Change in enacted tax rates
|
- | - | (794 | ) | ||||||||
|
Other
|
(133 | ) | 202 | 112 | ||||||||
|
Income taxes
|
$ | 41,342 | $ | 25,516 | $ | 48,967 | ||||||
|
Effective income tax rate
|
27.7% | 23.1% | 29.1% | |||||||||
At October 2, 2010, various subsidiaries had tax benefit carryforwards totaling $34,483. These tax
benefit carryforwards do not expire and can be used to reduce current taxes otherwise due on future
earnings of those subsidiaries. The change in the valuation allowance relates to tax benefit
carryforwards reflecting recent and projected financial performance, tax planning strategies and
statutory tax carryforward periods.
No provision has been made for U.S. federal or foreign taxes on that portion of certain foreign
subsidiaries’ undistributed earnings ($437,480 at October 2, 2010) considered to be permanently
reinvested. It is not practicable to determine the amount of tax that would be payable if these
amounts were repatriated to the U.S.
The components of income taxes are as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 10,642 | $ | (3,496 | ) | $ | 23,291 | |||||
|
Foreign
|
17,362 | 13,464 | 28,017 | |||||||||
|
State
|
2,024 | 2,218 | 3,357 | |||||||||
|
Total current
|
30,028 | 12,186 | 54,665 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
12,744 | 14,487 | (3,977 | ) | ||||||||
|
Foreign
|
(2,905 | ) | (1,999 | ) | (1,211 | ) | ||||||
|
State
|
1,475 | 842 | (510 | ) | ||||||||
|
Total deferred
|
11,314 | 13,330 | (5,698 | ) | ||||||||
|
Income taxes
|
$ | 41,342 | $ | 25,516 | $ | 48,967 | ||||||
Realization of deferred tax assets is dependent, in part, upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making its assessment of
the recoverability of deferred tax assets.
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The tax effects of temporary differences that generated deferred tax assets and liabilities are
detailed in the following table.
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Benefit accruals
|
$ | 150,346 | $ | 121,072 | ||||
|
Contract loss reserves not currently deductible
|
11,914 | 16,137 | ||||||
|
Tax benefit carryforwards
|
13,796 | 14,274 | ||||||
|
Inventory reserves
|
26,552 | 24,186 | ||||||
|
Other accrued expenses
|
10,204 | 8,731 | ||||||
|
Total gross deferred tax assets
|
212,812 | 184,400 | ||||||
|
Less valuation allowance
|
(7,352 | ) | (9,476 | ) | ||||
|
Total net deferred tax assets
|
205,460 | 174,924 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Differences in bases and depreciation of property, plant and equipment
|
147,363 | 139,855 | ||||||
|
Foreign currency
|
1,697 | 2,527 | ||||||
|
Pension
|
42,986 | 30,550 | ||||||
|
Other
|
49 | 1,470 | ||||||
|
Total gross deferred tax liabilities
|
192,095 | 174,402 | ||||||
|
Net deferred tax assets
|
$ | 13,365 | $ | 522 | ||||
Net deferred tax assets and liabilities are included in the balance sheet as follows:
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
Current assets
|
$ | 75,367 | $ | 73,673 | ||||
|
Other assets
|
9,739 | 6,270 | ||||||
|
Other accrued liabilities
|
(2,200 | ) | (2,511 | ) | ||||
|
Long-term liabilities
|
(69,541 | ) | (76,910 | ) | ||||
|
Net deferred tax assets
|
$ | 13,365 | $ | 522 | ||||
We have unrecognized tax benefits which, if ultimately recognized, will reduce our annual effective
tax rate. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest
and penalties, is as follows:
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
Balance at beginning of year
|
$ | 10,161 | $ | 7,630 | ||||
|
Increases as a result of tax positions for prior years
|
732 | 1,134 | ||||||
|
Increases as a result of tax positions for current year
|
78 | 3,745 | ||||||
|
Reductions as a result of lapse of statue of limitations
|
(1,135 | ) | (1,560 | ) | ||||
|
Settlement of tax positions
|
- | (788 | ) | |||||
|
Balance at end of year
|
$ | 9,836 | $ | 10,161 | ||||
We are subject to income taxes in the U.S. and in various states and foreign jurisdictions. Tax
regulations within each jurisdiction are subject to the interpretation of the related tax laws and
regulations and require the application of significant judgment. With few exceptions, we are no
longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2006. The statute of limitations in several jurisdictions will expire
in the next twelve months and we have unrecognized tax benefits of $1,863, which would be
recognized if the statute of limitations expires without the relevant taxing authority examining
the applicable returns.
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We accrue interest and penalties related to unrecognized tax benefits to income tax expense for all
periods presented. At October 3, 2009, we had accrued interest and penalties of $1,052. We
expensed an additional $767 of interest for 2010 and had $1,507 of accrued interest and penalties
at October 2, 2010.
Class A and Class B common stock share equally in our earnings and are identical with certain
exceptions. Other than on matters relating to the election of directors or as required by law where
the holders of Class A and Class B shares vote as separate classes, Class A shares have limited
voting rights, with each share of Class A being entitled to one-tenth of a vote on most matters,
and each share of Class B being entitled to one vote. Class A shareholders are entitled, subject to
certain limitations, to elect at least 25% of the Board of Directors (rounded up to the nearest
whole number) with Class B shareholders entitled to elect the balance of the directors. No cash
dividend may be paid on Class B shares unless at least an equal cash dividend is paid on Class A
shares. Class B shares are convertible at any time into Class A shares on a one-for-one basis at
the option of the shareholder. The number of common shares issued reflects conversion of Class B to
Class A of 14,044 in 2010, 2,850 in 2009 and 53,967 in 2008.
Class A shares reserved for issuance at October 2, 2010 are as follows:
| Shares | ||||
|
Conversion of Class B to Class A shares
|
7,794,296 | |||
|
2008 Stock Appreciation Rights Plan
|
2,000,000 | |||
|
2003 Stock Option Plan
|
1,161,769 | |||
|
1998 Stock Option Plan
|
449,484 | |||
|
Class A shares reserved for issuance
|
11,405,549 | |||
On October 2, 2009, we completed the offering and sale of 2,675,000 shares of Class A common stock
at a price of $29.50 per share. We used the net proceeds of $74,717 to repay a portion of the
indebtedness incurred under our revolving bank credit facility to acquire the Wolverhampton flight
control business.
We are authorized to issue up to 10,000,000 shares of preferred stock. The Board of Directors may
authorize, without further shareholder action, the issuance of additional preferred stock which
ranks senior to both classes of our common stock with respect to the payment of dividends and the
distribution of assets on liquidation. The preferred stock, when issued, would have such
designations relative to voting and conversion rights, preferences, privileges and limitations as
determined by the Board of Directors.
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We have equity-based compensation plans that authorize the issuance of equity-based awards for
shares of Class A common stock to directors, officers and key employees. Equity-based compensation
grants are designed to reward long-term contributions to Moog and provide incentives for recipients
to remain with Moog.
Equity-based compensation expense is based on share-based payment awards that are ultimately
expected to vest. Vesting requirements vary for directors, officers and key employees. In general,
options and stock appreciation rights (SARs) granted to outside directors vest one year from the
date of grant, options granted to officers vest on various schedules, options granted to key
employees vest in equal annual increments over a five-year period from the date of grant and SARs
granted to officers and key employees vest in equal annual installments over a three-year period
from the date of grant.
The fair value of equity-based awards granted was estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted-average fair value of the SARs was $10.92, $13.78
and $16.89 for those awarded in 2010, 2009 and 2008. The weighted-average fair value of the options
was $14.26 for options granted during 2008. No options were granted in 2010 or 2009. The following
table provides the range of assumptions used to value equity-based awards granted during 2010, 2009
and 2008.
| 2010 | 2009 | 2008 | ||||||||||
|
Expected volatility
|
37% - 46 | % | 34% - 35 | % | 27% - 32 | % | ||||||
|
Risk-free rate
|
1.1% - 2.8 | % | 1.8% - 3.6 | % | 2.5% - 3.7 | % | ||||||
|
Expected dividends
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected term
|
3-7 years | 3-7 years | 3-7 years | |||||||||
To determine expected volatility, we use historical volatility based on weekly closing prices of
our Class A common stock over periods that correlate with the expected terms of the awards granted.
The risk-free rate is based on the United States Treasury yield curve at the time of grant for the
appropriate term of the awards granted. Expected dividends are based on our history and expectation
of dividend payouts. The expected term of equity-based awards is based on vesting schedules,
expected exercise patterns and contractual terms.
The 2003 Stock Option Plan (2003 Plan) authorizes the issuance of options for 1,350,000 shares of
Class A common stock. The 1998 Stock Option Plan (1998 Plan) authorizes the issuance of options for
2,025,000 shares of Class A common stock. Under the terms of the plans, options may be either
incentive or non-qualified. Options issued as of October 2, 2010 consisted of both incentive
options and non-qualified options. The exercise price, determined by a committee of the Board of
Directors, may not be less than the fair market value of the Class A common stock on the grant
date. Options become exercisable over periods not exceeding ten years.
Shares under options are as follows:
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Stock | Exercise | Remaining | Intrinsic | |||||||||||||
| 1998 Stock Option Plan | Options | Price | Contractual Life | Value | ||||||||||||
|
Outstanding at September 29, 2007
|
849,331 | $ | 11.58 | |||||||||||||
|
Exercised in 2008
|
(261,150 | ) | 10.69 | |||||||||||||
|
Outstanding at September 27, 2008
|
588,181 | 11.97 | ||||||||||||||
|
Exercised in 2009
|
(48,937 | ) | 8.67 | |||||||||||||
|
Outstanding at October 3, 2009
|
539,244 | 12.27 | ||||||||||||||
|
Exercised in 2010
|
(89,760 | ) | 7.69 | |||||||||||||
|
Outstanding at October 2, 2010
|
449,484 | $ | 13.19 | 2.0 years | $ | 9,985 | ||||||||||
|
Exercisable at October 2, 2010
|
305,288 | $ | 11.50 | 1.6 years | $ | 7,296 | ||||||||||
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Table of Contents
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Stock | Exercise | Remaining | Intrinsic | |||||||||||||
| 2003 Stock Option Plan | Options | Price | Contractual Life | Value | ||||||||||||
|
Outstanding at September 29, 2007
|
1,008,467 | $ | 29.86 | |||||||||||||
|
Granted in 2008
|
266,054 | 42.46 | ||||||||||||||
|
Exercised in 2008
|
(102,629 | ) | 29.31 | |||||||||||||
|
Outstanding at September 27, 2008
|
1,171,892 | 32.73 | ||||||||||||||
|
Forfeited in 2009
|
(22,500 | ) | 28.01 | |||||||||||||
|
Outstanding at October 3, 2009
|
1,149,392 | 32.82 | ||||||||||||||
|
Exercised in 2010
|
(12,065 | ) | 23.75 | |||||||||||||
|
Forfeited in 2010
|
(1,538 | ) | 42.45 | |||||||||||||
|
Outstanding at October 2, 2010
|
1,135,789 | $ | 32.90 | 5.4 years | $ | 5,007 | ||||||||||
|
Exercisable at October 2, 2010
|
453,497 | $ | 31.67 | 5.1 years | $ | 2,031 | ||||||||||
|
|
||||||||||||||||
|
Total Stock Option Plans
|
||||||||||||||||
|
Outstanding at October 2, 2010
|
1,585,273 | $ | 27.31 | |||||||||||||
|
Exercisable at October 2, 2010
|
758,785 | $ | 23.55 | |||||||||||||
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic
value, based on our closing stock price of Class A common stock of $35.40 as of October 2, 2010.
That value would have been effectively received by the option holders had all option holders
exercised their options as of that date. The intrinsic value of options exercised in the 1998 Plan
during 2010, 2009 and 2008 was $1,821, $1,140 and $8,731, respectively. The intrinsic value of
options exercised in the 2003 Plan during 2010, 2009 and 2008 was $88, $0 and $1,588, respectively.
The total fair value of shares in the 1998 Plan that vested during 2010, 2009 and 2008 was $186,
$208 and $753, respectively. The total fair value of shares in the 2003 Plan that vested during
2010, 2009 and 2008 was $2,975, $783 and $1,391, respectively.
As of October 2, 2010, total unvested compensation expense associated with stock options amounted
to $2,412 and will be recognized over a weighted-average period of two years.
On January 9, 2008, shareholders approved the 2008 Stock Appreciation Rights Plan. The 2008 Stock
Appreciation Rights Plan authorizes the issuance of 2,000,000 SARs, which represent the right to
receive shares of Class A common stock. The exercise price of the SARs, determined by a committee
of the Board of Directors, may not be less than the fair market value of the Class A common stock
on the grant date. The number of shares received upon exercise of a SAR is equal in value to the
difference between the fair market value of the Class A common stock on the exercise date and the
exercise price of the SAR. The term of a SAR may not exceed ten years from the grant date. Activity
under the SAR plan is as follows:
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Table of Contents
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Exercise | Remaining | Intrinsic | ||||||||||||||
| 2008 Stock Appreciation Rights Plan | SARs | Price | Contractual Life | Value | ||||||||||||
|
Granted in 2008
|
108,000 | $ | 43.42 | |||||||||||||
|
Outstanding at September 27, 2008
|
108,000 | 43.42 | ||||||||||||||
|
Granted in 2009
|
384,500 | 35.12 | ||||||||||||||
|
Forfeited in 2009
|
(4,000 | ) | 43.42 | |||||||||||||
|
Outstanding at October 3, 2009
|
488,500 | 36.89 | ||||||||||||||
|
Granted in 2010
|
288,375 | 26.66 | ||||||||||||||
|
Forfeited in 2010
|
(13,666 | ) | 38.12 | |||||||||||||
|
Outstanding at October 2, 2010
|
763,209 | $ | 33.00 | 8.2 years | $ | 2,601 | ||||||||||
|
Exercisable at October 2, 2010
|
210,992 | $ | 37.52 | 7.3 years | $ | 76 | ||||||||||
The weighted-average grant-date fair value of the SARs granted during the year ended October 2,
2010 was $10.92. No SARs were exercised during 2010, 2009 or 2008.
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value,
based on our closing stock price of Class A common stock of $35.40 as of October 2, 2010. That
value would have been effectively received by the SAR holders had all SAR holders exercised their
SARs as of that date. The total fair value of SARs that vested during 2010, 2009 and 2008 was
$2,473, $648 and $140, respectively. As of October 2, 2010, total unvested compensation expense
associated with SARs amounted to $2,614 and will be recognized over a weighted-average period of
one year.
We have a Stock Employee Compensation Trust (SECT) to assist in administering and to provide
funding for employee stock plans and benefit programs, including the RSP. 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.
Other comprehensive income (loss), net of tax, consists of:
| 2010 | 2009 | 2008 | ||||||||||
|
Accumulated income (loss) on derivatives adjustment:
|
||||||||||||
|
Net incease (decrease) in fair value of derivatives, net of taxes of $82 in 2010,
$(279) in 2009 and $(497) in 2008
|
$ | 111 | $ | (547 | ) | $ | (796 | ) | ||||
|
Net reclassification from accumulated other comprehensive income into earnings,
net of taxes of $70 in 2010, $515 in 2009 and $187 in 2008
|
222 | 867 | 287 | |||||||||
|
Accumulated income (loss) on derivatives adjustment
|
333 | 320 | (509 | ) | ||||||||
|
Foreign currency translation adjustment
|
(858 | ) | (1,073 | ) | (2,854 | ) | ||||||
|
Retirement liability adjustment, net of taxes of $(30,208) in 2010, $(55,204) in 2009
and $825 in 2008
|
(57,977 | ) | (89,062 | ) | (357 | ) | ||||||
|
Other comprehensive (loss) income
|
$ | (58,502 | ) | $ | (89,815 | ) | $ | (3,720 | ) | |||
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Table of Contents
Accumulated other comprehensive income (loss), net of tax, consists of:
| October 2, | October 3, | |||||||
| 2010 | 2009 | |||||||
|
Accumulated gain (loss) on derivatives
|
$ | 144 | $ | (189 | ) | |||
|
Accumulated foreign currency translation
|
42,864 | 43,722 | ||||||
|
Accumulated retirement liability
|
(182,336 | ) | (124,359 | ) | ||||
|
Accumulated other comprehensive (loss) income
|
$ | (139,328 | ) | $ | (80,826 | ) | ||
Aircraft Controls.
We design, manufacture and integrate primary and secondary flight controls for
military and commercial aircraft and provide aftermarket support. Our systems are used in large
commercial transports, supersonic fighters, multi-role military aircraft, business jets and
rotorcraft. We also supply ground-based navigational aids. We are well positioned on both
development and production programs. Typically, development programs require concentrated periods
of research and development by our engineering teams and involve design, development, testing and
integration. We are currently working on several large development programs including the F-35
Joint Strike Fighter, Boeing 787 Dreamliner, Boeing’s extended range 747-8, Airbus A350XWB and
several business jet programs. The F-35 is in the flight test phase and recently entered low rate
initial production. The 787 program began design and development in 2004 and is transitioning to
production, with Boeing’s initial aircraft delivery expected to occur in 2011. The Airbus A350XWB
is in early stage development with entry into service planned for 2013. Production programs are
generally long-term manufacturing efforts that extend for as long as the aircraft builder receives
new orders. Our large military production programs include the F/A-18E/F Super Hornet, the V-22
Osprey tiltrotor, the Black Hawk/Seahawk helicopter and the F-15 Eagle. Our large commercial
production programs include the full line of Boeing 7-series aircraft, Airbus A330/340 and a
variety of business jets. Aftermarket sales, which represented 32% of 2010 sales for this segment,
consist of the maintenance, repair, overhaul and parts supply for both military and commercial
aircraft. Further, both our military and commercial customers throughout the world carry spares
inventory in order to minimize down time.
Space and Defense Controls.
Space and Defense Controls provides controls for satellites and space
vehicles, armored combat vehicles, launch vehicles, tactical and strategic missiles, security and
surveillance and other defense applications. For commercial and military satellites, we design,
manufacture and integrate steering and propulsion controls and controls for positioning antennae
and deploying solar panels. The Atlas, Delta and Ariane launch vehicle programs and the Space
Shuttle use our steering and propulsion controls. We are also developing products for NASA’s
replacement for the Space Shuttle. We supplied couplings, valves and actuators for the
International Space Station. We design and build steering and propulsion controls for tactical and
strategic missile programs, including Hellfire, TOW, Trident and Minuteman. We supply valves and
steering controls on the U.S. National Missile Defense development initiative. We design and
manufacture systems for gun aiming, stabilization, automatic ammunition loading and driver vision
enhancement on armored combat vehicles for a variety of international and U.S. customers.
Industrial Systems.
Industrial Systems serves a global customer base across a variety of markets.
Historically, our major markets have included plastics making machinery, simulation, power
generation, test, metal forming and heavy industry. Recent acquisitions have allowed us to target
wind energy as a new market. For the plastics making machinery market, we design, manufacture and
integrate systems for all axes of injection and blow molding machines using leading edge
technology, both hydraulic and electric. We supply electromechanical motion simulation bases for
the flight simulation and training markets. In the power generation market, we design, manufacture
and integrate complete control assemblies for fuel, steam and variable geometry control
applications. For wind energy, we design and manufacture electric rotor blade pitch controls and
blade monitoring systems for wind turbines. For the test markets, we supply controls for
automotive, structural and fatigue testing. Metal forming markets use our systems to provide
precise control of position, velocity, force, pressure, acceleration and other critical parameters.
Heavy industry uses our high precision electrical and hydraulic servovalves for steel and aluminum
mill equipment. Other markets include oil exploration, material handling, auto racing, carpet
tufting, paper and lumber mills.
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Table of Contents
Components.
The Components segment serves many of the same markets as our other segments. The Components
segment’s three largest product categories are slip rings, fiber optic rotary joints and motors. Slip rings
and fiber optic rotary joints use sliding contacts and optical technology to allow unimpeded rotation while
delivering power and data through a rotating interface. They come in a range of sizes that allow them to be
used in many applications, including diagnostic imaging CT scan medical equipment featuring high-speed data
communications, de-icing and data transfer for rotorcraft, forward-looking infrared camera installations, radar
pedestals, surveillance cameras and remotely operated vehicles for offshore oil exploration. Our motors are
used in an equally broad range of markets, many of which are the same as for slip rings. Components designs and
manufactures a series of miniature brushless motors that provide extremely low acoustic noise and reliable long
life operation, with the largest market being sleep apnea equipment. Industrial markets use our motors for material
handling and electric pumps. Military applications use our motors for gimbals, missiles and radar pedestals.
Components’ other product lines include electromechanical actuators for military, aerospace and commercial
applications, fiber optic modems that provide electrical-to-optical conversion of communication and data signals,
avionic instrumentation, optical switches and resolvers.
Medical Devices.
This segment operates within four medical devices market areas: infusion therapy, enteral clinical
nutrition, sensors and surgical handpieces. For infusion therapy, our primary products are electronic ambulatory
infusion pumps along with the necessary administration sets as well as disposable infusion pumps. Applications of
these products include hydration, nutrition, patient-controlled analgesia, local anesthesia, chemotherapy and antibiotics.
We manufacture and distribute a complete line of portable pumps, stationary pumps and disposable sets that are used in
the delivery of enteral nutrition for patients in their own homes, hospitals and long-term care facilities. We manufacture
and distribute ultrasonic and optical sensors used to detect air bubbles in infusion pump lines and ensure accurate fluid
delivery. Our surgical handpieces are used to safely fragment and aspirate tissue in common medical procedures such as
cataract removal.
92
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Segment information for the years ended 2010, 2009 and 2008 and reconciliations to consolidated
amounts are as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Net sales:
|
||||||||||||
|
Aircraft Controls
|
$ | 756,550 | $ | 663,463 | $ | 672,930 | ||||||
|
Space and Defense Controls
|
325,474 | 274,501 | 253,266 | |||||||||
|
Industrial Systems
|
545,672 | 454,629 | 532,098 | |||||||||
|
Components
|
359,992 | 345,509 | 340,941 | |||||||||
|
Medical Devices
|
126,564 | 110,816 | 103,431 | |||||||||
|
Net sales
|
$ | 2,114,252 | $ | 1,848,918 | $ | 1,902,666 | ||||||
|
Operating profit (loss) and margins:
|
||||||||||||
|
Aircraft Controls
|
$ | 76,374 | $ | 52,349 | $ | 54,979 | ||||||
|
|
10.1 % | 7.9 % | 8.2 % | |||||||||
|
Space and Defense Controls
|
35,844 | 40,018 | 29,261 | |||||||||
|
|
11.0 % | 14.6 % | 11.6 % | |||||||||
|
Industrial Systems
|
48,109 | 30,797 | 73,467 | |||||||||
|
|
8.8 % | 6.8 % | 13.8 % | |||||||||
|
Components
|
60,159 | 55,671 | 60,644 | |||||||||
|
|
16.7 % | 16.1 % | 17.8 % | |||||||||
|
Medical Devices
|
(4,044 | ) | (7,425 | ) | 9,062 | |||||||
|
|
(3.2% | ) | (6.7% | ) | 8.8 % | |||||||
|
Total operating profit
|
216,442 | 171,410 | 227,413 | |||||||||
|
|
10.2 % | 9.3 % | 12.0 % | |||||||||
|
Deductions from operating profit:
|
||||||||||||
|
Interest expense
|
(38,742 | ) | (39,321 | ) | (37,739 | ) | ||||||
|
Equity-based compensation expense
|
(5,445 | ) | (5,682 | ) | (4,551 | ) | ||||||
|
Corporate and other expenses, net
|
(22,819 | ) | (15,846 | ) | (17,088 | ) | ||||||
|
Earnings before income taxes
|
$ | 149,436 | $ | 110,561 | $ | 168,035 | ||||||
|
Depreciation and amortization:
|
||||||||||||
|
Aircraft Controls
|
$ | 37,211 | $ | 28,979 | $ | 21,604 | ||||||
|
Space and Defense Controls
|
10,690 | 9,072 | 8,361 | |||||||||
|
Industrial Systems
|
24,461 | 19,644 | 17,090 | |||||||||
|
Components
|
6,605 | 7,706 | 7,889 | |||||||||
|
Medical Devices
|
10,655 | 9,333 | 7,426 | |||||||||
|
|
89,622 | 74,734 | 62,370 | |||||||||
|
Corporate
|
1,594 | 1,650 | 1,006 | |||||||||
|
Total depreciation and amortization
|
$ | 91,216 | $ | 76,384 | $ | 63,376 | ||||||
|
Identifiable assets:
|
||||||||||||
|
Aircraft Controls
|
$ | 1,028,213 | $ | 998,048 | $ | 771,534 | ||||||
|
Space and Defense Controls
|
349,987 | 309,958 | 251,019 | |||||||||
|
Industrial Systems
|
684,021 | 692,348 | 614,824 | |||||||||
|
Components
|
362,417 | 362,022 | 354,911 | |||||||||
|
Medical Devices
|
246,606 | 238,378 | 198,418 | |||||||||
|
|
2,671,244 | 2,600,754 | 2,190,706 | |||||||||
|
Corporate
|
40,890 | 33,563 | 36,541 | |||||||||
|
Total assets
|
$ | 2,712,134 | $ | 2,634,317 | $ | 2,227,247 | ||||||
|
Capital expenditures:
|
||||||||||||
|
Aircraft Controls
|
$ | 30,449 | $ | 28,035 | $ | 48,122 | ||||||
|
Space and Defense Controls
|
7,315 | 14,103 | 11,069 | |||||||||
|
Industrial Systems
|
12,478 | 20,643 | 23,290 | |||||||||
|
Components
|
3,961 | 10,653 | 6,853 | |||||||||
|
Medical Devices
|
11,746 | 8,392 | 2,499 | |||||||||
|
Total capital expenditures
|
$ | 65,949 | $ | 81,826 | $ | 91,833 | ||||||
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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, manpower or profit.
Sales, based on the customer’s location, and property, plant and equipment by geographic area are
as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Net sales:
|
||||||||||||
|
United States
|
$ | 1,185,743 | $ | 1,118,178 | $ | 1,106,647 | ||||||
|
China
|
157,501 | 85,230 | 48,205 | |||||||||
|
Germany
|
150,427 | 98,718 | 118,116 | |||||||||
|
United Kingdom
|
115,944 | 62,658 | 90,974 | |||||||||
|
Japan
|
96,431 | 93,025 | 79,504 | |||||||||
|
Other
|
408,206 | 391,109 | 459,220 | |||||||||
|
Net sales
|
$ | 2,114,252 | $ | 1,848,918 | $ | 1,902,666 | ||||||
|
Property, plant and equipment, net:
|
||||||||||||
|
United States
|
$ | 274,591 | $ | 264,243 | $ | 237,376 | ||||||
|
Philippines
|
74,720 | 82,465 | 77,011 | |||||||||
|
United Kingdom
|
27,866 | 29,776 | 11,036 | |||||||||
|
Germany
|
25,899 | 30,256 | 32,702 | |||||||||
|
Other
|
83,868 | 74,986 | 69,995 | |||||||||
|
Property, plant and equipment, net
|
$ | 486,944 | $ | 481,726 | $ | 428,120 | ||||||
Sales to Boeing were $206,775, or 10% of sales, in 2010, including sales to Boeing Commercial
Airplanes of $91,112. Sales arising from U.S. Government prime or sub-contracts, including military
sales to Boeing, were $740,701, $705,145 and $618,118 in 2010, 2009 and 2008, respectively. Sales
to Boeing and the U.S. Government and its prime- or sub-contractors are made primarily from the
Aircraft Controls and Space and Defense Controls segments.
From time to time, we are named as a defendant in legal actions. We are not a party to any pending
legal proceedings which management believes will result in a material adverse effect on our
financial condition or results of operations.
We are engaged in administrative proceedings with governmental agencies and legal proceedings with
governmental agencies and other third parties in the normal course of our business, including
litigation under Superfund laws, regarding environmental matters. We believe that adequate reserves
have been established for our share of the estimated cost for all currently pending environmental
administrative or legal proceedings and do not expect that these environmental matters will have a
material adverse effect on our financial condition or results of operations.
We lease certain facilities and equipment under operating lease arrangements. These arrangements
may include fair market renewal or purchase options. Rent expense under operating leases amounted
to $25,061 in 2010, $24,044 in 2009 and $22,916 in 2008. Future minimum rental payments required
under noncancelable operating leases are $18,689 in 2011, $16,929 in 2012, $12,331 in 2013, $9,582
in 2014, $6,149 in 2015 and $20,113 thereafter.
We are contingently liable for $9,721 of standby letters of credit issued by a bank to third
parties on our behalf at October 2, 2010. Purchase commitments outstanding at October 2, 2010 are
$457,957, including $12,254 for property, plant and equipment.
94
Table of Contents
Net Sales and Earnings
| 1st | 2nd | 3rd | 4th | |||||||||||||||||
| 2010 | Qtr. | Qtr. | Qtr. | Qtr. | Total | |||||||||||||||
|
Net sales
|
$ | 495,178 | $ | 510,488 | $ | 536,775 | $ | 571,811 | $ | 2,114,252 | ||||||||||
|
Gross profit
|
144,402 | 147,901 | 155,947 | 164,361 | 612,611 | |||||||||||||||
|
Net earnings
|
21,561 | 25,001 | 29,232 | 32,300 | 108,094 | |||||||||||||||
|
Net earnings per share:
|
||||||||||||||||||||
|
Basic
|
$ | .48 | $ | .55 | $ | .64 | $ | .71 | $ | 2.38 | ||||||||||
|
Diluted
|
$ | .47 | $ | .55 | $ | .64 | $ | .71 | $ | 2.36 | ||||||||||
| 1st | 2nd | 3rd | 4th | |||||||||||||||||
| 2009 | Qtr. | Qtr. | Qtr. | Qtr. | Total | |||||||||||||||
|
Net sales
|
$ | 446,088 | $ | 453,335 | $ | 445,160 | $ | 504,335 | $ | 1,848,918 | ||||||||||
|
Gross profit
|
137,848 | 135,772 | 125,750 | 137,930 | 537,300 | |||||||||||||||
|
Net earnings
|
30,270 | 23,692 | 15,896 | 15,187 | 85,045 | |||||||||||||||
|
Net earnings per share:
|
||||||||||||||||||||
|
Basic
|
$ | .71 | $ | .56 | $ | .37 | $ | .36 | $ | 2.00 | ||||||||||
|
Diluted
|
$ | .70 | $ | .55 | $ | .37 | $ | .35 | $ | 1.98 | ||||||||||
Note: Quarterly amounts may not add to the total due to rounding.
95
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors of Moog Inc.
We have audited the accompanying consolidated balance sheets of Moog Inc. as of October 2, 2010 and
October 3, 2009, and the related consolidated statements of earnings, shareholders’ equity, and
cash flows for each of the three years in the period ended October 2, 2010. Our audits also
included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Moog Inc. at October 2, 2010 and October 3, 2009,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended October 2, 2010, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective September 30, 2007 the
Company changed its method of accounting for uncertainty in income taxes with the adoption of the
guidance originally issued in FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109” (codified in FASB ASC Topic 740, “Income
Taxes”), and the Company changed its method of accounting for defined benefit pension and other
postretirement plans with the adoption of the measurement provisions effective September 28, 2008
of the guidance originally issued in Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R)” (codified in FASB ASC Topic 715, “Compensation –
Retirement Benefits”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Moog Inc.’s internal control over financial reporting as of October 2, 2010,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated December 1, 2010 expressed
an unqualified opinion thereon.
Buffalo, New York
December 1, 2010
December 1, 2010
96
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act.
Under the supervision and with the participation of our management, including the Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of October 2, 2010 based upon the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal
control over financial reporting is effective as of October 2, 2010.
We completed four acquisitions in 2010, which were excluded from our management’s report on
internal control over financial reporting as of October 2, 2010. On April 29, 2010, we acquired
Advanced Integrated Systems, Ltd. On May 7, 2010, we acquired Ingenieurburo Pieper GmbH. On May 26,
2010, we acquired Mid America Aviation, Inc. On August 31, 2010, we acquired assets and the
business of Isel Robotik USA, LLC. All of these acquisitions are included in our 2010 consolidated
financial statements and collectively constituted $43.5 million and $33.7 million of total and net
assets, respectively, as of October 2, 2010 and $9.1 million and $(0.5) million of net sales and
net loss, respectively, for the year then ended.
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated
financial statements included in this Annual Report on Form 10-K and, as part of their audit, has
issued their report, included herein, on the effectiveness of our internal control over financial
reporting.
|
By
|
ROBERT T. BRADY
|
||
|
|
Chairman of the Board, | ||
|
|
President, Chief Executive Officer, | ||
|
|
and Director | ||
|
|
(Principal Executive Officer) | ||
|
|
|||
|
By
|
JOHN R. SCANNELL
|
||
|
|
Vice President, | ||
|
|
Chief Financial Officer | ||
|
|
(Principal Financial Officer) |
97
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
OVER FINANCIAL REPORTING
Shareholders and Board of Directors of Moog Inc.
We have audited Moog Inc.’s internal control over financial reporting as of October 2, 2010, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Moog Inc.’s management is
responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions or that
the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial
reporting did not include the internal controls of Advanced Integrated Systems, Ltd. acquired on
April 29, 2010, Ingenieurboro Pieper GmbH acquired on May 7, 2010, Mid America Aviation, Inc.
acquired on May 26, 2010 and assets and the business of Isel Robotik USA, LLC acquired on August
31, 2010, which are included in the 2010 consolidated financial statements of Moog Inc. and
collectively constituted $43.5 million and $33.7 million of total and net assets, respectively, as
of October 2, 2010 and $9.1 million and $(0.5) million of net sales and net loss, respectively, for
the year then ended. Our audit of internal control over financial reporting of Moog Inc. also did
not include an evaluation of the internal control over financial reporting of Advanced Integrated
Systems, Ltd., Ingenieurboro Pieper GmbH, Mid America Aviation, Inc. and Isel Robotik USA, LLC.
In our opinion, Moog Inc. maintained, in all material respects, effective internal control over
financial reporting as of October 2, 2010, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Moog Inc. as of October 2, 2010 and
October 3, 2009, and the related consolidated statements of earnings, shareholders’ equity, and
cash flows for each of the three years in the period ended October 2, 2010 of Moog Inc. and our
report dated December 1, 2010 expressed an unqualified opinion thereon.
Buffalo, New York
December 1, 2010
December 1, 2010
98
Table of Contents
Not applicable.
Disclosure Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in Exchange Act Rules
13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that these disclosure controls and procedures are effective as of the end of the
period covered by this report, to ensure that information required to be disclosed in reports filed
or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Management’s Report on Internal Control over Financial Reporting.
See the report appearing under Item 8, Financial Statements and Supplemental Data of this report.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during the most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Not applicable.
The information required herein with respect to our directors and certain information required
herein with respect to our executive officers is incorporated by reference to the 2010 Proxy. Other
information required herein is included in Item 1, Business, under “Executive Officers of the
Registrant” of this report.
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial
Officer, Vice President - Finance and Controller. The code of ethics is available upon request
without charge by contacting our Chief Financial Officer at 716-652-2000.
The information required herein is incorporated by reference to the 2010 Proxy.
The information required herein is incorporated by reference to the 2010 Proxy.
The information required herein is incorporated by reference to the 2010 Proxy.
The information required herein is incorporated by reference to the 2010 Proxy.
99
Table of Contents
| (a) | Documents filed as part of this report: |
| 1. | Index to Financial Statements. | ||
| The following financial statements are included: |
| (i) | Consolidated Statements of Earnings for the years ended October 2, 2010, October 3, 2009 and September 27, 2008. | ||
| (ii) | Consolidated Balance Sheets as of October 2, 2010 and October 3, 2009. | ||
| (iii) | Consolidated Statements of Shareholders’ Equity for the years ended October 2, 2010, October 3, 2009, and September 27, 2008. | ||
| (iv) | Consolidated Statements of Cash Flows for the years ended October 2, 2010, October 3, 2009, and September 27, 2008. | ||
| (v) | Notes to Consolidated Financial Statements. | ||
| (vi) | Reports of Independent Registered Public Accounting Firm. |
| 2. | Index to Financial Statement Schedules. | ||
| The following Financial Statement Schedule as of and for the years ended October 2, 2010, October 3, 2009 and September 27, 2008 is included in this Annual Report on Form 10-K: | |||
| II. Valuation and Qualifying Accounts. | |||
| Schedules other than that listed above are omitted because the conditions requiring their filing do not exist or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto. | |||
| 3. | Exhibits | ||
| The exhibits required to be filed as part of this Annual Report on Form 10-K have been included as follows: |
| (3) | (i) | Restated Certificate of Incorporation of Moog Inc., as amended, incorporated by reference to exhibit 3.1 of our Quarterly Report on Form 10-Q for the quarter ended December 30, 2006. |
| (ii) | Restated By-laws of Moog Inc., incorporated by reference to appendix B of our proxy statement filed under Schedule 14A on December 2, 2003. |
| (4) | (i) | Form of Indenture between Moog Inc. and JPMorgan Chase Bank, N.A., as Trustee, dated January 10, 2005, relating to the 6 1 / 4 % Senior Subordinated Notes due 2015, incorporated by reference to exhibit 4.1 of our report on Form 8-K dated January 5, 2005. | |
| (ii) | First Supplemental Indenture between Moog Inc. and Banc of America Securities, LLC, dated as of September 12, 2005, incorporated by reference to exhibit 4.2 of our report on Form 10-K for the year ended September 24, 2005. | ||
| (iii) | Form of Indenture between Moog Inc. and Wells Fargo Bank, N.A., as Trustee, dated June 2, 2008, relating to the 7 1 / 4 % Senior Subordinated Notes due 2018, incorporated by reference to exhibit 4.1 of our report on Form 10-Q for the quarter ended June 28, 2008. | ||
| (9) | (i) | Agreement as to Voting, effective November 30, 1983, incorporated by reference to exhibit (i) of our report |
100
Table of Contents
| on Form 8-K dated December 9, 1983. |
| (ii) | Agreement as to Voting, effective October 15, 1988, incorporated by reference to exhibit (i) of our report on Form 8-K dated November 30, 1988. | ||
| (10) | (i) | Deferred Compensation Plan for Directors and Officers, amended and restated May 16, 2002, incorporated by reference to exhibit 10(ii) of our Annual Report on Form 10-K for the year ended September 28, 2002.* |
| (ii) | Form of Employment Termination Benefits Agreement between Moog Inc. and Employee-Officers, incorporated by reference to exhibit 10(vii) of our Annual Report on Form 10-K for the year ended September 25, 1999.* | ||
| (iii) | Supplemental Retirement Plan, as amended and restated, effective October 1, 1978, as amended August 30, 1983, May 19, 1987, August 30, 1988, December 12, 1996, November 11, 1999 and November 29, 2001, incorporated by reference to exhibit 10.1 of our report on Form 10-Q for the quarter ended December 31, 2002.* | ||
| (iv) | 1998 Stock Option Plan, incorporated by reference to exhibit A of our proxy statement filed under Schedule 14A on January 5, 1998.* | ||
| (v) | 2003 Stock Option Plan, incorporated by reference to exhibit A of our proxy statement filed under Schedule 14A on January 9, 2003.* | ||
| (vi) | Forms of Stock Option Agreements under the 1998 Stock Option Plan and 2003 Stock Option Plan, incorporated by reference to exhibit 10.12 of our Annual Report on Form 10-K for the year ended September 25, 2004.* | ||
| (vii) | Moog Inc. Stock Employee Compensation Trust Agreement effective December 2, 2003, incorporated by reference to exhibit 10.1 of our report on Form 10-Q for the quarter ended December 31, 2003. | ||
| (viii) | Form of Indemnification Agreement for officers, directors and key employees, incorporated by reference to exhibit 10.1 of our report on Form 8-K dated November 30, 2004.* | ||
| (ix) | Description of Management Profit Sharing Program, incorporated by reference to exhibit 10.1 of our report on Form 10-Q for the quarter ended March 26, 2005.* | ||
| (x) | Second Amended and Restated Loan Agreement between Moog Inc., HSBC Bank USA, National Association, Manufacturers and Traders Trust Company, Bank of America, N.A. and JPMorgan Chase Bank, N.A. dated as of October 25, 2006 (the “Second Amended and Restated Loan Agreement”), incorporated by reference to exhibit 10.1 of our report on Form 8-K dated October 25, 2006. | ||
| (xi) | Amendment No. 3 dated as of March 14, 2008, to Second Amended and Restated Loan Agreement, incorporated by reference to exhibit 10.1 of our report on Form 8-K dated March 14, 2008. | ||
| (xii) | Amendment No. 4 dated as of June 26, 2009, to Second Amended and Restated Loan Agreement, incorporated by reference to exhibit 10.1 of our report on Form 8-K dated June 26, 2009. | ||
| (xiii) | 2008 Stock Appreciation Rights Plan, incorporated by reference to exhibit A of the proxy statement filed under Schedule 14A on December 10, 2007.* | ||
| (xiv) | Form of Stock Appreciation Rights Award Agreement under 2008 Stock Appreciation Rights Plan, incorporated by reference to exhibit 10.14 of our report on Form 10-K for the year ended September 27, 2008, filed on November 25, 2008.* |
| *Identifies a management contract or compensatory plan or arrangement. | |||
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Table of Contents
| (21) | Our subsidiaries. |
| (i) | Advanced Integrated Systems, Ltd., Incorporated in Nevada, wholly-owned subsidiary | ||
| (ii) | CSA Engineering, Inc., Incorporated in California, wholly-owned subsidiary | ||
| (iii) | Curlin Medical Inc., Incorporated in Delaware, wholly-owned subsidiary |
| (a) | Moog MDG SRL, Incorporated in Costa Rica, wholly-owned subsidiary of Curlin Medical, Inc. | ||
| (b) | UAB Moog MDG, Incorporated in Lithuania, wholly-owned subsidiary of Curlin Medical, Inc. |
| (1) | Viltechmeda UAB, Incorporated in Lithuania, wholly-owned subsidiary of UAB Moog MDG |
| (c) | X.O. Tec Corporation, Incorporated in Delaware, wholly-owned subsidiary of Curlin Medical, Inc. |
| (1) | Ethox (Beijing) Medical Devices Trading Inc., Incorporated in People’s Republic of China, wholly-owned subsidiary of X.O. Tec Corporation | ||
| (2) | Ethox International, Inc., Incorporated in New York, wholly-owned subsidiary of X.O. Tec Corporation |
| (2.a) | MMC Sterilization Services Group Inc., Incorporated in Pennsylvania, wholly-owned subsidiary of Ethox International, Inc. |
| (d) | ZEVEX Inc., Incorporated in Delaware, wholly-owned subsidiary of Curlin Medical, Inc. |
| (iv) | Flo-Tork Inc., Incorporated in Delaware, wholly-owned subsidiary | ||
| (v) | Ingenieurburo Pieper GmbH, Incorporated in Germany, wholly-owned subsidiary | ||
| (vi) | Mid-America Aviation, Inc., Incorporated in North Dakota, wholly-owned subsidiary | ||
| (vii) | Moog AG, Incorporated in Switzerland, wholly-owned subsidiary with branch operation in Ireland | ||
| (viii) | Moog Australia Pty. Ltd., Incorporated in Australia, wholly-owned subsidiary | ||
| (ix) | Moog do Brasil Controles Ltda., Incorporated in Brazil, wholly-owned subsidiary |
| (a) | Moog de Argentina SRL, Incorporated in Argentina, wholly-owned subsidiary of Moog do Brasil Controles Ltda. |
| (x) | Moog Controls Corporation, Incorporated in Ohio, wholly-owned subsidiary with branch operation in the Republic of the Philippines | ||
| (xi) | Moog Controls Hong Kong Ltd., Incorporated in People’s Republic of China, wholly-owned subsidiary |
| (a) | Moog Control Systems (Shanghai) Co., Ltd., Incorporated in People’s Republic of China, wholly-owned subsidiary of Moog Controls Hong Kong Ltd. | ||
| (b) | Moog Industrial Controls (Shanghai) Co., Ltd., Incorporated in People’s Republic of China, wholly-owned subsidiary of Moog Controls Hong Kong Ltd. |
| (xii) | Moog Controls (India) Private Ltd., Incorporated in India, wholly-owned subsidiary | ||
| (xiii) | Moog Controls Ltd., Incorporated in the United Kingdom, wholly-owned subsidiary |
| (a) | Fernau Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Moog Controls Ltd. |
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| (1) | Fernau Avionics Ltd., Incorporated in the United Kingdom, wholly-owned subsidiary of Fernau Limited |
| (b) | Moog Components Group Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Moog Controls Ltd. | ||
| (c) | Moog Norden A.B., Incorporated in Sweden, wholly-owned subsidiary of Moog Controls Ltd. | ||
| (d) | Moog OY, Incorporated in Finland, wholly-owned subsidiary of Moog Controls Ltd. | ||
| (e) | Moog Wolverhampton Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Moog Controls Ltd. |
| (xiv) | Moog Europe Holdings Luxembourg SCS, Incorporated in Luxembourg, wholly-owned subsidiary |
| (a) | Moog Holdings & Co. GmbH KG, a partnership organized in Germany, wholly-owned subsidiary of Moog Europe Holdings Luxembourg SCS |
| (1) | Insensys Holding Ltd., Incorporated in the United Kingdom, wholly-owned subsidiary of Moog Holdings & Co. GmbH KG |
| (1.a) | Moog Insensys Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Insensys Holding Ltd. | ||
| (1.b) | Aston Photonic Technologies Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Moog Insensys Limited | ||
| (1.c) | Indigo Photonics Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Aston Photonic Technologies Limited |
| (2) | Moog Unna GmbH, Incorporated in Germany, wholly-owned subsidiary of Moog Holdings & Co. GmbH KG |
| (2.a) | Moog Control Equipment (Shanghai) Co. Ltd., Incorporated in People’s Republic of China, wholly-owned subsidiary of Moog Unna GmbH |
| (3) | Moog B.V., Incorporated in The Netherlands, wholly-owned subsidiary of Moog Holdings & Co. GmbH KG | ||
| (4) | Moog FCS Limited, Incorporated in the United Kingdom, wholly-owned subsidiary of Moog B.V. | ||
| (5) | Moog GmbH, Incorporated in Germany, wholly-owned subsidiary of Moog Holdings & Co. GmbH KG |
| (5.a) | Moog Italiana S.r.l., Incorporated in Italy, wholly-owned subsidiary of Moog GmbH |
| (6) | Moog Luxembourg, S.a.r.l., Incorporated in Luxembourg, wholly-owned subsidiary of Moog Holdings & Co. GmbH KG | ||
| (7) | ProControl AG, Incorporated in Switzerland, wholly-owned subsidiary of Moog Holdings & Co. GmbH KG |
| (b) | Moog Luxembourg Finance S.a.r.l., Incorporated in Luxembourg, wholly-owned subsidiary of Moog Europe Holdings Luxembourg SCS, with branch operations in Switzerland |
| (1) | Moog Ireland International Financial Services Centre Limited, Incorporated in Ireland, wholly-owned subsidiary of Moog Luxembourg Finance S.a.r.l. |
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| (c) | Focal Technologies Corporation, Incorporated in Canada, wholly-owned subsidiary of Moog Europe Holdings Luxembourg SCS | ||
| (d) | Moog Verwaltungs GmbH, Incorporated in Germany, wholly-owned subsidiary of Moog Europe Holdings Luxembourg SCS |
| (xv) | Moog Holland Aircraft Services B.V., Incorporated in The Netherlands, wholly-owned subsidiary | ||
| (xvi) | Moog Japan Ltd., Incorporated in Japan, wholly-owned subsidiary | ||
| (xvii) | Moog Korea Ltd., Incorporated in South Korea, wholly-owned subsidiary | ||
| (xviii) | Moog S.A.R.L., Incorporated in France, wholly-owned subsidiary, 95% owned by Moog Inc.; 5% owned by Moog GmbH | ||
| (xix) | Moog Singapore Pte. Ltd., Incorporated in Singapore, wholly-owned subsidiary |
| (a) | Moog Motion Controls Private Limited, Incorporated in India, wholly-owned subsidiary of Moog Singapore Pte. Ltd. | ||
| (b) | Moog India Technology Center Pvt. Ltd., Incorporated in India, wholly-owned subsidiary of Moog Singapore Pte. Ltd. |
| (xx) | Moog Techtron Corp. Incorporated in Florida, wholly-owned subsidiary | ||
| (xxi) | QuickSet International, Inc., Incorporated in Illinois, wholly-owned subsidiary | ||
| (xxii) | Videolarm Inc., Incorporated in Georgia, wholly-owned subsidiary |
| (23) | Consent of Ernst & Young LLP. (Filed herewith) | ||
| (31.1) | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) | ||
| (31.2) | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) | ||
| (32.1) | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith) | ||
| (101.INS) | XBRL Instance Document.* | ||
| (101.SCH) | XBRL Taxonomy Extension Schema Document.* | ||
| (101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document.* | ||
| (101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document.* | ||
| (101.LAB) | XBRL Taxonomy Extension Label Linkbase Document.* | ||
| (101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document.* |
| * | Submitted electronically herewith. |
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Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business
Reporting Language):
(i) Consolidated Statements of Earnings for the fiscal years ended October 2, 2010, October 3, 2009 and September 27, 2008 (ii) Consolidated Balance Sheets at October 2, 2010 and October 3, 2009, (iii) Consolidated Statements of Cash Flows for the fiscal years ended October 2, 2010, October 3, 2009 and September27, 2008 and (iv) Notes to Consolidated Financial Statements.
(i) Consolidated Statements of Earnings for the fiscal years ended October 2, 2010, October 3, 2009 and September 27, 2008 (ii) Consolidated Balance Sheets at October 2, 2010 and October 3, 2009, (iii) Consolidated Statements of Cash Flows for the fiscal years ended October 2, 2010, October 3, 2009 and September27, 2008 and (iv) Notes to Consolidated Financial Statements.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this
Quarterly Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section and shall not be part of any
registration or other document filed under the Securities Act or the Exchange Act, except as shall
be expressly set forth by specific reference in such filing.
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MOOG
inc.
Valuation and Qualifying Accounts - Fiscal Years 2008, 2009 and 2010
| (dollars in thousands) | Schedule II | |||||||||||||||||||||||
| Additions | Foreign | |||||||||||||||||||||||
| Balance at | charged to | exchange | Balance | |||||||||||||||||||||
| beginning | costs and | impact | at end | |||||||||||||||||||||
| Description | of year | expenses | Deductions | Acquisitions | and other | of year | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fiscal year ended September 27, 2008
|
||||||||||||||||||||||||
|
Contract loss reserves
|
$ | 12,362 | $ | 23,036 | $ | 14,848 | $ | 29 | $ | (43 | ) | $ | 20,536 | |||||||||||
|
Allowance for doubtful accounts
|
3,086 | 1,585 | 929 | - | (393 | ) | 3,349 | |||||||||||||||||
|
Reserve for inventory valuation
|
55,157 | 11,942 | 4,117 | - | (453 | ) | 62,529 | |||||||||||||||||
|
Deferred tax valuation allowance
|
9,374 | 175 | 1,810 | - | 218 | 7,957 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fiscal year ended October 3, 2009
|
||||||||||||||||||||||||
|
Contract loss reserves
|
$ | 20,536 | $ | 23,529 | $ | 24,766 | $ | 30,927 | $ | (36 | ) | $ | 50,190 | |||||||||||
|
Allowance for doubtful accounts
|
3,349 | 1,297 | 655 | - | 23 | 4,014 | ||||||||||||||||||
|
Reserve for inventory valuation
|
62,529 | 18,340 | 6,944 | - | (643 | ) | 73,282 | |||||||||||||||||
|
Deferred tax valuation allowance
|
7,957 | 2,545 | 915 | - | (111 | ) | 9,476 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fiscal year ended October 2, 2010
|
||||||||||||||||||||||||
|
Contract loss reserves
|
$ | 50,190 | $ | 32,298 | $ | 39,799 | $ | (1,895 | ) | $ | 16 | $ | 40,810 | |||||||||||
|
Allowance for doubtful accounts
|
4,014 | 1,511 | 599 | - | (113 | ) | 4,813 | |||||||||||||||||
|
Reserve for inventory valuation
|
73,282 | 20,395 | 7,900 | - | (169 | ) | 85,608 | |||||||||||||||||
|
Deferred tax valuation allowance
|
9,476 | 946 | 2,664 | - | (406 | ) | 7,352 | |||||||||||||||||
|
|
||||||||||||||||||||||||
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
Moog Inc.
(Registrant) |
|||||
|
|
||||||
|
|
By | ROBERT T. BRADY | ||||
|
|
Chairman of the Board, President, Chief Executive Officer, and Director (Principal Executive Officer) Date: December 1, 2010 |
|||||
|
|
||||||
|
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By | JOHN R. SCANNELL | ||||
|
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Vice President, Chief Financial Officer (Principal Financial Officer) Date: December 1, 2010 |
|||||
|
|
||||||
|
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By | DONALD R. FISHBACK | ||||
|
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Vice President, Finance Date: December 1, 2010 |
|||||
|
|
||||||
|
|
By | JENNIFER WALTER | ||||
|
|
Controller (Principal Accounting Officer) Date: December 1, 2010 |
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Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
By
|
ROBERT T. BRADY | |
|
|
||
|
|
Robert T. Brady | |
|
|
Chairman of the Board, | |
|
|
President, Chief Executive Officer and Director | |
|
|
(Principal Executive Officer) | |
|
|
Date: December 1, 2010 | |
|
By
|
RICHARD A. AUBRECHT | By | KRAIG H. KAYSER | |||
|
|
||||||
|
|
Richard A. Aubrecht | Kraig H. Kayser | ||||
|
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Director | Director | ||||
|
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Date: December 1, 2010 | Date: December 1, 2010 | ||||
|
|
||||||
|
By
|
RAYMOND W. BOUSHIE | By | BRIAN J. LIPKE | |||
|
|
||||||
|
|
Raymond W. Boushie | Brian J. Lipke | ||||
|
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Director | Director | ||||
|
|
Date: December 1, 2010 | Date: December 1, 2010 | ||||
|
|
||||||
|
By
|
JOE C. GREEN | By | ROBERT H. MASKREY | |||
|
|
||||||
|
|
Joe C. Green | Robert H. Maskrey | ||||
|
|
Director | Director | ||||
|
|
Date: December 1, 2010 | Date: December 1, 2010 | ||||
|
|
||||||
|
By
|
PETER J. GUNDERMANN | By | ALBERT F. MYERS | |||
|
|
||||||
|
|
Peter J. Gundermann | Albert F. Myers | ||||
|
|
Director | Director | ||||
|
|
Date: December 1, 2010 | Date: December 1, 2010 | ||||
|
|
||||||
|
By
|
JOHN D. HENDRICK | |||||
|
|
||||||
|
|
John D. Hendrick | |||||
|
|
Director | |||||
|
|
Date: December 1, 2010 |
108
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 - Summary Of Significant Accounting PoliciesNote 2 - AcquisitionsNote 3 - ReceivablesNote 4 - InventoriesNote 5 - Property, Plant and EquipmentNote 6 - Goodwill and Intangible AssetsNote 7 - IndebtednessNote 8 - Derivative Financial InstrumentsNote 9 - Fair ValueNote 10 - RestructuringNote 11 - Employee Benefit PlansNote 12 - Income TaxesNote 13 - Shareholders EquityNote 14 - Equity-based CompensationNote 15 - Stock Employee Compensation TrustNote 16 - Other Comprehensive Income (loss)Note 17 - SegmentsNote 18 - Commitments and ContingenciesNote 19 - Quarterly Data - UnauditedItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules