# Moog Inc.: Form 10-Q for the period ended Apr 1, 2023

- Company: [Moog Inc.](/companies/mog-a.md) (CIK 67887)
- Form: 10-Q
- Filed: 2023-04-28
- Accepted by EDGAR: Apr 28, 2023, 11:55 ET
- Period: 2023-04-01
- Accession: 0000067887-23-000060
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67887/000006788723000060/mog-20230401.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67887/000006788723000060/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-04-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-04-01 | $836.8m | us-gaap:Revenues |
| Revenue | 6 months, 2022-10-02 to 2023-04-01 | $1.60bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-01-01 to 2023-04-01 | $615.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-10-02 to 2023-04-01 | $1.17bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-01-01 to 2023-04-01 | $221.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-10-02 to 2023-04-01 | $425.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-04-01 | $26.7m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-10-02 to 2023-04-01 | $50.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-04-01 | $116.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-10-02 to 2023-04-01 | $229.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-04-01 | $83.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-10-02 to 2023-04-01 | $170.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-04-01 | $15.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-10-02 to 2023-04-01 | $28.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-04-01 | $13.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-10-02 to 2023-04-01 | $27.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-04-01 | $43.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-10-02 to 2023-04-01 | $89.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-04-01 | $1.34 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-10-02 to 2023-04-01 | $2.79 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-04-01 | $1.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-10-02 to 2023-04-01 | $2.80 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-04-01 | 32,043,910 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-10-02 to 2023-04-01 | 31,959,315 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-10-02 to 2023-04-01 | −$33.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-10-02 to 2023-04-01 | $89.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-10-02 to 2023-04-01 | $16.9m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2022-10-02 to 2023-04-01 | $20.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-04-01 | $107.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-04-01 | $1.93bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-04-01 | $3.70bn | us-gaap:Assets |
| Current liabilities | at 2023-04-01 | $842.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-04-01 | $2.12bn | us-gaap:Liabilities |
| Long-term debt | at 2023-04-01 | $958.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-04-01 | $728.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-04-01 | $1.58bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,293 characters.

The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report filed on Form 10-K for the fiscal year ended October 1, 2022. In addition, the following should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Condensed Financial Statements contained herein. All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years. Amounts may differ from reported values due to rounding.

### OVERVIEW

We are a worldwide designer, manufacturer and systems integrator of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and defense and industrial markets.

Within the aerospace and defense market, our products and systems include:

- Defense market - primary and secondary flight controls for military aircraft, turreted weapon systems, stabilization and automatic ammunition loading controls for armored combat vehicles, tactical and strategic missile steering controls and gun aiming controls.
- Commercial aircraft market - primary and secondary flight controls for commercial aircraft.
- Space market - satellite positioning controls and thrust vector controls, as well as integrated space vehicles and hypersonic applications.

In the industrial market, our products are used in a wide range of applications including:

- Industrial automation market - components and systems for injection and blow molding machinery, heavy industry applications for steel and aluminum production, metal forming presses, flight simulation motion control systems and material and automotive structural and fatigue testing systems.
- Medical market - components and pumps for enteral clinical nutrition and infusion therapy, CT scan medical equipment, ultrasonic sensors and surgical handpieces and sleep apnea equipment.
- Energy market - control and safety components for steam and gas power generation turbines and oil and gas exploration components and systems.

We operate under three segments, Aircraft Controls, Space and Defense Controls and Industrial Systems. Our principal manufacturing facilities are located in the United States, Philippines, United Kingdom, Germany, Italy, Costa Rica, China, Netherlands, Luxembourg, Japan, Czech Republic, Canada, India and Lithuania.

Under ASC 606, 64% of revenue was recognized over time for the quarter ended April 1, 2023, using the cost-to-cost method of accounting. The over-time method of revenue recognition is predominantly used in Aircraft Controls and Space and Defense Controls. We use this method for U.S. Government contracts and repair and overhaul arrangements as we are creating or enhancing assets that the customer controls. In addition, many of our large commercial contracts qualify for over-time accounting as our performance does not create an asset with an alternative use and we have an enforceable right to payment for performance completed to date.

For the quarter ended April 1, 2023, 36% of revenue was recognized at the point in time control transferred to the customer. This method of revenue recognition is used most frequently in Industrial Systems. We use this method for commercial contracts in which the asset being created has an alternative use. We determine the point in time control transfers to the customer by weighing the five indicators provided by ASC 606. When control has transferred to the customer, profit is generated as cost of sales is recorded and as revenue is recognized.

We concentrate on providing our customers with products designed and manufactured to the highest quality standards. Our technical experts work collaboratively with customers around the world, delivering capabilities for mission-critical solutions. This approach is critical in creating products that are applied in demanding applications, "When Performance Really Matters®." By capitalizing on this customer intimacy, we believe we have achieved a leadership position in the high performance, precision controls market. Additionally, these strengths yield a broad control product portfolio, across a diverse base of customers and end markets.

By focusing on customer intimacy and commitment to solving our customers' most demanding technical problems, we have been able to expand our motion control franchise to multiple markets; organically growing from a high-performance components manufacturer to a high-performance systems designer, manufacturer and systems integrator. In addition, we continue expanding our content positions on our current platforms, seeking to be the market-leading supplier in the niche markets we serve. We also look for innovation in all aspects of our business, employing new technologies to improve productivity and operational performance.

Our path to success comes from our talented employees building a sustainable company for current and future generations. We are concentrating our efforts on: customer focus, people, community and the planet, and financial strength. Initiatives in these three areas will drive accountability, improve operational performance, increase employee engagement and workforce diversity and, with business simplification, result in improved financial results and increased shareholder value.

We will improve shareholder value through strategic revenue growth, both organic and acquired, through improving operating efficiencies and manufacturing productivity and through utilizing low cost manufacturing facilities without compromising quality. Historically, we have taken a balanced approach to capital deployment in order to maximize shareholder returns over the long term. These activities have included strategic acquisitions, share buybacks and dividend payments. Today, we believe we can create long term value for our shareholders by continuing to invest in our business through both capital expenditures as well as investments in new market opportunities. We will also continue exploring opportunities to make strategic acquisitions and return capital to shareholders.

### Acquisitions and Divestitures

#### Acquisitions

On February 21, 2022, we acquired TEAM Accessories Limited ("TEAM") based in Dublin, Ireland for a purchase price, net of acquired cash, of $14 million, consisting of $12 million in cash and contingent consideration with an initial fair value of $3 million. TEAM specializes in Maintenance, Repair and Overhaul of engine and airframe components. This operation is included in our Aircraft Controls segment.

#### Divestitures

On September 30, 2022, we sold a sonar business based in the United Kingdom previously included in our Industrial Systems segment. We have cumulatively received net proceeds of $13 million and recorded a loss of $15 million, net of transaction costs. The transaction is subject to adjustments associated with amounts currently held in escrow.

On September 20, 2022, we sold assets of a security business based in Northbrook, Illinois previously included in our Space and Defense Controls segment. We have cumulatively received net proceeds of $9 million and recorded a loss of $4 million, net of transaction costs. The transaction is subject to adjustments associated with amounts currently held in escrow.

On December 3, 2021, we sold the assets of our Navigation Aids ("NAVAIDS") business based in Salt Lake City, Utah previously included in our Aircraft Controls segment to Thales USA Inc. We have cumulatively received net proceeds of $37 million and recorded a gain of $16 million, net of transaction costs. The transaction is subject to adjustments associated with amounts currently held in escrow.

### CRITICAL ACCOUNTING POLICIES

On a regular basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including revenue recognition on long-term contracts, contract reserves, reserves for inventory valuation, reviews for impairment of goodwill, reviews for impairment of long-lived assets, pension assumptions and income taxes.

### RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 - Basis of Presentation in the Consolidated Condensed Financial Statements included in Item 1, Financial Statements of this report for further information regarding Financial Accounting Standards Board issued ASUs.

*(dollars and shares in millions, except per share data)*

| CONSOLIDATED RESULTS OF OPERATIONS | Three Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance | Six Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $837 | $771 | $66 | 9% | $1,597 | $1,495 | $102 | 7% |
| Gross margin | 26.4% | 27.6% |  |  | 26.6% | 27.2% |  |  |
| Research and development expenses | $27 | $31 | $(4) | (13%) | $51 | $58 | $(8) | (13%) |
| Selling, general and administrative expenses as a percentage of sales | 13.9% | 14.4% |  |  | 14.4% | 14.9% |  |  |
| Interest expense | $15 | $8 | $7 | 81% | $28 | $16 | $12 | 73% |
| Asset impairment | $1 | $15 | $(14) | (92%) | $1 | $15 | $(14) | (92%) |
| Restructuring expense | $2 | $8 | $(6) | (74%) | $3 | $8 | $(5) | (60%) |
| Gain on sale of business | $— | $— | $— | —% | $— | $(16) | $16 | (100%) |
| Gain on sale of buildings | $(1) | $— | $(1) | n/a | (10) | — | $(10) | n/a |
| Other | $4 | $1 | $3 | n/a | $6 | $1 | $4 | n/a |
| Effective tax rate | 23.6% | 24.9% |  |  | 23.6% | 24.8% |  |  |
| Net earnings | $43 | $29 | $14 | 48% | $89 | $75 | $14 | 18% |
| Diluted earnings per share | $1.34 | $0.91 | $0.43 | 47% | $2.79 | $2.34 | $0.45 | 19% |
| Twelve-month backlog |  |  |  |  | $2,300 | $2,300 | $— | —% |

Net sales increased in the second quarter and in the first half of 2023 compared to the same periods of 2022 across all of our segments. Weaker foreign currencies, primarily the Euro and the British Pound, relative to the U.S. Dollar, decreased sales $10 million in the second quarter and $26 million in the first half of 2023 relative to the same periods of 2022. Additionally, the absence of sales associated with our divested businesses in 2022 decreased sales $8 million in the second quarter and $20 million through the first half of 2023. The 2023 sales increases excluding these effects compared to the same periods of 2022 were 11% in the second quarter and 10% in the first half.

Gross margin in the second quarter of 2023 included an unfavorable sales mix in Aircraft Controls, contract-related charges in Space and Defense Controls and operational charges in Industrial Systems. Partially offsetting these negative impacts was the benefit of higher sales volumes. Gross margin also decreased in the first half of 2023 compared to the first half of 2022 due mostly to the same factors as the second quarter.

Research and development expenses decreased in the second quarter and in the first half of 2023 compared to the same periods of 2022. We had lower research and development activity due to our prioritization of our engineering activities on funded development programs.

Selling, general and administrative expense as a percentage of sales decreased in the second quarter and in the first half of 2023 compared to the second quarter and the first half of 2022 reflecting the incremental benefit of higher sales volume.

Interest expense in the second quarter and in the first half of 2023 increased due to higher interest rates on our outstanding debt balances and, to a lesser extent, higher debt levels.

The second quarter of 2023 included $3 million of charges for various restructuring activities and impairments across all of our segments. The second quarter of 2022 included $15 million of asset impairments, $8 million of restructuring expenses, primarily in Aircraft Controls, and $2 million of inventory write-down charges.

Through the first half of 2023, we benefited from a $10 million gain from the sale of three buildings in Industrial Systems. The first half of 2022 included a $16 million gain from the sale of our NAVAIDS business in Aircraft Controls.

The effective tax rate in the second quarter of 2023 decreased compared to the second quarter of 2022 due to the incremental benefit from share exercises.

The twelve-month backlog was relatively unchanged in the second quarter of 2023 compared with the second quarter of 2022. Within Industrial Systems, we had higher orders for simulation and test programs and for our core industrial programs. The twelve-month backlog decreased slightly in Aircraft Controls as the work-down of various military development programs was partially offset by higher orders for our business jet and commercial aftermarket programs. Space and Defense Controls' twelve-month backlog decreased slightly due in part to the absence of orders from our divested security business. Additionally, higher orders for space vehicles was offset by the timing of new and follow-on missile program orders.

### SEGMENT RESULTS OF OPERATIONS

Operating profit, as presented below, is net sales less cost of sales and other operating expenses, excluding interest expense, equity-based compensation expense, non-service pension expense and other corporate expenses. Cost of sales and other operating expenses are directly identifiable to the respective segment or allocated on the basis of sales, manpower or profit. Operating profit is reconciled to earnings before income taxes in Note 20 - Segments in the Notes to Consolidated Condensed Financial Statements included in this report.

### Aircraft Controls

*(dollars in millions)*

|  | Three Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance | Six Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales - military aircraft | $176 | $192 | $(16) | (9%) | $347 | $378 | $(31) | (8%) |
| Net sales - commercial aircraft | 171 | 119 | 52 | 44% | 310 | 237 | 73 | 31% |
|  | $347 | $311 | $36 | 11% | $657 | $615 | $43 | 7% |
| Operating profit | $32 | $12 | $19 | 156% | $62 | $54 | $7 | 13% |
| Operating margin | 9.2% | 4.0% |  |  | 9.4% | 8.8% |  |  |

Aircraft Controls' net sales increased in the second quarter and in the first half of 2023 compared to the second quarter and first half of 2022, as the continued commercial aircraft market recovery was partially offset by lower military sales.

In the second quarter of 2023, sales increased $43 million in our commercial OEM programs and $9 million in our commercial aftermarket programs as both continued to recover. Within commercial OEM, sales increased $20 million across all of our wide-body programs. Also, higher sales volumes for business jets and a strong order book for our Genesys programs increased sales $14 million. Within our commercial aftermarket programs, higher amounts of spares and repair volume increased sales $7 million for the A350 program.

Partially offsetting the commercial sales increase was a sales decline of $10 million in military aftermarket spread across most programs, as we benefited from a strong quarter a year ago. Additionally, sales for military OEM programs decreased $6 million. Lower volume on funded development programs and lower deliveries across our legacy programs were partially offset by a $7 million increase in the F-35 program.

The sales increases in the first half of 2023 compared to the first half of 2022 were largely due to the same factors as the second quarter. The continued recovery of the commercial market increased OEM program sales by $46 million and aftermarket sales by $27 million. Within our military programs, sales decreased across both our OEM and aftermarket programs due mostly to the same factors as the second quarter.

Operating margin increased in the second quarter of 2023 compared to the same period of 2022. The second quarter of 2023 included a $1 million impairment charge, whereas the second quarter of 2022 included $15 million of impairment and $4 million of restructuring expenses. Excluding these charges, adjusted operating margin in the second quarter of 2023 was 9.5% compared to 10.0% in the second quarter of 2022. The resulting decrease in adjusted operating margin was due to an unfavorable sales mix from higher amounts of commercial OEM sales, partially offset by lower research and development expenses.

Operating margin increased in the first half of 2023 compared to the first half of 2022. Adjustments in the first half of 2023 consisted of the second quarter charges, whereas the first half of 2022 included a $16 million gain associated with a divested business. Excluding this gain and the charges in the second quarter, the adjusted operating margin in the first half of 2023 was 9.5% and 9.3% in the first half of 2022. The resulting slight increase in adjusted operating margin in the first half of 2023 compared to the same period of 2022 is due to incremental sales volumes and $4 million of lower research and development expenses. Partially offsetting these benefits was the unfavorable sales mix due to higher levels of commercial OEM sales.

### Space and Defense Controls

*(dollars in millions)*

|  | Three Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance | Six Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $246 | $223 | $23 | 10% | $464 | $431 | $32 | 8% |
| Operating profit | $28 | $24 | $3 | 14% | $48 | $45 | $2 | 5% |
| Operating margin | 11.2% | 10.8% |  |  | 10.3% | 10.5% |  |  |

Space and Defense Controls' net sales increased in the second quarter and in the first half of 2023 compared to the second quarter and first half of 2022 primarily driven by growth in both of our markets.

In the first quarter of 2023, we shifted a product line from our defense market into our space market. Excluding this product shift, the increase in our space market sales in the second quarter of 2023 compared to the second quarter of 2022 was $18 million. This increase is primarily due to accelerated activity on satellite avionics and components programs, as well as growth on our space vehicle programs. Within our defense market, the sales increase was $5 million. The production ramp of our RIwP turret program, which hit full-rate production levels in the first quarter of 2023, increased sales $11 million. Partially offsetting the defense sales increase was a $5 million decrease due to the absence of prior year sales related to our security business that we divested in the fourth quarter of 2022.

The sales increases in the first half of 2023 compared to the first half of 2022 were largely due to the same factors as the second quarter. The strong demand for our space programs and our RIwP turret program were partially offset by the absence of sales from our divested security business.

Operating margin increased in the second quarter of 2023 compared to the second quarter of 2022. The second quarter of 2023 included $1 million of restructuring and impairment charges, while the second quarter of 2022 included $2 million of restructuring charges. Excluding these charges, adjusted operating margin for the second quarter of 2023 was 11.7% compared to 11.6% in the second quarter of 2022. The benefit of higher sales and improvements in the core business were mostly offset by close to 300 basis points of development charges on our space vehicle programs.

Excluding $2 million of restructuring and impairment charges in the first half of 2023, adjusted operating margin was 10.6%. Excluding $3 million of restructuring and inventory write-down charges in the first half of 2022, adjusted operating margin was 11.3%. The resulting decline in adjusted operating margin is primarily due to cost growth on our space vehicle development programs, partially offset by the incremental margin from higher sales and improved operational performance.

### Industrial Systems

*(dollars in millions)*

|  | Three Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance | Six Months Ended April 1, 2023 | April 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $244 | $236 | $8 | 3% | $476 | $449 | $27 | 6% |
| Operating profit | $24 | $21 | $4 | 18% | $61 | $38 | $23 | 61% |
| Operating margin | 10.0% | 8.8% |  |  | 12.8% | 8.4% |  |  |

Industrial Systems' net sales increased in the second quarter and in the first half of 2023 compared to the second quarter and the first half of 2022, primarily due to general market recoveries. Weaker foreign currencies, primarily the Euro relative to the U.S. Dollar, decreased sales $7 million and $18 million, respectively. Also, sales decreased $3 million and $6 million, respectively, due to the absence of prior year sales associated with our sonar business that we divested in the fourth quarter of 2022. Excluding the impacts of weaker foreign currencies and the divested sales, the resulting sales increases in the second quarter and first half of 2023 were 8% and 12%, respectively.

In the second quarter of 2023 compared to the second quarter of 2022, sales increased $15 million in our industrial automation market, driven by higher demand for industrial components and for our core industrial products. Partially offsetting the increase was a $5 million sales decline in our simulation and test market due to the timing for various programs within this market.

In the first half of 2023 compared to the same period of 2022, sales increased across our markets due to recovering demand. Sales increased $24 million for our industrial automation programs, $5 million in our medical market and $1 million in our simulation and test market. Additionally, sales increased $3 million in our energy market excluding the lost sales associated with our divested business.

Operating margin increased in the second quarter of 2023 compared to the second quarter of 2022. The second quarter of 2023 included $1 million of restructuring and other adjustments, while the second quarter of 2022 included a total of $4 million of impairment and restructuring charges. Excluding these items, adjusted operating margin for the second quarter of 2023 was 10.4% compared to 10.5% in the second quarter of 2022. Charges related to operations across various programs decreased margins. However, these were mostly offset by incremental margin from higher sales.

Operating margin in the first half of 2023 included a $10 million gain related to the sales of three buildings as we consolidated operations. Excluding this gain and the other charges in the second quarter, adjusted operating margin in the first half of 2023 was 11.3%. Adjusted operating margin in the first half of 2022 was 9.3% after excluding $4 million of similar charges. The resulting increase in adjusted operating margin was driven by the incremental margin from higher sales volumes.

### CONSOLIDATED SEGMENT OUTLOOK

*(dollars in millions, except per share data)*

| Net sales: | 2023 Outlook | 2022 | 2023 vs. 2022 $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Aircraft Controls | $1,330 | $1,256 | $74 | 6% |
| Space and Defense Controls | 920 | 872 | 48 | 5% |
| Industrial Systems | 940 | 907 | 33 | 4% |
|  | $3,190 | $3,036 | $154 | 5% |
| Operating profit: |  |  |  |  |
| Aircraft Controls | $136 | $124 | $12 | 10% |
| Space and Defense Controls | 106 | 87 | 19 | 21% |
| Industrial Systems | 113 | 72 | 40 | 56% |
|  | $354 | $283 | $71 | 25% |
| Operating margin: |  |  |  |  |
| Aircraft Controls | 10.2% | 9.8% |  |  |
| Space and Defense Controls | 11.5% | 10.0% |  |  |
| Industrial Systems | 12.0% | 8.0% |  |  |
|  | 11.1% | 9.3% |  |  |
| Net earnings | $186 | $155 |  |  |
| Diluted earnings per share | $5.81 | $4.83 |  |  |

***Total Company –*** We expect higher sales in 2023, driven by both the continued recoveries in commercial aircraft and industrial markets, as well as higher demand for space and defense programs. Excluding the lost sales associated with our divestitures in 2022, and the weaker foreign currencies through the first half of 2023, we expect our sales growth to be 7%. We expect operating margin will increase due to the incremental sales volumes, combined with lower amounts of charges related to restructuring and impairments. Excluding these charges, we expect adjusted operating margin will increase to 11.0%, from an adjusted operating margin in 2022 of 10.2%. Net earnings in 2023 are expected to benefit from the incremental operating margin, which we expect to be partially offset by higher interest expense due to higher interest rates. We expect adjusted diluted earnings per share will range between $5.50 and $5.90, with a midpoint of $5.70. Management believes that the adjusted outlook may be useful in evaluating the financial condition and results of operations of the Company.

***Aircraft Controls –*** In 2023, we anticipate sales increases across all of our major commercial OEM programs as the commercial aircraft market recovers and as our customers match the increasing air travel demand with increased orders. However, in our military programs, we anticipate a sales decrease primarily driven by our military aftermarket programs. We expect operating margin in 2023 will increase slightly due to improved factory utilization from the higher sales volume, mostly offset by an unfavorable sales mix.

***Space and Defense Controls –*** In 2023, we anticipate sales increases in our space programs from the higher activity on integrated space vehicle programs and for our satellite programs. Excluding the impact of lost sales associated with our divested security business, we expect sales increases across our defense programs, primarily driven by the continued production ramp of our RIwP program. We expect operating margin will increase in 2023 resulting from the incremental margin from higher sales volume and from the absence of charges from our security business sale. Partially offsetting the increases are the charges associated with our space vehicle programs in the first half of 2023.

***Industrial Systems –*** In 2023, we anticipate sales increases across our markets due to recovering demand and our growing backlog. We expect operating margin will increase in 2023 resulting from the gain associated with the sale of buildings and due to lower amounts of charges related to impairments and restructuring. Excluding these charges, we expect adjusted operating margin to increase due to the incremental margin from higher sales volume, and from the benefits of our portfolio shaping and pricing activities.

### LIQUIDITY AND CAPITAL RESOURCES

### Consolidated Statement of Cash Flows

*(dollars in millions)*

| Net cash provided (used) by: | Six Months Ended April 1, 2023 | April 2, 2022 | $ Variance |
| --- | ---: | ---: | ---: |
| Operating activities | $(33) | $180 | $(213) |
| Investing activities | (74) | (48) | (26) |
| Financing activities | 92 | (110) | 202 |

### Operating activities

Net cash was used by operating activities in the first half of 2023 compared to providing cash in the first half of 2022. Inventory used $79 million more cash as all of our segments experienced supply chain constraints preventing the release of products. We continue to strategically purchase materials ahead of requirements to reduce the risk of shipment delays. Accounts receivable used $72 million more cash, as last year included a $100 million benefit from the RPA program. Additionally, customer advances generated $43 million less cash due to the work-down of defense program milestones, primarily in our Space and Defense Controls segment.

We expect cash from operations in 2023 to be $165 million, a decrease compared to 2022, primarily due to the impact of the RPA transactions in the previous year.

### Investing activities

Net cash used by investing activities in the first half of 2023 included $90 million of capital expenditures, including a $28 million building purchase, as we continue to prioritize internal investments to support core business growth. The first half of 2023 also included $20 million of proceeds from the sales of buildings and businesses.

Net cash used by investing activities in the first half of 2022 included $74 million for capital expenditures. Also, the first half of 2022 included $12 million for the acquisition of TEAM Accessories. These cash outflows were partially offset by the proceeds from the sale of a business.

We expect capital expenditures in 2023 to be $165 million, as we continue to invest in facilities and infrastructure to support future growth and operational improvements.

### Financing activities

Net cash provided by financing activities in the first half of 2023 included $122 million of net borrowings on our credit facilities. Additionally, financing activities used $17 million of cash for dividend payments and $8 million for share repurchases.

Net cash used by financing activities in the first half of 2022 included $72 million of net payments on our credit facilities. Additionally, financing activities in the first half of 2022 included $17 million of share repurchases and $16 million of cash dividends.

### General

Cash flows from our operations, together with our various financing arrangements, fund on-going activities, debt service requirements, organic growth, acquisition opportunities and the ability to return capital to shareholders. We believe these sources of funding will be sufficient to meet our cash requirements for the next 12 months and for the foreseeable future thereafter.

At April 1, 2023, our cash balances were $110 million, which includes $99 million held outside of the U.S. by foreign operations. We regularly assess our cash needs, including repatriation of foreign earnings which may be subject to regulatory approvals and withholding taxes, where applicable by law.

### Financing Arrangements

In addition to operations, our capital resources include bank credit facilities and an accounts receivable financing program to fund our short and long-term capital requirements. We continuously evaluate various forms of financing to improve our liquidity and position ourselves for future opportunities, which from time to time, may result in selling debt and equity securities to fund acquisitions or take advantage of favorable market conditions.

We are generally not required to obtain the consent of lenders of the U.S. revolving credit facility before raising significant additional debt financing; however, certain limitations and conditions may apply that would require consent to be obtained. We have demonstrated our ability to secure consents to access debt markets. We have also been successful in accessing equity markets from time to time. We believe that we will be able to obtain additional debt or equity financing as needed.

In the normal course of business, we are exposed to interest rate risk from our long-term debt. To manage these risks, we may enter into derivative instruments such as interest rate swaps which are used to adjust the proportion of total debt that is subject to variable and fixed interest rates.

Our U.S. revolving credit facility, which matures on October 27, 2027, has a capacity of $1.1 billion and also provides an expansion option, which permits us to request an increase of up to $400 million to the credit facility upon satisfaction of certain conditions. The weighted-average interest rate on the majority of the outstanding credit facility borrowings was 6.08% and is principally based on SOFR plus the applicable margin, which was 1.60% at April 1, 2023.

The U.S. revolving credit facility contains various covenants. The minimum for the interest coverage ratio, defined as the ratio of EBITDA to interest expense for the most recent four quarters, is 3.0. The maximum for the leverage ratio, defined as the ratio of net debt to EBITDA for the most recent four quarters, is 4.0. EBITDA is defined in the loan agreement as (i) the sum of net income, interest expense, income taxes, depreciation expense, amortization expense, other non-cash items reducing consolidated net income and non-cash equity-based compensation expenses minus (ii) other non-cash items increasing consolidated net income.

The SECT has a revolving credit facility with a borrowing capacity of $35 million, maturing on July 26, 2024. Interest was 6.88% as of April 1, 2023 and is based on LIBOR plus a margin of 2.13%.

We have $500 million aggregate principal amount of 4.25% senior notes due December 15, 2027 with interest paid semiannually on June 15 and December 15 of each year. The senior notes are unsecured obligations, guaranteed on a senior unsecured basis by certain subsidiaries and contain normal incurrence-based covenants and limitations such as the ability to incur additional indebtedness, pay dividends, make other restricted payments and investments, create liens and certain corporate acts such as mergers and consolidations.

Our Receivables Purchase Agreement, which matures on November 4, 2024, allows the Receivables Subsidiary to sell receivables to the Purchasers in amounts up to a $100 million limit so long as certain conditions are satisfied. The receivables are sold to the Purchasers in consideration for the Purchasers making payments of cash. Each Purchaser’s share of capital accrues yield at a variable rate plus an applicable margin, which totaled 5.76% as of April 1, 2023.

At April 1, 2023, we had $663 million of unused capacity, including $645 million from the U.S. revolving credit facility after considering standby letters of credit. Our leverage ratio covenant limits our ability to increase net debt by $591 million as of April 1, 2023.

We are in compliance with all covenants under each of our financing arrangements.

See Note 10 – Indebtedness, of Part I, Item 1, Financial Information of this report for additional details.

### Dividends and Common Stock

We believe we can create long term value for our shareholders by continuing to invest in our business through both capital expenditures as well as investments in new market opportunities. We will also continue exploring opportunities to make strategic acquisitions and return capital to shareholders.

We are currently paying quarterly cash dividends on our Class A and Class B common stock and expect to continue to do so for the foreseeable future. See the Consolidated Condensed Statement of Shareholders Equity and Cash Flows, of Part I, Item 1, Financial Information, of this report for additional details.

The Board of Directors authorized a share repurchase program that permits repurchases for both Class A and Class B common stock, and allows us to buy up to an aggregate 3 million common shares. There are approximately 2.2 million common shares remaining under this authorization. See the Consolidated Condensed Statement of Shareholders Equity and Cash Flows, of Part I, Item 1, Financial Information and Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this report for additional details.

Today, we believe we can create long term value for our shareholders by continuing to invest in our business through both capital expenditures as well as investments in new market opportunities. We will also continue exploring opportunities to make strategic acquisitions and return capital to shareholders.

### Off Balance Sheet Arrangements

We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, results of operations or cash flows.

### Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments have not changed materially from the disclosures in our Annual Report on Form 10-K for the year ended October 1, 2022. See Note 7 - Leases, Note 10 - Indebtedness, Note 15 - Employee Benefit Plans and Note 22 - Commitments and Contingencies, of Part I, Item 1, Financial Information, of this report for additional details.

### ECONOMIC CONDITIONS AND MARKET TRENDS

We operate within the aerospace and defense and industrial markets. Our businesses are facing varying levels of supply chain pressures from the residual impacts of the COVID-19 pandemic.

Our aerospace and defense businesses represented 70% of our 2022 sales. Within the defense market, our programs are directly affected by funding levels, which has recently increased. Our commercial aircraft market, which represented less than 18% of our 2022 sales, is still recovering from the initial, dramatic, reductions in air travel at the onset of the COVID-19 pandemic. While domestic travel has recovered, global international travel remains below pre-pandemic levels.

Within our industrial markets, which represented 30% of our 2022 sales, our programs benefited from increased order demand within industrial automation, simulation and test and energy markets. However, as customer demand increases, across these markets, we are now experiencing supply chain pressures.

A common factor throughout our markets is the continuing demand for technologically advanced products.

### Aerospace and Defense

Within aerospace and defense, we serve three end markets: defense, commercial aircraft and space.

The defense market is dependent on military spending for development and production programs. We have a growing development program order book for future generation aircraft and hypersonic missiles, and we strive to embed our technologies within these high-performance military programs of the future. Aircraft production programs are typically long-term in nature, offering predictable capacity needs and future revenues. We maintain positions on numerous high priority programs, including the Lockheed Martin F-35 Lightning II and V-22 Osprey. The large installed base of our products leads to attractive aftermarket sales and service opportunities. The tactical and strategic missile, missile defense and defense controls markets are dependent on many of the same market conditions as military aircraft, including overall military spending and program funding levels. At times when there are perceived threats to national security, U.S. defense spending can increase; at other times, defense spending can decrease. Future levels of defense spending have increased in the near-term given the current global tensions, and are subject to presidential and congressional approval.

The commercial OEM aircraft market has depended on a number of factors, including both the last decade's increasing global demand for air travel and increasing fuel prices. Both factors contributed to the demand for new, more fuel-efficient aircraft with lower operating costs that led to large production backlogs for Boeing and Airbus. While domestic air travel has recovered from the impact of the COVID-19 pandemic, international travel utilizing wide-body aircraft continues to be a longer recovery period. We believe Boeing and Airbus will continue to directionally match their wide-body aircraft production rates with the post-pandemic air traffic volumes, which affects our demand for our flight control systems.

The commercial aftermarket is driven by usage and the age of the existing aircraft fleet for passenger and cargo aircraft, which drives the need for maintenance and repairs. While there were initial dramatic reductions in flight hours at the onset of the COVID-19 pandemic, we have seen a recovery in the demand volume for our maintenance services and spare parts.

The space market is comprised of four customer markets: the civil market, the U.S. Department of Defense market, the commercial space market and the new space market. The civil market, namely NASA, is driven by investment for commercial and exploration activities, including NASA's return to the moon. The U.S. Department of Defense market is driven by governmental-authorized levels of defense spending, including funding for hypersonic defense technologies. Levels of U.S. defense spending could increase as there is growing emphasis on space as the next frontier of potential future conflicts. The commercial space market is comprised of large satellite customers, which traditionally sell to communications companies. Trends for this market, as well as for commercial launch vehicles, follow demand for increased capacity. This, in turn tends to track with underlying demand for increased consumption of telecommunication services, satellite replacements and global navigation needs. The new space market is driven by investments to increase the speed and access to space through smaller satellites at reduced cost.

### Industrial

Within industrial, we serve two end markets: industrial and medical.The industrial market consists of industrial automation products, simulation and test products and energy generation and exploration products. The medical market consists of medical devices and medical components products.

The industrial market we serve with our industrial automation products is influenced by several factors including capital investment levels, the pace of product innovation, economic conditions, cost-reduction efforts, technology upgrades and the subsequent effects of the COVID-19 pandemic. As our industrial market continues to recover, ongoing supply chain constraints continue to impact our operations, as will potential future economic recessions.

Our simulation and test products operate in markets that were largely affected by the same factors and investment challenges stemming from the COVID-19 pandemic. However, we have seen stronger order demand for flight simulation systems as the airline training market recovers.

Our energy generation and exploration products operate in a market that is influenced by changing oil and natural gas prices, global urbanization and the resulting change in supply and demand for global energy. Historically, drivers for global growth include investments in power generation infrastructure and exploration of new oil and gas resources. Recently, we have seen oil prices rise above pre-pandemic levels due, in part, to global disruptions; but future energy crises could increase the market's uncertainty.

The medical market we serve, in general, is influenced by economic conditions, regulatory environments, hospital and outpatient clinic spending on equipment, population demographics, medical advances, patient demands and the need for precision control components and systems. When the COVID-19 pandemic altered the way hospitals provided care by asking non-critical patients to recuperate at home, our medical devices products saw an increase in orders. This surge in demand has waned, as our customers have resized their inventory levels.

### Foreign Currencies

We are affected by the movement of foreign currencies compared to the U.S. dollar, particularly in Aircraft Controls and Industrial Systems. About one-fifth of our 2022 sales were denominated in foreign currencies. During the first six months of 2023, average foreign currency rates generally weakened against the U.S. dollar compared to 2022. The translation of the results of our foreign subsidiaries into U.S. dollars decreased sales by $26 million compared to the same period one year ago.

### Cautionary Statement

Information included or incorporated by reference in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. In evaluating these forward-looking statements, you should carefully consider the factors set forth below.

Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors and other risks and uncertainties that arise from time to time are described in Item 1A “Risk Factors” of our Annual Report on Form 10-K and in our other periodic filings with the SEC and include the following:

### STRATEGIC RISKS

- We operate in highly competitive markets with competitors who may have greater resources than we possess;
- Our research and development and innovation efforts are substantial and may not be successful, which could reduce our sales and earnings;
- If we are unable to adequately enforce and protect our intellectual property or defend against assertions of infringement, our business and our ability to compete could be harmed; and
- Our sales and earnings may be affected if we cannot identify, acquire or integrate strategic acquisitions, or as we conduct divestitures.

### MARKET CONDITION RISKS

- The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operating results to fluctuate;
- We depend heavily on government contracts that may not be fully funded or may be terminated, and the failure to receive funding or the termination of one or more of these contracts could reduce our sales and increase our costs;
- The loss of The Boeing Company or Lockheed Martin as a customer or a significant reduction in sales to either company could adversely impact our operating results; and
- We may not realize the full amounts reflected in our backlog as revenue, which could adversely affect our future revenue and growth prospects.

### OPERATIONAL RISKS

- A reduced supply, as well as inflated prices, across various raw materials and third-party provided components and sub-assemblies within our supply chain could have a material impact on our ability to manufacture and ship our products, in addition to adversely impacting our operating profit and balance sheet;
- We face various risks related to health pandemics, such as the COVID-19 pandemic, which have had material adverse consequences on our operations, financial position, cash flows, and those of our customers and suppliers;
- If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted;
- We face, and may continue to face, risks related to information systems interruptions, intrusions or new software implementations, which may adversely affect our business operations;
- We may not be able to prevent, or timely detect, issues with our products and our manufacturing processes, which may adversely affect our operations and our earnings; and
- The failure or misuse of our products may damage our reputation, necessitate a product recall or result in claims against us that exceed our insurance coverage, thereby requiring us to pay significant damages.

### FINANCIAL RISKS

- We make estimates in accounting for over-time contracts, and changes in these estimates may have significant impacts on our earnings;
- We enter into fixed-price contracts, which could subject us to losses if we have cost overruns;
- Our indebtedness and restrictive covenants under our credit facilities and indenture governing our senior notes could limit our operational and financial flexibility;
- Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could adversely affect our earnings and equity and increase our pension funding requirements;
- A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth; and
- Unforeseen exposure to additional income tax liabilities may affect our operating results.

### LEGAL AND COMPLIANCE RISKS

- Contracting on government programs is subject to significant regulation, including rules related to bidding, billing and accounting standards, and any false claims or non-compliance could subject us to fines, penalties or possible debarment;
- Our operations in foreign countries expose us to currency, political and trade risks and adverse changes in local legal and regulatory environments could impact our results of operations;
- Government regulations could limit our ability to sell our products outside the United States and otherwise adversely affect our business;
- We are involved in various legal proceedings, the outcome of which may be unfavorable to us;
- Our operations are subject to environmental laws and complying with those laws may cause us to incur significant costs; and
- We may face reputational, regulatory or financial risks from a perceived, or an actual, failure to achieve our sustainability goals.

### GENERAL RISKS

- Future terror attacks, war, natural disasters or other catastrophic events beyond our control could negatively impact our business; and
- Our performance could suffer if we cannot maintain our culture as well as attract, retain and engage our employees.

While we believe we have identified and discussed above the material risks affecting our business, there may be additional factors, risks and uncertainties not currently known to us or that we currently consider immaterial that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to update any forward-looking statement made in this report, except as required by law.

## Market risk

As filed, 226 characters.

Refer to the Company’s Annual Report on Form 10-K for the year ended October 1, 2022 for a complete discussion of our market risk. There have been no material changes in the current year regarding this market risk information.

## Controls and procedures

As filed, 1,236 characters.

(a) Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of April 1, 2023 to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control over Financial Reporting. There have been no changes during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 215 characters.

Refer to the Company’s Annual Report on Form 10-K for the year ended October 1, 2022 for a complete discussion of our risk factors. There have been no material changes in the current year regarding our risk factors.

Filed Apr 28, 2023.
Source: SEC EDGAR, the filing index for accession 0000067887-23-000060. Last ingested by Listed: Nov 12, 2026, 19:28 ET. No prices; not investment advice.