Moog(MOG_B) - 2024 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Moog Inc.'s unaudited Q1 FY2024 consolidated financial statements, including earnings, balance sheets, cash flows, and notes Consolidated Condensed Statements of Earnings For the three months ended December 30, 2023, Moog Inc. reported an increase in net sales and net earnings compared to the prior year period, with gross profit also showing improvement | Metric (in thousands) | Dec 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Net sales | $856,850 | $760,103 | | Cost of sales | $623,651 | $556,417 | | Gross profit | $233,199 | $203,686 | | Net earnings | $47,812 | $46,016 | | Basic EPS | $1.50 | $1.45 | | Diluted EPS | $1.48 | $1.44 | Consolidated Condensed Statements of Comprehensive Income Comprehensive income for the three months ended December 30, 2023, decreased compared to the prior year, primarily due to a lower foreign currency translation adjustment, despite an increase in net earnings | Metric (in thousands) | Dec 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Net earnings | $47,812 | $46,016 | | Foreign currency translation adjustment | $31,013 | $50,735 | | Other comprehensive income, net of tax | $33,009 | $53,853 | | Comprehensive income | $80,821 | $99,869 | Consolidated Condensed Balance Sheets As of December 30, 2023, total assets and total liabilities increased compared to September 30, 2023, with significant increases in cash and cash equivalents, unbilled receivables, and inventories. Shareholders' equity also saw an increase | Metric (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Total current assets | $2,116,615 | $1,985,332 | | Total assets | $3,987,955 | $3,808,036 | | Total current liabilities | $1,009,831 | $965,473 | | Total liabilities | $2,280,738 | $2,171,949 | | Total shareholders' equity | $1,707,217 | $1,636,087 | - Cash and cash equivalents increased from $68,959 thousand to $126,398 thousand[18] - Unbilled receivables increased from $706,601 thousand to $760,561 thousand[18] Consolidated Condensed Statements of Shareholders' Equity Shareholders' equity increased to $1,707,217 thousand as of December 30, 2023, driven by net earnings and increases in additional paid-in capital and retained earnings, partially offset by adjustments to treasury shares and trusts | Metric (in thousands) | Dec 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total Shareholders' Equity | $1,707,217 | $1,525,181 | | Retained Earnings (End of period) | $2,536,172 | $2,397,814 | | Net earnings | $47,812 | $46,016 | | Dividends | $(8,619) | $(8,257) | - Cash dividends were $0.27 per share for the three months ended December 30, 2023, up from $0.26 per share in the prior year[21] Consolidated Condensed Statements of Shareholders' Equity, Shares The number of Class A common shares outstanding increased, while Class B common shares decreased due to conversions. Treasury shares for both classes saw minor changes, reflecting compensation-related issuances and purchases | Share Class | Dec 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Common Stock - Class A (End of period) | 43,825,917 | 43,806,835 | | Common Stock - Class B (End of period) | 7,453,796 | 7,472,878 | | Treasury Shares - Class A (End of period) | (14,647,019) | (14,666,508) | | Treasury Shares - Class B (End of period) | (2,891,694) | (2,991,901) | Consolidated Condensed Statements of Cash Flows Net cash provided by operating activities significantly increased to $60,391 thousand for the three months ended December 30, 2023, compared to $8,083 thousand in the prior year, primarily driven by changes in receivables. Investing activities used more cash due to acquisitions and increased capital expenditures, while financing activities provided less cash due to lower net borrowings | Cash Flow Activity (in thousands) | Dec 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Net cash provided by operating activities | $60,391 | $8,083 | | Net cash used by investing activities | $(43,107) | $(25,293) | | Net cash provided by financing activities | $38,905 | $59,396 | | Increase in cash, cash equivalents and restricted cash | $57,684 | $46,678 | | Cash, cash equivalents and restricted cash at end of period | $126,828 | $164,006 | - Receivables provided $58,887 thousand in cash in Q1 2024, a significant improvement from using $(27,387) thousand in Q1 2023[26] - Acquisitions of businesses, net of cash acquired, used $5,212 thousand in Q1 2024, compared to none in Q1 2023[26] Notes to Consolidated Condensed Financial Statements The notes provide detailed explanations of the company's accounting policies, significant transactions, and financial statement line items, including changes in segment reporting, revenue recognition methods, acquisitions, debt, and employee benefit plans Note 1 - Basis of Presentation The unaudited consolidated condensed financial statements are prepared in accordance with U.S. GAAP for interim financial information. Effective October 1, 2023, the company changed its segment reporting structure, separating the former Aircraft Controls segment into Military Aircraft and Commercial Aircraft, with restatements applied to relevant footnotes - Segment reporting structure changed effective October 1, 2023, separating Aircraft Controls into Military Aircraft and Commercial Aircraft[29] - No new accounting pronouncements were adopted for the three months ended December 30, 2023[31] Recent Accounting Pronouncements Not Yet Adopted | Standard | Description | Planned Date of Adoption | | :--------- | :---------- | :----------------------- | | ASU 2023-07 (Segment Reporting) | Requires disclosure of significant segment expenses and other segment items, CODM title/position, and CODM's use of segment profit/loss measures. | FY 2025 | | ASU 2023-09 (Income Taxes) | Expands annual income tax disclosures, requiring specific categories in rate reconciliation table using percentages and currency amounts, and additional info for reconciling items. | FY 2026 | Note 2 - Revenue from Contracts with Customers The company recognizes revenue using the five-step model of ASC 606, with a significant portion recognized over time, particularly in Space and Defense, Military Aircraft, and Commercial Aircraft segments, using the cost-to-cost method. Revenue recognized at a point in time is more frequent in the Industrial segment - Revenue is recognized using either the over-time or point-in-time method, with the over-time method predominantly used in Space and Defense, Military Aircraft, and Commercial Aircraft segments for U.S. Government contracts and repair/overhaul[39] - The point-in-time method is most frequently used in the Industrial segment for commercial contracts where the asset has an alternative use[40] - For the three months ended December 30, 2023, the company recognized lower revenue of $95 thousand due to adjustments to performance obligations satisfied in previous periods[41] Contract Assets and Liabilities Contract assets (unbilled receivables) increased, while net contract assets decreased due to a larger increase in contract advances and progress billings (contract liabilities). The company recognized $97,705 thousand of revenue from beginning-of-year contract liabilities | Metric (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Unbilled receivables | $760,561 | $706,601 | | Contract advances and progress billings | $445,706 | $377,977 | | Net contract assets | $314,855 | $328,624 | - For the three months ended December 30, 2023, $97,705 thousand of revenue was recognized from the contract liability balance at the beginning of the year[48] Remaining Performance Obligations As of December 30, 2023, the aggregate transaction price allocated to unsatisfied performance obligations was $5.3 billion, with approximately 47% expected to be recognized as sales over the next twelve months - Aggregate transaction price for unsatisfied performance obligations was $5,300,000 thousand as of December 30, 2023[49] - Approximately 47% of the remaining performance obligations are expected to be recognized as sales over the next twelve months[49] Disaggregation of Revenue Disclosures related to the disaggregation of revenue are provided in Note 20 - Segments - Revenue disaggregation details are provided in Note 20 - Segments[50] Note 3 - Acquisitions and Divestitures On October 20, 2023, Moog Inc. acquired Data Collection Limited (DCL) for $5,882 thousand, net of acquired cash, integrating it into the Military Aircraft segment. The company also noted prior divestitures of a sonar business in 2022 and the NAVAIDS business in 2021 - Acquired Data Collection Limited (DCL) on October 20, 2023, for approximately $5,882 thousand (net of acquired cash), specializing in pavement surveying equipment, included in the Military Aircraft segment[51] - Sold a sonar business in the UK on September 30, 2022, for net proceeds of $13,075 thousand, recording a loss of $15,246 thousand[52] - Sold NAVAIDS business assets on December 3, 2021, for net proceeds of $36,550 thousand, recording a gain of $15,242 thousand[53] Note 4 - Receivables Receivables, net, decreased to $381,609 thousand as of December 30, 2023. The company amended its Receivables Purchase Agreement (RPA), increasing capacity to $125,000 thousand and extending maturity to December 11, 2026, with $125,000 thousand sold to purchasers and derecognized from the balance sheet | Metric (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Accounts receivable | $369,853 | $426,804 | | Receivables, net | $381,609 | $434,723 | | Allowance for credit losses | $(3,711) | $(4,010) | - The Receivables Purchase Agreement (RPA) capacity increased from $100,000 thousand to $125,000 thousand, and its maturity extended to December 11, 2026[55] - As of December 30, 2023, $125,000 thousand of receivables were sold to purchasers and derecognized, with $583,838 thousand in unsold receivables held as collateral[59] Note 5 - Inventories Inventories, net of reserves, increased to $788,040 thousand as of December 30, 2023, primarily driven by increases in raw materials and work in progress | Metric (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Raw materials and purchased parts | $292,483 | $270,305 | | Work in progress | $405,599 | $368,277 | | Finished goods | $89,958 | $85,420 | | Inventories, net | $788,040 | $724,002 | Note 6 - Property, Plant and Equipment Property, plant and equipment, net, increased to $842,682 thousand as of December 30, 2023, reflecting additions to buildings and improvements, and machinery and equipment | Metric (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Property, plant and equipment, at cost | $1,783,287 | $1,733,037 | | Less accumulated depreciation and amortization | $(940,605) | $(918,341) | | Property, plant and equipment, net | $842,682 | $814,696 | Note 7 - Leases The company leases manufacturing facilities, office space, and equipment, recognizing ROU assets and lease liabilities for both operating and finance leases. Operating lease costs were $6,970 thousand and total finance lease costs were $3,058 thousand for the three months ended December 30, 2023 Lease Expense (in thousands) | Metric | Dec 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------- | :----------- | :----------- | | Operating lease cost | $6,970 | $7,395 | | Amortization of ROU assets | $1,826 | $972 | | Interest on lease liabilities | $1,232 | $364 | | Total finance lease cost | $3,058 | $1,336 | Lease Liabilities (in thousands) | Metric | Dec 30, 2023 (in thousands) | Sep 30, 2023 (in thousands) | | :-------------------------- | :----------- | :----------- | | Total operating lease liabilities | $70,993 | $67,681 | | Total finance lease liabilities | $79,629 | $76,846 | - Weighted average remaining lease term for operating leases is 6.7 years and for finance leases is 23.0 years as of December 30, 2023[69] Note 8 - Goodwill and Intangible Assets Goodwill increased to $833,413 thousand as of December 30, 2023, primarily due to foreign currency translation and the DCL acquisition. Following the segment reporting change, goodwill was reassigned and impairment tests showed no impairment. Acquired intangible assets are amortized, with estimated future amortization of $10,900 thousand for 2024 - Goodwill increased to $833,413 thousand as of December 30, 2023, from $821,301 thousand at September 30, 2023, driven by foreign currency translation and the DCL acquisition[71] - Following the segment reporting change, quantitative goodwill impairment tests were performed on the new Military Aircraft and Commercial Aircraft reporting units, showing fair value exceeded carrying value, thus no impairment[70] Estimated Future Amortization of Acquired Intangible Assets (in thousands) | Year | Estimated Amortization (in thousands) | | :--- | :--------------------- | | 2024 | $10,900 | | 2025 | $9,800 | | 2026 | $9,600 | | 2027 | $8,300 | | 2028 | $7,500 | Note 9 - Equity Method Investments and Joint Ventures Net investment balances for equity method investments and joint ventures totaled $3,093 thousand as of December 30, 2023, including interests in Moog Aircraft Service Asia (MASA), NOVI LLC, and Suffolk Technologies Fund 1, L.P. Losses from these investments were $67 thousand for the three months ended December 30, 2023 | Investment (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :------------------------ | :----------- | :----------- | | Moog Aircraft Service Asia | $1,511 | $1,302 | | NOVI LLC | $325 | $325 | | Suffolk Technologies Fund 1, L.P. | $1,257 | $1,180 | | Net investment balance | $3,093 | $2,807 | - Losses from equity method investments and joint ventures were $67 thousand for the three months ended December 30, 2023, down from $204 thousand in the prior year[74] - The company holds a 51% ownership in MASA (Commercial Aircraft segment) and a 20% interest in NOVI LLC (Space and Defense segment)[75] Note 10 - Indebtedness Long-term debt increased to $920,103 thousand as of December 30, 2023, primarily due to increased borrowings on the U.S. revolving credit facility. The company remains in compliance with all covenants for its credit facilities and senior notes | Debt Type (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :----------------------- | :----------- | :----------- | | U.S. revolving credit facility | $423,000 | $334,500 | | SECT revolving credit facility | $1,000 | $33,000 | | Senior notes 4.25% | $500,000 | $500,000 | | Long-term debt | $920,103 | $863,092 | - The U.S. revolving credit facility has a capacity of $1,100,000 thousand, maturing October 27, 2027, and is secured by substantially all U.S. assets[80] - The company has $500,000 thousand in 4.25% senior notes due December 15, 2027, which are unsecured obligations[82] Note 11 - Other Accrued Liabilities Other accrued liabilities increased to $238,871 thousand as of December 30, 2023, primarily due to increases in employee benefits, contract reserves, and accrued income taxes | Liability (in thousands) | Dec 30, 2023 | Sep 30, 2023 | | :----------------------- | :----------- | :----------- | | Employee benefits | $57,677 | $47,653 | | Contract reserves | $54,553 | $45,257 | | Warranty accrual | $24,096 | $22,939 | | Accrued income taxes | $42,011 | $29,631 | | Other accrued liabilities | $238,871 | $211,769 | - Warranty accrual activity for the three months ended December 30, 2023, included $3,319 thousand in new warranties issued and $(1,876) thousand in reductions for settling warranties[84] Note 12 - Derivative Financial Instruments The company uses derivative financial instruments, primarily foreign currency contracts, to manage foreign exchange risk. As of December 30, 2023, outstanding foreign currency contracts designated as cash flow hedges had notional amounts of $2,792 thousand, while those not designated as hedges had notional amounts of $149,110 thousand - Outstanding foreign currency contracts designated as cash flow hedges had notional amounts of $2,792 thousand at December 30, 2023, maturing through March 1, 2024[86] - Foreign currency contracts not designated as hedging instruments had notional amounts of $149,110 thousand at December 30, 2023, with a net gain of $4,452 thousand recorded in earnings[90] Fair Value and Classification of Derivatives (in thousands) | Derivative Type | Balance Sheets location | Dec 30, 2023 (in thousands) | Sep 30, 2023 (in thousands) | | :------------------------ | :---------------------- | :----------- | :----------- | | Designated foreign currency contracts | Other current assets | $123 | $295 | | Designated foreign currency contracts | Accrued liabilities and other | $176 | $581 | | Non-designated foreign currency contracts | Other current assets | $968 | $93 | | Non-designated foreign currency contracts | Accrued liabilities and other | $145 | $324 | Note 13 - Fair Value The company's financial assets and liabilities measured on a recurring basis are primarily classified as Level 2, with acquisition contingent consideration classified as Level 3. The fair value of long-term debt was $893,656 thousand, differing from its carrying value of $924,000 thousand as of December 30, 2023 - Derivatives are valued using pricing models or discounted cash flow analyses, classified as Level 2 within the valuation hierarchy[93] - Acquisition contingent consideration is classified as Level 3, with a balance of $3,172 thousand at December 30, 2023[93] - The fair value of long-term debt was $893,656 thousand at December 30, 2023, compared to its carrying value of $924,000 thousand[93] Note 14 - Restructuring Restructuring activities initiated in 2023, primarily for portfolio shaping, resulted in a total accrual of $9,978 thousand as of December 30, 2023. Charges to expense for the 2023 plan were $1,889 thousand for the three months ended December 30, 2023 - Restructuring actions initiated in 2023 are expected to incur additional costs of up to approximately $10,400 thousand through 2027[95] Restructuring Accrual by Segment (in thousands) | Segment | Balance at Oct 1, 2023 (in thousands) | Charged to expense - 2023 plan (in thousands) | Cash payments - 2023 plan (in thousands) | Balance at Dec 30, 2023 (in thousands) | | :---------------- | :--------------------- | :----------------------------- | :------------------------ | :---------------------- | | Space and Defense | $1,622 | — | $(727) | $740 | | Military Aircraft | $347 | — | $(72) | $275 | | Industrial | $8,208 | $1,889 | $(1,238) | $8,963 | | Total | $10,177 | $1,889 | $(2,037) | $9,978 | Note 15 - Employee Benefit Plans Total expense for defined contribution plans increased to $14,350 thousand for the three months ended December 30, 2023. Net periodic benefit costs for U.S. defined benefit plans were $5,922 thousand, and for non-U.S. plans were $1,038 thousand Defined Contribution Plan Expense (in thousands) | Plan Type | Dec 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------- | :----------- | :----------- | | U.S. defined contribution plans | $12,052 | $10,185 | | Non-U.S. defined contribution plans | $2,298 | $2,065 | | Total expense for defined contribution plans | $14,350 | $12,250 | Net Periodic Benefit Costs for Defined Benefit Plans (in thousands) | Plan Type | Dec 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------- | :----------- | :----------- | | Expense for U.S. defined benefit plans | $5,922 | $6,471 | | Expense for non-U.S. defined benefit plans | $1,038 | $1,037 | Note 16 - Income Taxes The effective tax rate for the three months ended December 30, 2023, was 23.6%, slightly lower than the 23.7% in the prior year, and higher than the U.S. federal statutory rate due to taxes on foreign earnings | Metric | Dec 30, 2023 | Dec 31, 2022 | | :---------------- | :----------- | :----------- | | Effective tax rate | 23.6% | 23.7% | - The effective tax rate was higher than the U.S. federal statutory tax rate of 21% due to tax on earnings generated outside the U.S[98] Note 17 - Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive loss (AOCIL) decreased to $(221,600) thousand as of December 30, 2023, primarily due to a positive foreign currency translation adjustment and retirement liability adjustment Changes in AOCIL (in thousands) | Component | AOCIL at Sep 30, 2023 (in thousands) | OCI, net of tax (in thousands) | AOCIL at Dec 30, 2023 (in thousands) | | :-------------------------------- | :-------------------- | :-------------- | :-------------------- | | Accumulated foreign currency translation | $(140,486) | $31,013 | $(109,473) | | Accumulated retirement liability | $(113,605) | $1,678 | $(111,927) | | Accumulated gain (loss) on derivatives | $(518) | $318 | $(200) | | Total | $(254,609) | $33,009 | $(221,600) | Net Reclassification from AOCIL into Earnings (in thousands) | Item | Dec 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------- | :----------- | :----------- | | Retirement liability | $2,044 | $2,212 | | Derivatives | $225 | $991 | Note 18 - Stock Employee Compensation Trust and Supplemental Retirement Plan Trust The Stock Employee Compensation Trust (SECT) and Supplemental Retirement Plan (SERP) Trust assist in administering equity-based compensation and benefit programs, holding Moog shares as investments that are not considered outstanding for EPS calculations - SECT and SERP Trust hold Moog shares as investments, which are not considered outstanding for earnings per share calculations[102] - The SECT assists in funding equity-based compensation plans (RSP, RSP(+), ESPP), and the SERP Trust funds benefits under the SERP provisions[102] Note 19 - Earnings per Share Basic weighted-average shares outstanding increased to 31,902,101 for the three months ended December 30, 2023, with diluted shares at 32,249,313, reflecting the dilutive effect of equity-based awards | Metric | Dec 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Basic weighted-average shares outstanding | 31,902,101 | 31,746,001 | | Dilutive effect of equity-based awards | 347,212 | 128,717 | | Diluted weighted-average shares outstanding | 32,249,313 | 31,874,718 | Note 20 - Segments Net sales increased across all segments for the three months ended December 30, 2023, compared to the prior year, driven by commercial aircraft recovery and higher product demand. Operating profit also increased across most segments, with Commercial Aircraft showing the largest sales growth Net Sales by Segment (in thousands) | Segment | Dec 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------ | :----------- | :----------- | | Space and Defense | $230,128 | $217,785 | | Military Aircraft | $186,244 | $177,800 | | Commercial Aircraft | $194,222 | $132,459 | | Industrial | $246,256 | $232,059 | | Total Net sales | $856,850 | $760,103 | Operating Profit by Segment (in thousands) | Segment | Dec 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------ | :----------- | :----------- | | Space and Defense | $25,297 | $20,294 | | Military Aircraft | $19,589 | $15,201 | | Commercial Aircraft | $20,626 | $14,517 | | Industrial | $29,024 | $36,751 | | Total operating profit | $94,536 | $86,763 | - Effective October 1, 2023, the former Aircraft Controls segment was separated into Military Aircraft and Commercial Aircraft, with all prior period amounts restated[106] Note 21 - Related Party Transactions The company engages in ordinary course business with M&T Bank Corporation and M&T Bank, where John Scannell, Moog's Non-Executive Chairman, serves on the Board. Transactions for financing routine purchases and leases totaled $3,707 thousand for the three months ended December 30, 2023 - Transactions with M&T Bank, where Moog's Non-Executive Chairman is a board member, totaled $3,707 thousand for the three months ended December 30, 2023[108] - M&T Bank maintains an interest of approximately 12% in Moog's U.S. revolving credit facility[108] Note 22 - Commitments and Contingencies The company is involved in various legal and administrative proceedings, including environmental matters, but management believes these will not have a material adverse effect on financial condition. Contingent liabilities for standby letters of credit totaled $19,285 thousand at December 30, 2023 - Management believes current legal and environmental proceedings will not result in a material adverse effect on financial condition, results of operations, or cash flows[109][110] - Contingent liabilities for standby letters of credit amounted to $19,285 thousand at December 30, 2023[112] Note 23 - Subsequent Event On January 25, 2024, the company declared a quarterly dividend of $0.28 per share, payable on February 27, 2024 - A quarterly dividend of $0.28 per share was declared on January 25, 2024, payable on February 27, 2024[113] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion of Moog Inc.'s Q1 FY2024 financial condition, operations, outlook, and key risks OVERVIEW Moog Inc. is a global designer, manufacturer, and systems integrator of high-performance precision motion and fluid controls for aerospace and defense and industrial markets. The company operates under four segments: Space and Defense, Military Aircraft, Commercial Aircraft, and Industrial, with a focus on strategic growth, operational efficiencies, and capital deployment to maximize shareholder returns - Moog Inc. operates in aerospace and defense (Military Aircraft, Commercial Aircraft, Space, Defense) and industrial markets (Industrial Automation, Simulation and Test, Energy, Medical)[116][119] - 63% of revenue for the quarter ended December 30, 2023, was recognized over time using the cost-to-cost method, primarily in aerospace and defense segments[117] - Key long-term strategies include pricing initiatives for fair value recognition and simplification initiatives such as utilizing 80/20 processes, portfolio shaping, footprint rationalization, factory focus, and investment in automation[121][125] Acquisitions and Divestitures In October 2023, Moog Inc. acquired Data Collection Limited (DCL) for approximately $6 million, integrating it into the Military Aircraft segment. This follows prior divestitures of a sonar business in 2022 and the NAVAIDS business in 2021 - Acquired Data Collection Limited (DCL) on October 20, 2023, for approximately $6 million, included in the Military Aircraft segment[122] - Sold a sonar business in the UK on September 30, 2022, for net proceeds of $13 million, resulting in a $15 million loss[123] - Sold NAVAIDS business assets on December 3, 2021, for net proceeds of $37 million, resulting in a $15 million gain[124] CRITICAL ACCOUNTING POLICIES The company regularly evaluates critical accounting policies, including revenue recognition on long-term contracts, contract reserves, inventory valuation, impairment reviews for goodwill and long-lived assets, pension assumptions, and income taxes - Critical accounting policies include revenue recognition on long-term contracts, contract reserves, inventory valuation, goodwill impairment, long-lived asset impairment, pension assumptions, and income taxes[126] RECENT ACCOUNTING PRONOUNCEMENTS Information regarding recent accounting pronouncements issued by the Financial Accounting Standards Board (FASB) is detailed in Note 1 - Basis of Presentation - Further information on recent accounting pronouncements is available in Note 1 - Basis of Presentation[127] CONSOLIDATED RESULTS OF OPERATIONS For the first quarter of 2024, consolidated net sales increased by 13% to $857 million, driven by commercial aircraft recovery and higher demand across all segments. Gross margin improved to 27.2%, and diluted EPS increased by 3% to $1.48. The twelve-month backlog also grew by 9% to $2.5 billion | Metric (in millions, except per share) | Dec 30, 2023 | Dec 31, 2022 | $ Variance | % Variance | | :------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $857 | $760 | $97 | 13% | | Gross margin | 27.2% | 26.8% | | | | Research and development expenses | $31 | $24 | $7 | 28% | | Interest expense | $17 | $13 | $4 | 27% | | Net earnings | $48 | $46 | $2 | 4% | | Diluted earnings per share | $1.48 | $1.44 | $0.04 | 3% | | Twelve-month backlog | $2,500 | $2,300 | $200 | 9% | - Net sales increased across all segments due to continued commercial aircraft recovery and higher product demand[129] - Research and development expenses increased by 28% due to higher activity supporting new growth programs in Space and Defense and Industrial[130] SEGMENT RESULTS OF OPERATIONS Segment operating profit is calculated as net sales less cost of sales and other operating expenses, excluding interest, equity-based compensation, non-service pension, and other corporate expenses. All segments, except Industrial, saw an increase in operating profit for the first quarter of 2024 compared to the prior year Space and Defense Space and Defense net sales increased by 6% to $230 million, driven by higher demand in both defense and space applications. Operating profit grew by 25% to $25 million, with operating margin improving to 11.0% due to production efficiencies and pricing initiatives, partially offset by higher R&D expenses | Metric (in millions) | Dec 30, 2023 | Dec 31, 2022 | $ Variance | % Variance | | :------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $230 | $218 | $12 | 6% | | Operating profit | $25 | $20 | $5 | 25% | | Operating margin | 11.0% | 9.3% | | | - Sales increased $9 million in defense programs and $4 million in space programs[137] - Operating margin benefited from production efficiencies and pricing initiatives, but was partially offset by $3 million higher R&D expense[138] Military Aircraft Military Aircraft net sales increased by 5% to $186 million, primarily due to expanding demand in OEM programs, particularly the V-280 program. Operating profit rose by 29% to $20 million, with operating margin improving to 10.5% due to increased activity and a more favorable sales mix | Metric (in millions) | Dec 30, 2023 | Dec 31, 2022 | $ Variance | % Variance | | :------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $186 | $178 | $8 | 5% | | Operating profit | $20 | $15 | $4 | 29% | | Operating margin | 10.5% | 8.5% | | | - Military OEM sales increased $9 million, driven by higher activity on the V-280 program, partially offset by lower funded development program activity[140] - Operating margin increased due to increased activity on the V-280 program as staffing levels approached full capacity, and a more favorable sales mix[140] Commercial Aircraft Commercial Aircraft net sales surged by 47% to $194 million, driven by market recoveries across all programs, with significant increases in commercial OEM and aftermarket sales. Operating profit increased by 42% to $21 million, though operating margin slightly decreased to 10.6% due to the absence of prior year's favorable retrofit activity | Metric (in millions) | Dec 30, 2023 | Dec 31, 2022 | $ Variance | % Variance | | :------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $194 | $132 | $62 | 47% | | Operating profit | $21 | $15 | $6 | 42% | | Operating margin | 10.6% | 11.0% | | | - Commercial OEM sales increased $49 million, with over half from Boeing and Airbus widebody programs, and aftermarket sales increased $13 million[142] - Operating margin decreased due to the non-recurrence of favorable retrofit activity from the prior year, offsetting pricing initiative benefits[143] Industrial Industrial net sales increased by 6% to $246 million, driven by higher demand in simulation and test, and industrial automation markets. However, operating profit decreased by 21% to $29 million, and operating margin fell to 11.8%, primarily due to a $10 million gain from building sales in the prior year and restructuring charges | Metric (in millions) | Dec 30, 2023 | Dec 31, 2022 | $ Variance | % Variance | | :------------------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $246 | $232 | $14 | 6% | | Operating profit | $29 | $37 | $(8) | (21%) | | Operating margin | 11.8% | 15.8% | | | - Sales increased $9 million in simulation and test, and $5 million in industrial automation[145] - Operating margin decreased due to a $10 million gain from building sales in the prior year and restructuring charges ($2 million in Q1 2024 vs. $1 million in Q1 2023)[146] CONSOLIDATED SEGMENT OUTLOOK Moog Inc. projects higher consolidated sales in 2024, driven by aerospace and defense market recovery, but anticipates a slowdown in Industrial. Overall operating margin is expected to increase due to pricing and simplification initiatives, with adjusted diluted EPS projected between $6.70 and $7.10 | Metric (in millions, except per share) | 2024 Outlook | 2023 | $ Variance | % Variance | | :------------------------------------- | :----------- | :--- | :--------- | :--------- | | Net sales | $3,500 | $3,319 | $181 | 5% | | Operating profit | $418 | $343 | $75 | 22% | | Operating margin | 12.0% | 10.3% | | | | Net earnings | $222 | $171 | | | | Diluted earnings per share | $6.86 | $5.34 | | | - Overall 2024 sales growth is expected to be 5%, driven by aerospace and defense, but offset by anticipated lower sales in Industrial[147] - Adjusted diluted earnings per share for 2024 are expected to range between $6.70 and $7.10, with a midpoint of $6.90[147] 2024 Outlook – Overall The company expects higher sales in 2024, driven by aerospace and defense market recovery, but anticipates reduced sales in Industrial due to an expected slowdown in orders. Operating margin is projected to increase due to pricing and simplification initiatives, despite higher interest expense and tax rates - Higher sales expected in 2024, driven by aerospace and defense market recovery, but Industrial sales will reduce due to anticipated slowdown of orders[147] - Operating margin is expected to increase due to pricing and simplification initiatives, partially offset by higher interest expense and tax rate[147] 2024 Outlook for Space and Defense Space and Defense expects 7% sales growth in 2024, driven by increased defense spending. Operating margin is projected to increase significantly to 13.5% due to the absence of prior year charges and benefits from pricing initiatives | Metric (in millions) | 2024 Outlook | 2023 | $ Variance | % Variance | | :------------------- | :----------- | :--- | :--------- | :--------- | | Net sales | $1,015 | $947 | $68 | 7% | | Operating profit | $137 | $96 | $41 | 43% | | Operating margin | 13.5% | 10.1% | | | - Sales growth expected across both space and defense markets, primarily driven by increased investment in defense spending[147] - Operating margin increase due to absence of prior year's charges associated with space vehicle programs and benefits of pricing initiatives[147] 2024 Outlook for Military Aircraft Military Aircraft anticipates 3% sales growth in 2024, driven by OEM programs, particularly the V-280, but expects a decline in aftermarket sales due to a shift in defense funding. Operating margin is projected to increase significantly to 11.6% due to full-year V-280 activity and winding down of funded development contracts | Metric (in millions) | 2024 Outlook | 2023 | $ Variance | % Variance | | :------------------- | :----------- | :--- | :--------- | :--------- | | Net sales | $745 | $720 | $25 | 3% | | Operating profit | $87 | $60 | $26 | 43% | | Operating margin | 11.6% | 8.4% | | | - Sales growth expected in OEM programs, especially V-280, but offset by expected sales decline in military aftermarket programs[148] - Operating margin increase due to full year of V-280 program activity and lower charges from winding down funded development contracts[148] 2024 Outlook for Commercial Aircraft Commercial Aircraft forecasts 22% sales growth in 2024, primarily from widebody OEM programs as build rates increase. However, lower aftermarket sales due to non-recurring retrofit activity from the prior year are expected to reduce operating margin to 10.2% | Metric (in millions) | 2024 Outlook | 2023 | $ Variance | % Variance | | :------------------- | :----------- | :--- | :--------- | :--------- | | Net sales | $815 | $669 | $146 | 22% | | Operating profit | $83 | $84 | $(1) | (2%) | | Operating margin | 10.2% | 12.6% | | | - Sales growth expected from widebody OEM programs as build rates ramp up[149] - Lower sales in commercial aftermarket due to non-recurring prior year retrofit activity will reduce operating margin[149] 2024 Outlook for Industrial Industrial expects a 6% decrease in sales in 2024 due to lower orders in industrial automation and lost sales from footprint and portfolio initiatives. Despite this, operating margin is projected to increase to 12.1% due to pricing initiatives and savings from simplified operations | Metric (in millions) | 2024 Outlook | 2023 | $ Variance | % Variance | | :------------------- | :----------- | :--- | :--------- | :--------- | | Net sales | $925 | $983 | $(58) | (6%) | | Operating profit | $112 | $102 | $10 | 9% | | Operating margin | 12.1% | 10.4% | | | - Sales decrease expected due to lower orders in industrial automation market and lost sales from footprint and portfolio initiatives[150] - Operating margin increase due to benefits of pricing initiatives and savings from simplified operations[150] LIQUIDITY AND CAPITAL RESOURCES The company's liquidity is supported by cash flows from operations and various financing arrangements, which are deemed sufficient for current and future cash requirements. Net cash provided by operating activities significantly increased in Q1 2024, while investing activities used more cash due to acquisitions and capital expenditures, and financing activities provided less cash Consolidated Statement of Cash Flows Net cash provided by operating activities increased significantly to $60 million in Q1 2024. Investing activities used $43 million, primarily for acquisitions and capital expenditures. Financing activities provided $39 million, mainly from net borrowings on credit facilities | Cash Flow Activity (in millions) | Dec 30, 2023 | Dec 31, 2022 | $ Variance | | :------------------------------- | :----------- | :----------- | :--------- | | Net cash provided by operating activities | $60 | $8 | $52 | | Net cash used by investing activities | $(43) | $(25) | $(18) | | Net cash provided by financing activities | $39 | $59 | $(20) | Operating activities Net cash provided by operating activities increased by $52 million in Q1 2024, primarily due to an $86 million increase from accounts receivable collections, partially offset by increased cash usage from inventories and unbilled receivables - Net cash provided by operating activities increased by $52 million in Q1 2024 compared to Q1 2023[152] - Accounts receivable provided $86 million more cash, driven by strong collections, primarily in aircraft segments[152] - Inventories and unbilled receivables combined used $27 million more cash to support business growth in aerospace and defense[152] Investing activities Net cash used by investing activities increased by $18 million in Q1 2024, totaling $43 million, due to $37 million in capital expenditures and $5 million for the DCL acquisition - Net cash used by investing activities was $43 million in Q1 2024, including $37 million for capital expenditures and $5 million for the DCL acquisition[153] - In Q1 2023, investing activities used $30 million for capital expenditures, partially offset by proceeds from a building sale[153] Financing activities Net cash provided by financing activities decreased by $20 million in Q1 2024, totaling $39 million, primarily from $57 million in net borrowings on credit facilities and $9 million in cash dividends - Net cash provided by financing activities was $39 million in Q1 2024, including $57 million of net borrowings on credit facilities and $9 million of cash dividends[154] - In Q1 2023, financing activities provided $59 million, including $81 million of net borrowings, $8 million of share repurchases, and $8 million of cash dividends[154] General The company believes its cash flows from operations and financing arrangements are sufficient to meet cash requirements for the foreseeable future. As of December 30, 2023, cash balances were $127 million, with $106 million held by foreign operations - Cash flows from operations and financing arrangements are expected to be sufficient for cash requirements for the next 12 months and foreseeable future[155] - As of December 30, 2023, cash balances totaled $127 million, with $106 million held outside the U.S. by foreign operations[156] Financing Arrangements The company utilizes bank credit facilities and an accounts receivable financing program, including a $1.1 billion U.S. revolving credit facility and $500 million in 4.25% senior notes. As of December 30, 2023, the company had $656 million of unused capacity and was in compliance with all financing covenants - The U.S. revolving credit facility has a $1.1 billion capacity, matures October 27, 2027, and had a weighted-average interest rate of 6.84% at December 30, 2023[160] - The company has $500 million aggregate principal amount of 4.25% senior notes due December 15, 2027[163] - As of December 30, 2023, the company had $656 million of unused capacity, including $622 million from the U.S. revolving credit facility, and was in compliance with all covenants[164][166] Dividends and Common Stock The company aims to create long-term shareholder value through business investments, strategic acquisitions, and returning capital via quarterly cash dividends and a share repurchase program. Approximately 2.2 million common shares remain under the current repurchase authorization - The company expects to continue paying quarterly cash dividends on Class A and Class B common stock[168] - A share repurchase program authorizes buying up to 3 million common shares, with approximately 2.2 million shares remaining under authorization[169] Off Balance Sheet Arrangements The company does not have any material off-balance sheet arrangements that are reasonably likely to have a material future effect on its financial condition, results of operations, or cash flows - No material off-balance sheet arrangements exist that are reasonably likely to have a material future effect on financial condition, results of operations, or cash flows[171] Contractual Obligations and Commercial Commitments Contractual obligations and commercial commitments have not materially changed from the disclosures in the Annual Report on Form 10-K for the year ended September 30, 2023 - Contractual obligations and commercial commitments have not materially changed from the prior annual report[172] ECONOMIC CONDITIONS AND MARKET TRENDS The company's performance is influenced by economic conditions and market trends in aerospace and defense (70% of 2023 sales) and industrial markets (30% of 2023 sales). Aerospace and defense markets are benefiting from increased defense funding and commercial aircraft recovery, while industrial markets see increased demand in automation, simulation, and energy. Foreign currency movements also impact sales Aerospace and Defense The aerospace and defense market, representing 70% of 2023 sales, is driven by military spending, commercial aircraft demand, and space investments. Defense spending has increased due to global tensions, commercial OEM aircraft production rates are expected to rise, and the space market benefits from investments in small satellites and launch vehicles - Defense market is dependent on military spending, which has recently increased due to global tensions[179] - Commercial OEM aircraft market is recovering, with Boeing and Airbus expected to increase widebody aircraft production rates[180] - Space market is driven by civil, U.S. Department of Defense, and commercial space investments, with growing emphasis on space as a frontier for potential conflicts[182] Industrial The industrial market, comprising 30% of 2023 sales, includes industrial automation, simulation and test, energy, and medical products. This market is influenced by capital investment levels, economic conditions, and technological advancements, with strong order demand in flight simulation and industrial automation - Industrial market is influenced by capital investment levels, product innovation, economic conditions, and technology upgrades[184] - Stronger order demand observed for flight simulation systems and industrial automation products[185] - Medical market is influenced by economic conditions, regulatory environments, hospital spending, and patient demands for precision control components[187] Foreign Currencies Foreign currency movements, particularly against the U.S. dollar, impact the company, with about one-sixth of 2023 sales denominated in foreign currencies. In Q1 2024, strengthening foreign currency rates increased sales by $6 million compared to the prior year - Approximately one-sixth of 2023 sales were denominated in foreign currencies[188] - Strengthening foreign currency rates against the U.S. dollar increased sales by $6 million in Q1 2024 compared to the prior year[188] Cautionary Statement Outlines risks and uncertainties that could cause actual results to differ from forward-looking statements, covering strategic, market, operational, financial, legal, and general risks - Forward-looking statements are subject to factors, risks, and uncertainties that could cause actual results to differ materially[189] - Key risk categories include strategic, market condition, operational, financial, legal and compliance, and general risks[190][191][193][194][195] STRATEGIC RISKS Strategic risks include intense market competition, potential failure of R&D efforts, inability to protect intellectual property, and challenges in identifying, acquiring, or integrating strategic acquisitions or conducting portfolio shaping initiatives - Operating in highly competitive markets with potentially greater-resourced competitors[192] - Risk that R&D and innovation efforts may not be successful, potentially reducing sales and earnings[192] - Challenges in identifying, acquiring, or integrating strategic acquisitions, or conducting portfolio shaping and footprint rationalization initiatives[192] MARKET CONDITION RISKS Market condition risks involve cyclical and sensitive markets, heavy reliance on government contracts that may not be fully funded or terminated, potential adverse impact from the loss of The Boeing Company as a customer, and the possibility of not realizing full backlog amounts as revenue - Markets are cyclical and sensitive to domestic and foreign economic conditions and events[192] - Heavy dependence on government contracts that may not be fully funded or could be terminated[192] - Risk of adverse impact from the loss of The Boeing Company as a customer or a significant reduction in sales to them[192] OPERATIONAL RISKS Operational risks include a constrained supply chain and inflated prices impacting manufacturing and profit, subcontractor/supplier failure, information systems interruptions or new software implementation issues, inability to prevent or detect product/manufacturing process issues, and potential damage to reputation or claims from product failure/misuse - Constrained supply chain and inflated prices for raw materials and components could impact manufacturing, operating profit, and balance sheet[192] - Risks related to information systems interruptions, intrusions, or new software implementations[192] - Inability to prevent or timely detect issues with products and manufacturing processes, potentially affecting operations and earnings[192] FINANCIAL RISKS Financial risks encompass significant impacts from changes in estimates for over-time contracts, potential losses from fixed-price contracts due to cost overruns, limitations from indebtedness and restrictive covenants, adverse effects from changes in pension assumptions, goodwill impairment, and unforeseen income tax liabilities - Changes in estimates for over-time contracts may have significant impacts on earnings[197] - Fixed-price contracts could lead to losses if cost overruns occur[197] - Indebtedness and restrictive covenants under credit facilities and senior notes could limit operational and financial flexibility[197] LEGAL AND COMPLIANCE RISKS Legal and compliance risks include significant regulation on government programs, exposure to currency/political/trade risks in foreign operations, government regulations limiting product sales outside the U.S., unfavorable outcomes from legal proceedings, environmental compliance costs, sustainability goal failures, and the impact of facility security clearance invalidation - Government programs are subject to significant regulation, with non-compliance potentially leading to fines, penalties, or debarment[197] - Operations in foreign countries expose the company to currency, political, and trade risks, and adverse changes in local legal/regulatory environments[197] - The recently received invalidation of facility security clearance by DCSA could impact potential future business and operating results[197] GENERAL RISKS General risks include potential negative impacts from terror attacks, war, natural disasters, or other catastrophic events beyond control, and the risk of suffering if the company cannot maintain its culture, attract, retain, and engage employees - Future terror attacks, war, natural disasters, or other catastrophic events beyond control could negatively impact the business[197] - Performance could suffer if the company cannot maintain its culture, attract, retain, and engage employees[197] Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the company's quantitative and qualitative disclosures about market risk during the current year, as detailed in the Annual Report on Form 10-K for the year ended September 30, 2023 - No material changes in market risk information during the current year[196] - Refer to the Annual Report on Form 10-K for the year ended September 30, 2023, for a complete discussion of market risk[196] Item 4. Controls and Procedures The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 30, 2023. There have been no material changes in internal control over financial reporting during the most recent fiscal quarter - Disclosure controls and procedures were effective as of December 30, 2023[199] - No material changes in internal control over financial reporting during the most recent fiscal quarter[199] PART II OTHER INFORMATION Item 1A. Risk Factors There have been no material changes in the company's risk factors during the current year, as previously discussed in the Annual Report on Form 10-K for the year ended September 30, 2023 - No material changes in risk factors during the current year[200] - Refer to the Annual Report on Form 10-K for the year ended September 30, 2023, for a complete discussion of risk factors[200] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's purchases of common stock for the quarter ended December 30, 2023, totaled 96,425 shares at an average price of $131.53. These purchases were primarily related to the SECT acquiring Class B shares and the company accepting shares for equity-based compensation exercises and tax withholding | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | October 1, 2023 - October 28, 2023 | 6,732 | $114.38 | | October 29, 2023 - December 2, 2023 | 72,498 | $130.36 | | December 3, 2023 - **Decembe