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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

MOOG INC.
(Exact Name of Registrant as Specified in its Charter)

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

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.                  

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes     X               No          

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 March 31, 2004, the last business day of the registrant's most recently completed second quarter, was approximately $738 million.

The number of shares of Common Stock outstanding as of the close of business on November 29, 2004 was: Class A 22,917,428; Class B 2,821,497.

Portions of the 2004 Proxy Statement to Shareholders ("2004 Proxy") are incorporated by reference into Part III of this Form 10-K.

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Cautionary Statement
Information included herein or incorporated by reference 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," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume" and "assume," are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. These important factors, risks and uncertainties include (i) fluctuations in general business cycles for commercial aircraft, military aircraft, space and defense products and industrial capital goods, (ii) the Company's dependence on government contracts that may not be fully funded or may be terminated, (iii) the Company's dependence on certain major customers, such as The Boeing Company and Lockheed Martin, for a significant percentage of its sales, (iv) the possibility that advances in technology could reduce the demand for certain of the Company's products, specifically hydraulic-based motion controls, (v) intense competition in the Company's business which may require the Company to lower prices or offer more favorable terms of sale, (vi) the Company's significant indebtedness which could limit its operational and financial flexibility, (vii) the significant amount of the Company's debt which is at variable interest rates that may increase, (viii) higher pension costs and increased cash funding requirements which could occur in future years if future actual plan results differ from assumptions used for the Company's defined benefit pension plans, including returns on plan assets and discount rates, (ix) a write-off of all or part of the Company's goodwill which could adversely affect the Company's operating results and net worth and cause it to violate covenants in its bank agreements, (x) the potential for substantial fines and penalties or suspension or debarment from future contracts in the event the Company does not comply with regulations relating to defense industry contracting, (xi) the potential for cost overruns on fixed price contracts, (xii) the risk that actual results may differ from estimates used, including those used in long-term contract accounting, (xiii) the Company's ability to successfully identify and consummate acquisitions and integrate the acquired businesses, including the September 30, 2003 acquisition of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation, and the risk that known liabilities will be assumed by the Company in connection with acquisitions, including liabilities for which indemnification from the seller may be limited or unavailable, (xiv) the possibility of a catastrophic loss of one or more of the Company's manufacturing facilities, (xv) the impact of product liability claims related to the Company's products used in applications where failure can result in significant property damage, injury or death, (xvi) the possibility that litigation may result unfavorably to the Company, (xvii) foreign currency fluctuations in those countries in which the Company does business and other risks associated with international operations and (xviii) the cost of compliance with environmental laws. The factors identified above are not exhaustive. New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements made in this report.

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PART I

    The Registrant, Moog Inc., a New York corporation formed in 1951, is referred to in this Annual Report on Form 10-K as "Moog," "the Company" or in the nominative "we" or the possessive "our."

Item 1. Business.

    Description of the Company's Business. Moog is a leading worldwide designer and manufacturer of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and industrial markets. The Company operates in four principal business segments: Aircraft Controls, Space and Defense Controls, Industrial Controls and Components. The Components segment is new in 2004 as a result of the acquisition of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation.

    Comparative segment revenues, operating profits and related financial information for 2004, 2003 and 2002 are provided in Note 15 of Item 8, Financial Statements and Supplementary Data, on pages 59 through 61 of this report.

    Aircraft Controls. The Company's largest segment is Aircraft Controls. This segment generates revenues from three major markets: military aircraft, commercial aircraft and aftermarket support. The Company differentiates itself in these markets by offering a complete range of technologies, system integration and unparalleled customer service.

    The Company designs, manufactures and integrates primary and secondary flight controls for military and commercial aircraft. Its systems control large commercial transports, supersonic fighters, multi-role military aircraft, business jets and rotorcraft. Major factors influence the sales volume in these target markets, including whether the programs that the Company is working on are development or production and the number of new aircraft being built.

    Typically, development programs require concentrated periods of research and development ("R&D") by the Company's engineering teams. Revenues and margins fluctuate as the program transitions through design, development, testing and integration. Production programs, on the other hand, are generally long-term manufacturing efforts that extend for as long as the aircraft builder receives new orders. Margins are better on production programs because more consistent shipment rates create efficiencies. Revenues on production programs usually exhibit predictable trends driven by the demand for new aircraft.

    The Company is currently working on several large development programs including the F-35 Joint Strike Fighter, Boeing's 7E7 Dreamliner and the Airbus A400M. Design work on the F-35 Joint Strike Fighter peaked this year and will now trend down as the aircraft goes through an integration and test phase prior to production. The 7E7 and the A400M programs began design and development in 2004. This work will escalate in 2005, continuing for several years.

    The Company's large military production programs include the F/A-18E/F Super Hornet and the V-22 Osprey. The large commercial production programs include the total array of Boeing 7-series aircraft.

    Aftermarket support is the result of the Company's original equipment heritage. With its equipment flying on active aircraft around the world, the Company supports the major commercial airlines in the free world, various U.S. government agencies and many of the U.S.'s overseas allies. This part of the Company's business is partially affected by hours flown for commercial transports and by hours flown and environmental factors for military aircraft. However, the largest factor in the Company's aftermarket business is its ability to respond to customers' needs for rapid turnaround times and their desire for factory warranted parts and repairs.

    Space and Defense Controls. During 2004, the Company changed its segment reporting. The Company renamed the Space Controls segment Space and Defense Controls and is including defense controls, which was previously included in Industrial Controls. Defense controls are actuation systems used to position gun barrels and automatically load ammunition for military vehicles. Although the product line was derived from the Company's industrial products, in particular those in Europe, the customer base is military. Because of the expertise and customer intimacy that the Company has within Space and Defense Controls with military customers, the chief operating decision maker is now reviewing performance and assessing the allocation of resources of defense controls as part of this new Space and Defense Controls segment.

    Space and Defense Controls has the longest heritage, beginning in 1951. Today, there are several important markets that generate segment revenues such as satellites and space vehicles, launch vehicles, strategic missiles, missile defense, tactical missiles and defense controls. The Company differentiates itself in these markets by having unique competence in the most difficult applications, complex motion and fluid control systems technology, innovative design and comprehensive project management.

    For the commercial and military satellite markets, the Company designs, manufactures and integrates chemical and electric propulsion systems and space flight motion controls. Launch vehicles and missiles use the Company's steering and propulsion controls, and the Space Station uses Company couplings, valves and actuators.

    During the year, the Company's systems were instrumental in the success of many of NASA's science objectives including the Mars Opportunity and Spirit, Cassini, Gravity Probe B and Stardust. In August, NASA launched its Mercury MESSENGER (Mercury Surface, Space Environment, Geochemistry, and Ranging) spacecraft on a Delta II launch vehicle. MESSENGER will travel to the solar system's innermost planet, providing the first images of the entire planet, collecting detailed information on the composition and structure of its crust, the nature of its thin atmosphere and the makeup of its core materials. The Company's systems are integral to the success of the mission. The Delta II launch vehicle uses the Company's servovalves to steer the launch vehicle and also uses its pilot valves, swing check valves and solenoid valves to control and propel the launch vehicle into space. MESSENGER also relies on the Company's isolation, service and solenoid thruster valves to guide the spacecraft, and the Company's solar array drives will help to power the spacecraft during its journey to Mercury.

    Various factors influence the markets within Space and Defense Controls. Commercial satellites and launchers are driven by the viability of telecommunications companies, their need for capacity and

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the age and condition of their existing satellites. Orders for military satellites and launchers depend on the need for bandwidth. Tactical and strategic missile production depends on customer inventory levels. The Space Station, Space Shuttle and space vehicles depend on relevant funding from NASA as well as the Shuttle's return to flight. Defense control revenues are driven mostly by German, Scandinavian and Asian-Pacific military spending.

    Industrial Controls. Industrial Controls is the Company's most diverse segment, serving customers around the world and in many markets. Six major markets, plastics, turbines, metal forming, heavy industry, material test and simulation, generate over half of total sales in this segment. The Company differentiates itself in industrial markets by providing performance-based, customized products and systems, process expertise, best-in-class products in every leading technology and superior aftermarket support.

    For the plastics market, the Company designs, manufactures and integrates systems for all axes of injection and blow molding machines using leading edge technology, both hydraulic and electric. In the power generation turbine market, the Company designs, manufactures and integrates complete control assemblies for fuel, steam and variable geometry control applications that include wind turbines. Metal forming markets use Company-designed and manufactured systems that provide precise control of position, velocity, force, pressure, acceleration and other critical parameters. Heavy industry uses the Company's high precision electrical and hydraulic servovalves for steel and aluminum mill equipment. For the material test markets, the Company supplies controls for automotive testing, structural testing and fatigue testing. Its hydraulic and electromechanical motion simulation bases are used for the flight and training markets. Other markets include material handling and testing, auto racing, carpet tufting, paper mills and lumber mills.

    The factors that influence the industrial markets are as varied as the markets themselves. Capital investment, product innovation, economic growth, cost-reduction efforts, technology upgrades and the need in developing countries for manufacturing capacity and power generation are among the most important drivers in this segment. Catalysts for growth include automotive manufacturers that are upgrading their metal forming, injection molding and material test capabilities, steel manufacturers that are seeking to reduce energy costs and injection molding machine manufacturers that need exquisite precision in the production of CD's and DVD's.

    Components. Components is the newest segment, having been formed as a result of the Poly-Scientific acquisition at the beginning of 2004. Many of the same major markets, including military and commercial aerospace, defense controls and industrial applications, that drive sales in the other segments of the Company, affect Components. In addition, Components serves two medical equipment markets.

    This segment's three largest product categories, slip rings, fiber optic rotary joints and motors, serve very broad markets. Slip rings and fiber optic rotary joints use sliding contacts and optical technology to allow unimpeded rotation while delivering power and data across a rotating interface. They come in a range of sizes that allow them to be used in many applications that include diagnostic imaging, particularly CT scan medical equipment featuring high-speed data communications, de-icing and data transfer for rotorcraft, forward-looking infrared camera installations, radar pedestals, material handling, surveillance cameras, packaging and robotics.

    Motors designed and manufactured by Components are used in equally broad-based markets, many of which are the same as for slip rings. For the medical pump and blower market, and particularly sleep apnea equipment, Components designs and manufactures a series of miniature brushless motors that provide extremely low noise and reliable long life operation. Industrial markets use its motors for material handling, fuel cells and electric pumps. Military applications use Components' motors for gimbals, missiles and radar pedestals.

    Components has several other product lines including 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.

    Continuous demand for product innovation in the medical equipment, homeland security, aircraft protection and navigation systems and industrial machinery markets influence Components. Recent product innovation has resulted in lighter and smaller motors and increases in fiber optic bandwidth for CT scans. Other opportunities for growth will come from this segment's penetration of international markets as it increasingly collaborates with the Company's international sales engineers in the European and Pacific regions.

    Distribution. The Company's 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 Moog's engineering staff. Moog's 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 markets.

    Industry and Competitive Conditions. The Company experiences considerable competition in aerospace, defense and industrial markets.

    In Aircraft Controls, the Company's principal competitors include Parker Hannifin, Nabtesco, Smiths Industries, Goodrich, Liebherr, HR Textron, Curtiss-Wright and Hamilton Sundstrand. In Space and Defense Controls, the Company's principal competitors include Honeywell, HR Textron, Parker Hannifin, MPC, Goodrich, Vacco, Valvetech, Marotta, Ketema, Valcor, Aeroflex, Starsys and Snecma. In Industrial Controls, competitors include Bosch Rexroth, Eaton Vickers, Danaher, Parker Hannifin, Fokker and Hydraudyne. In Components, competitors include Danaher, Faulhaber, Penn Engineering, MPC, Axsys, Kaydon, Schleifring, Airflyte, Smiths and Kearfott.

    Competition in each market served is based upon design capability, product performance and life, service, price and delivery time. The Company believes it competes effectively on all of these bases.

    Backlog. Substantially all backlog will be realized as sales in the next twelve months. Also see the discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 37 of this report.

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    Raw Materials. Materials, supplies and components are purchased from numerous suppliers. The Company believes the loss of any one supplier, although potentially disruptive in the short-term, would not materially affect the Company's operations in the long-term.

    Working Capital. See the discussion on operating cycle in Note 1 of Item 8, Financial Statements and Supplementary Data, on page 50 of this report.

    Seasonality. Moog's business is generally not seasonal.

    Patents. Moog owns numerous patents and has filed applications for others. While the protection afforded by these patents is of value, the Company does not consider the successful conduct of any material part of its business to be dependent upon such protection. The Company's patents and patent applications, including U.S. and international patents, relate to electrohydraulic, electro-pneumatic and electromechanical actuation mechanisms and control valves, electronic control component systems and interface devices. The Company has trademark and trade name protection in major markets throughout the world.

    Research Activities. Research and product development activity has been, and continues to be, significant to the Company. See Item 6, Selected Financial Data, on page 36 of this report.

    Employees. On September 25, 2004, the Company employed 5,781 full-time employees, compared to 4,744 full-time employees on September 27, 2003.

    Customers. The Company's customers fall into three groups, Original Equipment Manufacturer (OEM) customers of its aerospace and defense markets, OEM customers of its industrial business and aftermarket customers in all markets. Aerospace and defense OEM customers collectively represented 46% of fiscal 2004 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 the Company's relationships with aerospace and defense OEM customers are based on long-term agreements. The Company's OEM sales of industrial controls are to a wide diversity of customers around the world and are normally based on lead times of 90 days or less. The Company also provides aftermarket support, consisting of spare and replacement parts and repair and overhaul services, for all of its product applications. The Company's major aftermarket customers are the U.S. Government and the commercial airlines.

    The Boeing Company represented approximately 13% of consolidated sales in 2004, including sales to Boeing Commercial Airplanes which represented 3% of fiscal 2004 sales. Sales to Lockheed Martin were approximately 10% of sales. Sales arising from U.S. Government prime or subcontracts, including military sales to Boeing and Lockheed Martin, were approximately 38% of sales. Sales to these customers are made primarily through Aircraft Controls, Space and Defense Controls and Components.

    Additional information is included in Note 15 of Item 8, Financial Statements and Supplementary Data, on pages 59 through 61 of this report.

    International Operations. Operations outside the United States are conducted through wholly-owned foreign subsidiaries. The Company's international operations are located predominantly in Europe and the Asian-Pacific region. See Note 15 of Item 8, Financial Supplementary Data, on pages 59 through 61 of this report for information regarding sales by geographic area and Exhibit 21 of Item15, Exhibits and Financial Statement Schedules, on pages 65 and 66 of this report for a list of subsidiaries. The Company's international operations are subject to the usual risks inherent in international trade, including currency fluctuations, 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 such operations are conducted.

    Environmental Matters. See the discussion in Note 16 of Item 8, Financial Statements and Supplementary Data, on page 61 of this report.

    Website Access to Information. The Company's internet address is www.moog.com. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and, if applicable, amendments to those reports available on the investor information portion of its 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. The Company has posted its corporate governance guidelines, board committee charters and code of ethics to the investor information portion of its website. This information is available in print to any shareholder upon request. All requests for these documents should be made to the Company's manager of investor relations by calling (716) 687-4225.

    Executive Officers of the Registrant. Other than Lawrence J. Ball and John B. Drenning, the principal occupations of the Company's officers for the past five years have been their employment with the Company. John B. Drenning's principal occupation is partner in the law firm of Hodgson Russ LLP.

    On January 16, 2004, Lawrence J. Ball was named Vice President and General Manager of Components Group. His employment with the Company began on September 30, 2003, when the Company acquired the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. Previously he was Poly-Scientific's President, a position he assumed in 1996.

    On February 7, 2002, Jay K. Hennig was named Vice President and continues as the Space Systems Group's General Manager, a position he assumed in January 2001. Previously he was General Manager of Moog's Chatsworth Operations in California.

    On June 1, 2000, Timothy P. Balkin was named Treasurer. Previously he was Director of Financial Planning and Analysis.

    On February 25, 2000, Warren C. Johnson was named Vice President and continues as General Manager of the Aircraft Group, a position he assumed in October 1999. Previously he was Chief Engineer of the Aircraft Group.

    On February 25, 2000, Martin J. Berardi was named Vice President and continues as a General Manager in the Industrial Controls segment.

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Item 2. Properties.

    On September 25, 2004, the Company occupied approximately 2,955,000 square feet of space in the United States and countries throughout the world, distributed by segment as follows:

    Aircraft Controls has principal manufacturing facilities located in New York, California, Utah, England and the Philippines. Space and Defense Controls has primary manufacturing facilities located in New York, California and Germany. Industrial Controls has principal manufacturing facilities located in New York, Germany, Italy, Japan, Ireland and Luxembourg. Components has principal manufacturing facilities located in Virginia, North Carolina and Pennsylvania. The Company's corporate headquarters are located in East Aurora, New York.

    The Company believes that its properties have been adequately maintained and are generally in good condition. The Company is expanding its manufacturing space at the low cost manufacturing site in the Philippines by approximately 40,000 square feet to support its expected future growth. Operating leases for properties expire at various times from 2005 through 2013. Upon the expiration of its current leases, the Company believes that it will be able to either secure renewal terms or enter into leases for alternative locations at market terms.

Item 3. Legal Proceedings.

    From time to time, the Company is named as a defendant in legal actions. The Company is not a party to any pending legal proceedings that management believes will result in a material adverse effect on the Company's financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

    None.

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

    Moog's 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.

    The number of shareholders of record of Class A Common Stock and Class B Common Stock was 1,227 and 575, respectively, as of November 29, 2004.

    Dividend restrictions are included in Note 7 of Item 8, Financial Statements and Supplementary Data, on page 54 of this report. The Company does not pay dividends on its Class A Common Stock or Class B Common Stock.

    The following table summarizes the Company's purchases of its common stock for the quarter ended September 25, 2004.

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Item 6. Selected Financial Data.

    For a more detailed discussion of 2002 through 2004, refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 37 through 44 of this report and Item 8, Financial Statements and Supplementary Data, on pages 45 through 63 of this report.

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    All references to years in this Management's Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years.

OVERVIEW

    Moog is a leading worldwide designer and manufacturer of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and industrial markets. We operate under four segments, Aircraft Controls, Space and Defense Controls, Industrial Controls and Components. The Components segment is new in 2004 as a result of our acquisition of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. Our principal manufacturing facilities are located in the United States, including facilities in New York, California, Utah, Virginia, North Carolina and Pennsylvania, and in Germany, England, Italy, the Philippines, Luxembourg, Japan, India and Ireland.

    Revenue under long-term contracts, representing approximately one-third of our sales, is recognized using the percentage of completion, cost-to-cost method of accounting. This method of revenue recognition is associated with the Aircraft Controls and Space and Defense Controls segments due to the contracting nature of the business activities, with the exception of their respective aftermarket activities. 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 associated with the Industrial Controls and Components segments, as well as with aftermarket activity.

    We continuously look for opportunities to capitalize on our technical strengths to expand our existing business in addition to growing through strategic acquisitions. We have a substantial established presence throughout Europe and the Pacific region and have the potential to market and distribute certain products to a wider customer base by utilizing our existing offices.

    Challenges facing us include improving shareholder value through increased profitability while experiencing pricing pressures from customers, strong competition and increases in certain costs, such as health care, retirement and corporate governance costs. We address these challenges by focusing on strategic revenue growth and by continuing to improve operating efficiencies through various process and manufacturing initiatives and using low cost manufacturing facilities without compromising quality.

Current Year Considerations

    The Board of Directors approved a three-for-two stock split of our Class A and Class B common shares effected in the form of a 50% share distribution paid on February 17, 2004 to shareholders of record on January 26, 2004. All share and per share amounts included in Management's Discussion and Analysis of Financial Condition and Results of Operations have been restated to show the effects of the stock split.

    On September 30, 2003, we acquired the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman. The adjusted purchase price was $152 million. The acquired business is a separate reporting segment, Components, and is a manufacturer of motion control and data transmission devices. Its principal products are slip rings, fiber optic rotary joints and motors. On September 16, 2003, we completed the sale of 3,018,750 shares of Class A common stock at $25.33 per share, and used the net proceeds of $72 million to pay a portion of the Poly-Scientific purchase price.

CRITICAL ACCOUNTING POLICIES

    Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. 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 34% of 2004 sales was accounted for using the percentage of completion, cost-to-cost method of accounting in accordance with American Institute of Certified Public Accountants' Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. This method of revenue recognition is associated with the Aircraft Controls and Space and Defense Controls segments due to the contracting 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 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.

    Occasionally, it is appropriate under SOP 81-1 to combine or segment contracts. Contracts are combined in those limited cir-

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cumstances 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 a contract and the total economic returns of the separate contract elements are similar to the economic returns of the overall contract. 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 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. Certain contracts contain provisions for performance incentives and penalties and are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Amounts representing contract cl