Moog(MOG_B) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated condensed financial statements for Moog Inc., including statements of earnings, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, revenue recognition, acquisitions, and various financial accounts Consolidated Condensed Statements of Earnings This table provides key financial performance metrics for the three and six months ended April 1, 2023, and April 2, 2022 Consolidated Condensed Statements of Earnings (Unaudited) - Key Figures (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $836.8 | $770.8 | $1,596.9 | $1,494.9 | | Gross profit | $221.3 | $213.0 | $425.0 | $405.9 | | Earnings before income taxes | $56.3 | $38.7 | $116.6 | $100.1 | | Net earnings | $43.0 | $29.1 | $89.0 | $75.4 | | Basic Net earnings per share | $1.35 | $0.91 | $2.80 | $2.35 | | Diluted Net earnings per share | $1.34 | $0.91 | $2.79 | $2.34 | Consolidated Condensed Statements of Comprehensive Income This table details the components of comprehensive income, including net earnings and other comprehensive income (loss), for the specified interim periods Consolidated Condensed Statements of Comprehensive Income (Unaudited) - Key Figures (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net earnings | $43.0 | $29.1 | $89.0 | $75.4 | | Other comprehensive income (loss), net of tax | $14.7 | $(14.0) | $68.5 | $(16.4) | | Comprehensive income | $57.7 | $15.0 | $157.5 | $59.0 | Consolidated Condensed Balance Sheets This table presents the company's financial position, including assets, liabilities, and shareholders' equity, as of April 1, 2023, and October 1, 2022 Consolidated Condensed Balance Sheets (Unaudited) - Key Figures (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :-------------------------------- | :-------------- | :-------------- | | Total current assets | $1,933.2 | $1,758.3 | | Total assets | $3,699.6 | $3,431.8 | | Total current liabilities | $842.9 | $838.4 | | Total liabilities | $2,119.8 | $1,995.0 | | Total shareholders' equity | $1,579.8 | $1,436.8 | Consolidated Condensed Statements of Shareholders' Equity This section outlines changes in shareholders' equity, including retained earnings and dividends, for the six-month periods ended April 1, 2023, and April 2, 2022 Consolidated Condensed Statements of Shareholders' Equity (Unaudited) - Key Figures (dollars in millions) | Metric | April 1, 2023 (Six Months) | April 2, 2022 (Six Months) | | :-------------------------------- | :------------------------- | :------------------------- | | Beginning Retained Earnings | $2,360.1 | $2,237.8 | | Net earnings | $89.0 | $75.4 | | Dividends | $(16.9) | $(16.4) | | End Retained Earnings | $2,432.2 | $2,296.8 | | Total Shareholders' Equity | $1,579.8 | $1,430.6 | - Cash dividends were $0.27 per share for the three months ended April 1, 2023, and $0.53 per share for the six months ended April 1, 2023, representing an increase from $0.26 and $0.51 per share for the corresponding periods in 2022[19] Consolidated Condensed Statements of Cash Flows This table summarizes the cash flows from operating, investing, and financing activities for the six months ended April 1, 2023, and April 2, 2022 Consolidated Condensed Statements of Cash Flows (Unaudited) - Key Figures (dollars in millions) | Metric | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided (used) by operating activities | $(33.0) | $180.2 | | Net cash used by investing activities | $(74.2) | $(48.1) | | Net cash provided (used) by financing activities | $92.2 | $(109.7) | | Increase (decrease) in cash, cash equivalents and restricted cash | $(9.6) | $21.2 | | Cash, cash equivalents and restricted cash at end of period | $109.7 | $122.1 | Notes to Consolidated Condensed Financial Statements This section provides detailed explanations and disclosures supporting the consolidated condensed financial statements, covering accounting policies, specific accounts, and significant events Note 1 - Basis of Presentation The financial statements are unaudited, prepared in accordance with U.S. GAAP for interim information, and include normal recurring adjustments, with interim results not indicative of the full year - In 2023, a $1,000 impairment charge was recorded on long-lived assets in the Aircraft Controls segment due to the U.S. Air Force's KC-10 tanker retirement announcement, and a $219 impairment charge on receivables in the Space and Defense Controls segment due to an expected contract cancellation[27] - In 2022, impairment charges were recorded on long-lived assets in the Aircraft Controls segment due to a slower commercial aircraft business recovery, and on receivables and inventories due to Russian actions in Ukraine[28] Note 2 - Revenue from Contracts with Customers The company recognizes revenue using the five-step model of ASC 606, with most contracts accounted for as one performance obligation, recognized either over time or at a point in time - Revenue is recognized over time using the cost-to-cost method for U.S. Government contracts and repair/overhaul arrangements, and for many large commercial contracts where performance does not create an asset with an alternative use and there's an enforceable right to payment[38] - Revenue is recognized at a point in time for commercial contracts in Industrial Systems where the asset has an alternative use, determined by factors like right to payment, legal title, physical possession, risks/rewards, and customer acceptance[39] Contract Assets and Liabilities (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :----------------- | :-------------- | :-------------- | | Unbilled receivables | $685.4 | $614.8 | | Contract advances | $317.3 | $296.9 | | Net contract assets | $368.1 | $317.9 | - As of April 1, 2023, the aggregate transaction price allocated to unsatisfied performance obligations was $5.2 billion, with approximately 44% expected to be recognized as sales over the next twelve months[46] Note 3 - Acquisitions and Divestitures The company completed one acquisition in February 2022 and three divestitures in late 2021 and 2022, impacting its Aircraft Controls, Industrial Systems, and Space and Defense Controls segments - On February 21, 2022, Moog acquired TEAM Accessories Limited for $14.394 million (net of cash), specializing in Maintenance, Repair and Overhaul of engine and airframe components, integrated into the Aircraft Controls segment[48] - In September 2022, Moog sold a sonar business (Industrial Systems segment) for $13.075 million net proceeds, recording a $15.246 million loss, and a security business (Space and Defense Controls segment) for $9.108 million net proceeds, recording a $4.324 million loss[49][50] - In December 2021, Moog sold its Navigation Aids (NAVAIDS) business (Aircraft Controls segment) for $36.550 million net proceeds, recording a $16.146 million gain[51] Note 4 - Receivables Receivables increased significantly from October 2022 to April 2023, primarily driven by unbilled receivables, with $100 million sold and derecognized through a Receivables Purchase Agreement Receivables Composition (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :---------------------- | :-------------- | :-------------- | | Accounts receivable | $382.1 | $363.1 | | Unbilled receivables | $685.4 | $614.8 | | Receivables, net | $1,080.0 | $990.3 | | Allowance for credit losses | $(4.1) | $(4.6) | - Under the RPA, Moog Receivables LLC may sell receivables up to a $100 million limit; as of April 1, 2023, $100 million was sold and derecognized from the balance sheet, with $731.26 million in unsold receivables held as collateral[53][56] Note 5 - Inventories Inventories, net of reserves, increased across all categories from October 2022 to April 2023, with work in progress being the largest component Inventories, net of reserves (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :-------------------------- | :-------------- | :-------------- | | Raw materials and purchased parts | $260.2 | $219.9 | | Work in progress | $339.5 | $305.3 | | Finished goods | $79.3 | $63.2 | | Inventories, net | $679.0 | $588.5 | Note 6 - Property, Plant and Equipment Net property, plant and equipment increased from October 2022 to April 2023, primarily driven by increases in buildings and improvements, and machinery and equipment Property, Plant and Equipment (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :-------------------------------- | :-------------- | :-------------- | | Property, plant and equipment, at cost | $1,636.3 | $1,522.7 | | Less accumulated depreciation and amortization | $(898.7) | $(853.8) | | Property, plant and equipment, net | $737.6 | $668.9 | Note 7 - Leases The company leases manufacturing facilities, office space, and equipment, classifying them as operating or finance leases, with weighted average remaining lease terms of 7.8 years for operating and 14.5 years for finance leases Components of Lease Expense (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Operating lease cost | $7.6 | $7.2 | $15.0 | $14.2 | | Total finance lease cost | $1.6 | $0.9 | $2.9 | $1.7 | Supplemental Balance Sheet Information Related to Leases (April 1, 2023) | Metric | Operating Leases (dollars in millions) | Finance Leases (dollars in millions) | | :-------------------------------- | :------------------------------- | :----------------------------- | | Right-of-use assets (net) | $62.6 | $32.9 | | Total lease liabilities | $72.3 | $34.9 | | Weighted average remaining lease term (years) | 7.8 | 14.5 | | Weighted average discount rates | 5.1% | 5.3% | Note 8 - Goodwill and Intangible Assets Goodwill increased across all segments, primarily due to foreign currency translation adjustments, reaching $826.5 million as of April 1, 2023, while intangible assets are amortized over their estimated useful lives Goodwill by Segment (dollars in millions) | Segment | Balance at October 1, 2022 | Adjustments to prior year acquisitions | Foreign currency translation | Balance at April 1, 2023 | | :---------------------- | :------------------------- | :----------------------------------- | :--------------------------- | :----------------------- | | Aircraft Controls | $199.5 | $0.1 | $4.8 | $204.4 | | Space and Defense Controls | $259.4 | — | $0.1 | $259.5 | | Industrial Systems | $346.4 | — | $16.2 | $362.6 | | Total | $805.3 | $0.1 | $21.1 | $826.5 | Intangible Assets (April 1, 2023, dollars in millions) | Type | Weighted Average Life (years) | Gross Carrying Amount | Accumulated Amortization | | :------------------ | :---------------------------- | :-------------------- | :----------------------- | | Customer-related | 11 | $138.9 | $(92.9) | | Technology-related | 9 | $71.6 | $(55.8) | | Program-related | 23 | $37.7 | $(21.0) | | Marketing-related | 8 | $22.4 | $(18.7) | | Other | 10 | $1.8 | $(1.6) | | Total | 12 | $272.4 | $(190.0) | - Estimated future amortization of acquired intangible assets is approximately $11.7 million for 2023, $10.9 million for 2024, $9.8 million for 2025, $9.6 million for 2026, and $8.7 million for 2027[69] Note 9 - Equity Method Investments and Joint Ventures The company holds equity method investments in joint ventures like Moog Aircraft Services Asia (MASA) and NOVI LLC, and a limited partnership, Suffolk Technologies Fund 1, L.P., with varying ownership interests and capital commitments Equity Method Investments and Joint Ventures (April 1, 2023, dollars in millions) | Entity | Net Investment Balance | Income (Loss) Three Months Ended | Income (Loss) Six Months Ended | | :-------------------------- | :--------------------- | :------------------------------- | :----------------------------- | | Moog Aircraft Service Asia | $1.2 | $0.1 | $(0.1) | | NOVI LLC | $0.6 | — | — | | Suffolk Technologies Fund 1, L.P. | $1.0 | $0.2 | $0.1 | | Total | $2.9 | $0.2 | $0.03 | - Moog holds a 51% ownership in MASA (Aircraft Controls segment) for MRO services, a 42.5% interest in NOVI LLC (Space and Defense Controls segment) for machine learning in space situational awareness, and a limited partnership interest in Suffolk Technologies Fund 1, L.P. (Industrial Systems segment) with a remaining capital commitment of up to $6.751 million[71][72] Note 10 - Indebtedness The company's long-term debt primarily consists of a U.S. revolving credit facility, SECT revolving credit facility, and senior notes, with the U.S. facility amended in October 2022 to extend maturity and increase capacity Long-term Debt Composition (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :-------------------------- | :-------------- | :-------------- | | U.S. revolving credit facility | $435.8 | $321.3 | | SECT revolving credit facility | $28.0 | $20.0 | | Senior notes 4.25% | $500.0 | $500.0 | | Long-term debt | $958.4 | $836.9 | - The U.S. revolving credit facility was amended on October 27, 2022, extending its maturity to October 27, 2027, and increasing its capacity to $1.1 billion with an expansion option of up to $400 million[76] - The company has $500 million in 4.25% senior notes due December 15, 2027, and is in compliance with all covenants for its financing arrangements[78] Note 11 - Other Accrued Liabilities Other accrued liabilities primarily include employee benefits, contract reserves, warranty accruals, and accrued income taxes, with warranty accrual activity showing new warranties issued and reductions for settling existing ones Other Accrued Liabilities (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :---------------------- | :-------------- | :-------------- | | Employee benefits | $47.0 | $56.1 | | Contract reserves | $45.6 | $46.5 | | Warranty accrual | $22.1 | $23.1 | | Accrued income taxes | $24.8 | $17.8 | | Other accrued liabilities | $212.3 | $215.4 | Warranty Accrual Activity (dollars in millions) | Metric | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Beginning of period | $23.1 | $26.6 | | Issued during current period | $5.0 | $3.4 | | Reductions for settling warranties | $(6.0) | $(4.9) | | End of period | $22.1 | $24.5 | Note 12 - Derivative Financial Instruments The company uses derivative financial instruments, primarily foreign currency contracts, to manage foreign exchange risk for operations and transactions, with some designated as cash flow hedges and others not - As of April 1, 2023, the company had $14.124 million in notional foreign currency contracts designated as cash flow hedges, maturing through March 1, 2024, to fix exchange rates on future payments and revenue[82] - The company also had $122.789 million in notional foreign currency contracts not designated as hedging instruments, used to minimize foreign currency exposure on intercompany balances[86] Fair Value of Derivatives (dollars in millions) | Metric | April 1, 2023 | October 1, 2022 | | :-------------------------------- | :-------------- | :-------------- | | Total asset derivatives (hedging) | $0.5 | $0.7 | | Total liability derivatives (hedging) | $0.9 | $4.6 | | Asset derivatives (non-hedging) | $0.03 | $0.7 | | Liability derivatives (non-hedging) | $0.1 | $0.7 | Note 13 - Fair Value The company classifies its financial assets and liabilities into a fair value hierarchy, with derivatives primarily Level 2 and acquisition contingent consideration Level 3, and the fair value of long-term debt differing from its carrying value - Derivatives are valued using pricing models or discounted cash flow analyses incorporating observable market data, classifying them as Level 2 within the valuation hierarchy[91] - Acquisition contingent consideration is classified as Level 3, with its balance decreasing from $3.272 million at October 1, 2022, to $2.954 million at April 1, 2023[91] - As of April 1, 2023, the fair value of long-term debt was $920.817 million, compared to its carrying value of $964.574 million, classified as Level 2[91] Note 14 - Restructuring Restructuring accruals, primarily for severance and other costs, increased from October 2022 to April 2023, with the majority related to the 2022 plan, and most costs expected to be paid within a year Restructuring Accrual by Segment (dollars in millions) | Segment | Balance at October 1, 2022 | Charged to expense - 2022 plan | Cash payments - 2022 plan | Balance at April 1, 2023 | | :---------------------- | :------------------------- | :----------------------------- | :------------------------ | :----------------------- | | Aircraft Controls | $0.2 | — | $(0.2) | — | | Space and Defense Controls | $0.2 | $0.7 | $(0.4) | $0.5 | | Industrial Systems | $6.7 | $2.4 | $(0.3) | $8.8 | | Total | $7.1 | $3.1 | $(1.0) | $9.3 | - As of April 1, 2023, the restructuring accrual included $5.263 million for the 2022 plan, $2.707 million for the 2020 plan, and $1.301 million for the 2018 plan[92] Note 15 - Employee Benefit Plans The company incurs expenses for both defined contribution and defined benefit pension plans, with total expense for defined contribution plans slightly increasing and net periodic benefit costs for defined benefit plans also rising in the first half of 2023 Total Expense for Defined Contribution Plans (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | U.S. defined contribution plans | $12.0 | $11.2 | $22.2 | $21.7 | | Non-U.S. defined contribution plans | $2.0 | $2.4 | $4.1 | $4.5 | | Total expense | $14.1 | $13.6 | $26.3 | $26.3 | Expense for Defined Benefit Plans (Six Months Ended, dollars in millions) | Metric | April 1, 2023 | April 2, 2022 | | :-------------------------------- | :-------------- | :-------------- | | U.S. defined benefit plans | $12.9 | $11.9 | | Non-U.S. defined benefit plans | $2.1 | $3.8 | Note 16 - Income Taxes The effective tax rate for the three and six months ended April 1, 2023, was 23.6%, a decrease from the prior year, primarily due to the incremental benefit from share exercises - The effective tax rate for the three and six months ended April 1, 2023, was 23.6%, lower than the 24.9% and 24.8% for the corresponding periods in 2022, mainly due to the incremental benefit from share exercises[94] Note 17 - Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) (AOCIL) improved significantly, moving from a loss of $(311.0) million at October 1, 2022, to $(242.5) million at April 1, 2023, driven by positive foreign currency translation adjustments and retirement liability adjustments Changes in AOCIL (Six Months Ended April 1, 2023, dollars in millions) | Component | AOCIL at October 1, 2022 | OCI, net of tax | AOCIL at April 1, 2023 | | :-------------------------------- | :------------------------- | :-------------- | :----------------------- | | Accumulated foreign currency translation | $(182.0) | $62.3 | $(119.7) | | Accumulated retirement liability | $(125.2) | $3.2 | $(122.0) | | Accumulated gain (loss) on derivatives | $(3.8) | $3.0 | $(0.8) | | Total | $(311.0) | $68.5 | $(242.5) | Net Reclassification from AOCIL into Earnings (Six Months Ended, dollars in millions) | Metric | April 1, 2023 | April 2, 2022 | | :-------------------------------- | :-------------- | :-------------- | | Retirement liability | $4.4 | $7.0 | | Derivatives | $1.7 | $0.5 | Note 18 - Stock Employee Compensation Trust and Supplemental Retirement Plan Trust The Stock Employee Compensation Trust (SECT) and Supplemental Retirement Plan (SERP) Trust hold Moog shares to fund equity-based compensation and retirement benefits, with these shares not considered outstanding for EPS calculations - The SECT assists in administering and funding equity-based compensation plans (RSP, RSP+, ESPP), while the SERP Trust funds benefits under the SERP provisions[98] - Shares held by the SECT and SERP Trust are not considered outstanding for earnings per share calculations, but their trustees vote them on shareholder matters[98] Note 19 - Earnings per Share Basic and diluted weighted-average shares outstanding decreased slightly in the first half of 2023 compared to 2022, while anti-dilutive shares from equity-based awards also decreased Weighted-Average Shares Outstanding (Shares) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Basic weighted-average shares outstanding | 31,848,140 | 31,984,674 | 31,797,071 | 32,021,036 | | Diluted weighted-average shares outstanding | 32,043,910 | 32,120,726 | 31,959,315 | 32,154,442 | | Anti-dilutive shares from equity-based awards | 3,425 | 54,057 | 12,576 | 58,204 | Note 20 - Segments The company operates in three segments: Aircraft Controls, Space and Defense Controls, and Industrial Systems, all of which saw increased net sales for both the three and six months ended April 1, 2023 Net Sales by Segment (dollars in millions) | Segment | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Aircraft Controls | $347.0 | $311.3 | $657.3 | $614.6 | | Space and Defense Controls | $245.9 | $223.3 | $463.6 | $431.2 | | Industrial Systems | $243.9 | $236.2 | $476.0 | $449.1 | | Total Net sales | $836.8 | $770.8 | $1,596.9 | $1,494.9 | Operating Profit by Segment (dollars in millions) | Segment | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Aircraft Controls | $31.9 | $12.4 | $61.6 | $54.4 | | Space and Defense Controls | $27.5 | $24.1 | $47.8 | $45.4 | | Industrial Systems | $24.4 | $20.7 | $61.1 | $37.9 | | Total operating profit | $83.8 | $57.2 | $170.5 | $137.6 | Note 21 - Related Party Transactions Moog Inc. engages in ordinary course business with M&T Bank Corporation and M&T Bank, where its Non-Executive Chairman also serves on the board, including credit extensions and an interest in the U.S. revolving credit facility - Moog Inc. has ongoing financing activities with M&T Bank, including credit extensions totaling $7.054 million for the six months ended April 1, 2023, and M&T Bank holds approximately 12% interest in Moog's U.S. revolving credit facility[102] - Wilmington Trust, a subsidiary of M&T Bank, acts as the trustee for the pension assets of Moog's qualified U.S. defined benefit plan[102] Note 22 - Commitments and Contingencies The company is involved in various legal and administrative proceedings, including environmental matters, but does not expect them to have a material adverse effect, and is contingently liable for standby letters of credit - Moog is involved in legal and administrative proceedings, including environmental matters, but management believes adequate reserves are established and no material adverse effect on financial condition, results of operations, or cash flows is expected[103][104] - The company is contingently liable for $22.027 million related to standby letters of credit issued by a bank to third parties as of April 1, 2023[106] Note 23 - Subsequent Event On April 27, 2023, the company declared a quarterly dividend of $0.27 per share for Class A and Class B common stock, payable on May 30, 2023 - On April 27, 2023, Moog declared a $0.27 per share quarterly dividend for Class A and Class B common stock, payable on May 30, 2023, to shareholders of record on May 12, 2023[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, covering consolidated results, segment-specific performance, liquidity, capital resources, and market trends OVERVIEW Moog Inc. is a global designer and manufacturer of high-performance precision motion and fluid controls for aerospace and defense and industrial markets, operating through three segments - Moog Inc. operates in aerospace and defense (primary/secondary flight controls, weapon systems, satellite positioning) and industrial markets (industrial automation, medical, energy)[110][113] - For the quarter ended April 1, 2023, 64% of revenue was recognized over time (predominantly Aircraft Controls and Space and Defense Controls) and 36% at a point in time (most frequently Industrial Systems)[111][112] - The company aims to improve shareholder value through strategic revenue growth (organic and acquired), enhanced operating efficiencies, manufacturing productivity, and capital deployment including acquisitions, share buybacks, and dividends[116] 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, impairment reviews of goodwill and long-lived assets, pension assumptions, and income taxes[122] RECENT ACCOUNTING PRONOUNCEMENTS There have been no new accounting pronouncements adopted for the six months ended April 1, 2023, and other ASUs are assessed to be either not applicable or to have an immaterial impact - No new accounting pronouncements were adopted for the six months ended April 1, 2023; other ASUs were assessed and deemed either not applicable or to have an immaterial impact[30][31][123] CONSOLIDATED RESULTS OF OPERATIONS Consolidated net sales increased across all segments in Q2 and H1 2023, despite negative impacts from foreign currency and divested businesses, with net earnings and diluted EPS seeing significant growth Consolidated Results of Operations (dollars in millions, except per share data) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | % Variance | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | % Variance | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------- | :------------------------------- | :------------------------------- | :--------- | | Net sales | $837 | $771 | 9% | $1,597 | $1,495 | 7% | | Gross margin | 26.4% | 27.6% | | 26.6% | 27.2% | | | Research and development expenses | $27 | $31 | (13%) | $51 | $58 | (13%) | | Selling, general and administrative expenses as a percentage of sales | 13.9% | 14.4% | | 14.4% | 14.9% | | | Interest expense | $15 | $8 | 81% | $28 | $16 | 73% | | Asset impairment | $1 | $15 | (92%) | $1 | $15 | (92%) | | Restructuring expense | $2 | $8 | (74%) | $3 | $8 | (60%) | | Net earnings | $43 | $29 | 48% | $89 | $75 | 18% | | Diluted earnings per share | $1.34 | $0.91 | 47% | $2.79 | $2.34 | 19% | - Net sales increased 11% in Q2 2023 and 10% in H1 2023, excluding negative impacts of $10 million (Q2) and $26 million (H1) from weaker foreign currencies and $8 million (Q2) and $20 million (H1) from divested businesses[125] - Gross margin decreased in Q2 and H1 2023 due to unfavorable sales mix in Aircraft Controls, contract-related charges in Space and Defense Controls, and operational charges in Industrial Systems, partially offset by higher sales volumes[126] - Twelve-month backlog remained relatively unchanged in Q2 2023, with higher orders in Industrial Systems (simulation, test, core industrial) offsetting slight decreases in Aircraft Controls (military development work-down) and Space and Defense Controls (divested security business, timing of missile orders)[131] SEGMENT RESULTS OF OPERATIONS Segment operating profits show varied performance, with Aircraft Controls seeing significant growth, Space and Defense Controls facing development charges, and Industrial Systems benefiting from market recoveries and asset sales Aircraft Controls Aircraft Controls net sales increased due to commercial aircraft market recovery, particularly in OEM and aftermarket programs, despite lower military sales, leading to improved operating margin Aircraft Controls Segment Performance (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | % Variance | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | % Variance | | :-------------------------- | :------------------------------- | :------------------------------- | :--------- | :------------------------------- | :------------------------------- | :--------- | | Net sales - military aircraft | $176 | $192 | (9%) | $347 | $378 | (8%) | | Net sales - commercial aircraft | $171 | $119 | 44% | $310 | $237 | 31% | | Total Net sales | $347 | $311 | 11% | $657 | $615 | 7% | | Operating profit | $32 | $12 | 156% | $62 | $54 | 13% | | Operating margin | 9.2% | 4.0% | | 9.4% | 8.8% | | - Commercial OEM sales increased $43 million in Q2 2023, with wide-body programs up $20 million and business jets/Genesys programs up $14 million; commercial aftermarket sales increased $9 million, driven by spares and repair volume for the A350 program[135] - Military aftermarket sales declined $10 million, and military OEM programs decreased $6 million, partially offset by a $7 million increase in the F-35 program[136] - Adjusted operating margin for Q2 2023 was 9.5% (vs. 10.0% in Q2 2022) and for H1 2023 was 9.5% (vs. 9.3% in H1 2022), reflecting an unfavorable sales mix from higher commercial OEM sales, partially offset by lower R&D expenses and incremental sales volumes[138][139] Space and Defense Controls Space and Defense Controls experienced net sales growth driven by both space and defense markets, with operating margin increasing in Q2 2023 but declining in H1 2023 on an adjusted basis due to development program costs Space and Defense Controls Segment Performance (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | % Variance | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | % Variance | | :-------------------------- | :------------------------------- | :------------------------------- | :--------- | :------------------------------- | :------------------------------- | :--------- | | Net sales | $246 | $223 | 10% | $464 | $431 | 8% | | Operating profit | $28 | $24 | 14% | $48 | $45 | 5% | | Operating margin | 11.2% | 10.8% | | 10.3% | 10.5% | | - Space market sales increased $18 million in Q2 2023 (excluding product shift) due to accelerated activity on satellite avionics and space vehicle programs; defense market sales increased $5 million, driven by an $11 million increase from the RIwP turret program reaching full-rate production, partially offset by the absence of sales from a divested security business[141] - Adjusted operating margin for Q2 2023 was 11.7% (vs. 11.6% in Q2 2022), benefiting from higher sales but offset by nearly 300 basis points of development charges on space vehicle programs; adjusted operating margin for H1 2023 was 10.6% (vs. 11.3% in H1 2022) due to cost growth on space vehicle development programs[143][144] Industrial Systems Industrial Systems net sales increased due to general market recoveries, despite negative impacts from weaker foreign currencies and a divested sonar business, with operating margin improving significantly in H1 2023 Industrial Systems Segment Performance (dollars in millions) | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | % Variance | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | % Variance | | :-------------------------- | :------------------------------- | :------------------------------- | :--------- | :------------------------------- | :------------------------------- | :--------- | | Net sales | $244 | $236 | 3% | $476 | $449 | 6% | | Operating profit | $24 | $21 | 18% | $61 | $38 | 61% | | Operating margin | 10.0% | 8.8% | | 12.8% | 8.4% | | - Excluding weaker foreign currencies ($7 million Q2, $18 million H1) and divested sonar business sales ($3 million Q2, $6 million H1), sales increased 8% in Q2 2023 and 12% in H1 2023[146] - Industrial automation market sales increased $15 million in Q2 2023; in H1 2023, sales increased $24 million for industrial automation, $5 million in medical, $1 million in simulation and test, and $3 million in energy (excluding divested business)[147][148] - Operating margin in H1 2023 included a $10 million gain from the sale of three buildings; adjusted operating margin for H1 2023 was 11.3% (vs. 9.3% in H1 2022), driven by incremental margin from higher sales volumes[150] CONSOLIDATED SEGMENT OUTLOOK Moog Inc. anticipates higher sales and operating margins in 2023, driven by commercial and industrial market recoveries and increased demand for space and defense programs, with net earnings and diluted EPS also expected to increase 2023 Outlook vs. 2022 (dollars in millions, except per share data) | Metric | 2023 Outlook | 2022 | $ Variance | % Variance | | :-------------------------- | :------------- | :--- | :--------- | :--------- | | Net sales | $3,190 | $3,036 | $154 | 5% | | Operating profit | $354 | $283 | $71 | 25% | | Operating margin | 11.1% | 9.3% | | | | Net earnings | $186 | $155 | | | | Diluted earnings per share | $5.81 | $4.83 | | | - Total company sales growth is expected to be 7% in 2023, excluding impacts from 2022 divestitures and weaker foreign currencies; adjusted operating margin is projected to increase to 11.0% from 10.2% in 2022[152] - Aircraft Controls expects sales increases in commercial OEM programs and a slight operating margin increase due to improved factory utilization[153] - Space and Defense Controls anticipates sales growth in space and defense programs and increased operating margin from higher sales volume and absence of prior charges[154] - Industrial Systems projects sales increases across markets and an improved operating margin from building sales gain, lower charges, and portfolio shaping[155] LIQUIDITY AND CAPITAL RESOURCES The company experienced a shift from cash provided by operating activities to cash used in H1 2023, primarily due to increased inventory and receivables, while financing activities provided cash through net borrowings Net Cash Provided (Used) by Activities (Six Months Ended, dollars in millions) | Metric | April 1, 2023 | April 2, 2022 | $ Variance | | :-------------------------- | :-------------- | :-------------- | :--------- | | Operating activities | $(33) | $180 | $(213) | | Investing activities | $(74) | $(48) | $(26) | | Financing activities | $92 | $(110) | $202 | - Operating activities used $33 million in H1 2023, a $213 million decrease from H1 2022, primarily due to $79 million more cash used by inventory, $72 million more by accounts receivable, and $43 million less from customer advances[157] - Investing activities used $74 million in H1 2023, including $90 million in capital expenditures (with a $28 million building purchase), partially offset by $20 million from sales of buildings and businesses; capital expenditures are projected to be $165 million in 2023[159][160] - Financing activities provided $92 million in H1 2023, including $122 million of net borrowings on credit facilities, partially offset by $17 million for dividend payments and $8 million for share repurchases[161] - As of April 1, 2023, the company had $663 million of unused capacity, including $645 million from the U.S. revolving credit facility, and was in compliance with all financing covenants[174] ECONOMIC CONDITIONS AND MARKET TRENDS The company's businesses operate in aerospace and defense and industrial markets, facing varying supply chain pressures, with defense spending increasing, commercial aircraft recovering, and industrial markets showing increased order demand - Aerospace and defense businesses accounted for 70% of 2022 sales, with defense market funding increasing and commercial aircraft market (less than 18% of 2022 sales) still recovering, especially international travel[184] - Industrial markets (30% of 2022 sales) benefited from increased order demand in industrial automation, simulation and test, and energy, but are now experiencing supply chain pressures[185] - Weaker foreign currencies, primarily the Euro and British Pound, against the U.S. dollar decreased sales by $26 million in the first six months of 2023 compared to the prior year[125][197] Cautionary Statement This section outlines various strategic, market condition, operational, financial, legal, compliance, and general risks that could cause actual results to differ materially from forward-looking statements - Forward-looking statements are subject to factors, risks, and uncertainties, including competitive markets, R&D success, intellectual property protection, acquisition/divestiture integration, cyclical markets, government contract dependency, customer concentration (Boeing, Lockheed Martin), backlog realization, supply chain issues, health pandemics, information systems risks, product quality, and product failure[198][199][200][201] - Additional risks include accounting estimates for over-time contracts, fixed-price contract losses, indebtedness covenants, pension funding, goodwill impairment, income tax liabilities, foreign operations risks, government regulations, legal proceedings, environmental laws, sustainability goals, catastrophic events, and employee retention[202][203][204] Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the company's market risk disclosures since the Annual Report on Form 10-K for the fiscal year ended October 1, 2022 - No material changes in market risk information have occurred in the current year compared to the disclosures in the Annual Report on Form 10-K for the fiscal year ended October 1, 2022[206] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of April 1, 2023, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of April 1, 2023[208] - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter[208] PART II OTHER INFORMATION Item 1A. Risk Factors There have been no material changes to the company's risk factors since the Annual Report on Form 10-K for the fiscal year ended October 1, 2022 - No material changes in risk factors have occurred in the current year compared to the disclosures in the Annual Report on Form 10-K for the fiscal year ended October 1, 2022[209] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's share repurchase program allows for the purchase of up to 3 million common shares, with approximately 2.2 million shares remaining under authorization as of April 1, 2023 Common Stock Purchases for the Quarter Ended April 1, 2023 | Period | Total Number of Shares Purchased | Average Price Paid Per Share (dollars) | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs | | :----------------------------------- | :------------------------------- | :----------------------------------- | :----------------------------------------------------------------------- | | January 1, 2023 - January 28, 2023 | 92,322 | $87.13 | 2,198,081 | | January 29, 2023 - February 25, 2023 | 28,745 | $97.79 | 2,198,081 | | February 26, 2023 - April 1, 2023 | 23,421 | $100.30 | 2,198,081 | | Total | 144,488 | $91.39 | 2,198,081 | - The Board of Directors authorized a share repurchase program for up to 3 million common shares (Class A or Class B), with approximately 2.2 million shares remaining under this authorization[212] - Purchases included shares by the SECT from the ESPP, RSP, and equity-based compensation award recipients, as well as shares accepted/withheld for exercise price and tax obligations related to equity-based awards[212] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including employment agreements, certifications from the CEO and CFO, and XBRL interactive data files - Exhibits include Form of Employment Termination Benefits Agreement, Certifications of Chief Executive Officer and Chief Financial Officer (pursuant to Exchange Act Rule 13a-14(a) and 18 U.S.C. Section 1350), and Interactive Data Files (XBRL)[213][214] SIGNATURES This section confirms the official signing of the report by the Chief Executive Officer, Chief Financial Officer, and Controller on April 28, 2023 - The report was signed on April 28, 2023, by Pat Roche (Chief Executive Officer), Jennifer Walter (Vice President and Chief Financial Officer), and Michael J. Swope (Controller)[216]