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

- Company: [Moog Inc.](/companies/mog-a.md) (CIK 67887)
- Form: 10-Q
- Filed: 2023-07-28
- Accepted by EDGAR: Jul 28, 2023, 12:26 ET
- Period: 2023-07-01
- Accession: 0000067887-23-000080
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/67887/000006788723000080/mog-20230701.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/67887/000006788723000080/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-07-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-02 to 2023-07-01 | $850.2m | us-gaap:Revenues |
| Revenue | 9 months, 2022-10-02 to 2023-07-01 | $2.45bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-04-02 to 2023-07-01 | $627.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-10-02 to 2023-07-01 | $1.80bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-02 to 2023-07-01 | $222.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-10-02 to 2023-07-01 | $647.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-02 to 2023-07-01 | $26.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-10-02 to 2023-07-01 | $77.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-04-02 to 2023-07-01 | $121.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-10-02 to 2023-07-01 | $351.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-02 to 2023-07-01 | $84.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-10-02 to 2023-07-01 | $255.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-02 to 2023-07-01 | $17.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-10-02 to 2023-07-01 | $45.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-02 to 2023-07-01 | $8.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-10-02 to 2023-07-01 | $35.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-02 to 2023-07-01 | $42.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-10-02 to 2023-07-01 | $131.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-02 to 2023-07-01 | $1.32 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-10-02 to 2023-07-01 | $4.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-02 to 2023-07-01 | $1.33 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-10-02 to 2023-07-01 | $4.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-02 to 2023-07-01 | 32,067,391 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-10-02 to 2023-07-01 | 31,995,340 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-10-02 to 2023-07-01 | −$17.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-10-02 to 2023-07-01 | $125.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-10-02 to 2023-07-01 | $25.5m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2022-10-02 to 2023-07-01 | $23.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-07-01 | $122.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-07-01 | $2.06bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-07-01 | $3.88bn | us-gaap:Assets |
| Current liabilities | at 2023-07-01 | $903.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-07-01 | $2.26bn | us-gaap:Liabilities |
| Long-term debt | at 2023-07-01 | $1.01bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-07-01 | $696.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-07-01 | $1.62bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,062 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 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, gas and steam exploration and generation components and systems as well as 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.

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 July 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 July 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, and through margin expansion driven by our simplification and pricing initiatives. 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. TEAM has been rebranded as Moog MRO Services as of July 1, 2023.

#### 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 July 1, 2023 | July 2, 2022 | $ Variance | % Variance | Nine Months Ended July 1, 2023 | July 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $850 | $773 | $77 | 10% | $2,447 | $2,268 | $179 | 8% |
| Gross margin | 26.2% | 27.4% |  |  | 26.5% | 27.2% |  |  |
| Research and development expenses | $27 | $26 | $1 | 2% | $77 | $84 | $(7) | (9%) |
| Selling, general and administrative expenses as a percentage of sales | 14.3% | 14.7% |  |  | 14.4% | 14.8% |  |  |
| Interest expense | $17 | $9 | $8 | 89% | $45 | $25 | $20 | 79% |
| Asset impairment | $— | $1 | $— | (37%) | $2 | $16 | $(14) | (90%) |
| Restructuring expense | $2 | $1 | $1 | 185% | $5 | $8 | $(4) | (43%) |
| Gain on sale of business | $— | $— | $— | —% | $— | $(16) | $16 | (100%) |
| Gain on sale of buildings | $— | $— | $— | n/a | $(10) | — | $(10) | n/a |
| Other | $5 | $2 | $3 | n/a | $10 | $3 | $7 | n/a |
| Effective tax rate | 15.8% | 15.7% |  |  | 21.3% | 21.4% |  |  |
| Net earnings | $42 | $50 | $(8) | (16%) | $131 | $126 | $6 | 4% |
| Diluted earnings per share | $1.32 | $1.57 | $(0.25) | (16%) | $4.11 | $3.91 | $0.20 | 5% |
| Twelve-month backlog |  |  |  |  | $2,300 | $2,200 | $100 | 5% |

Net sales increased across all of our segments in the third quarter and in the first three quarters of 2023 compared to the same periods of 2022. The absence of sales associated with our divested businesses in 2022 decreased sales $9 million in the third quarter and $29 million through the first three quarters of 2023. Also, weaker foreign currencies, primarily the Euro and the British Pound, relative to the U.S. Dollar, decreased sales $25 million in the first three quarters of 2023 relative to the same periods of 2022. The 2023 sales increases excluding these effects compared to the same periods of 2022 were 11% in both the third quarter and in the first three quarters.

Gross margin in the third quarter of 2023 included an additional $14 million of contract-related charges in Space and Defense Controls. Excluding these charges, gross margin in the third quarter would have increased slightly compared to the third quarter of 2022. The benefits of our pricing initiatives in Industrial Systems was mostly offset by an unfavorable sales mix within Aircraft Controls. In the first three quarters of 2023 compared to the same periods of 2022, gross margin decreased due mostly to the same factors as the third quarter.

Research and development expenses were relatively unchanged in the third quarter, but lower through the first three quarters of 2023 compared to the same periods of 2022. Predominantly through the first half of 2023, 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 third quarter and in the first three quarters of 2023 compared to the third quarter and the first three quarters of 2022, reflecting the incremental benefit of higher sales volume.

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

The third quarters of 2023 and 2022 included charges for various restructuring activities and impairments across all of our segments. Through the first three quarters of 2023, we benefited from a $10 million gain from the sale of three buildings in Industrial Systems and incurred $7 million of various restructuring and impairment charges across all of our segments. The first three quarters of 2022 included a total of $28 million from various asset impairments, restructuring expenses and inventory write-down charges across all of our segments. Also, the first quarter of 2022 included a $16 million gain from the sale of our NAVAIDS business in Aircraft Controls.

The effective tax rate in the third quarter of 2023 was relatively unchanged as compared to the third quarter of 2022. In both quarters, we benefited from favorable adjustments for tax credits associated with the prior years' tax returns.

The twelve-month backlog increased in the third quarter of 2023 compared with the third quarter of 2022. Within Aircraft Controls, we had higher orders for both commercial and military OEM programs. The twelve-month backlog also increased in Space and Defense Controls across our defense control programs as well as our space vehicle programs. Partially offsetting these increases was a decline in Industrial Systems' twelve-month backlog due to lower orders across our industrial automation programs, particularly from customers in China.

### 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 July 1, 2023 | July 2, 2022 | $ Variance | % Variance | Nine Months Ended July 1, 2023 | July 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales - military aircraft | $171 | $181 | $(10) | (6%) | $518 | $559 | $(41) | (7%) |
| Net sales - commercial aircraft | 184 | 137 | 47 | 34% | 494 | 374 | 121 | 32% |
|  | $355 | $318 | $37 | 12% | $1,012 | $933 | $80 | 9% |
| Operating profit | $38 | $34 | $3 | 10% | $99 | $89 | $11 | 12% |
| Operating margin | 10.7% | 10.8% |  |  | 9.8% | 9.5% |  |  |

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

In the third quarter of 2023, sales increased $40 million in our commercial OEM and $7 million in our commercial aftermarket programs. Within commercial OEM, sales increased $15 million across our wide-body programs and increased $6 million across our other Boeing and Airbus programs. Also, higher sales volumes for business jets and a strong order book for our Genesys programs increased sales a combined $11 million. Within commercial aftermarket, higher amounts of spares and repair volume increased sales $5 million for the A350 program.

Partially offsetting the commercial sales increases was a sales decline of $8 million in our military OEM programs. Lower volume on funded development programs and lower deliveries across our legacy programs were partially offset by higher sales for foreign military fighters.

The sales increases in the first three quarters of 2023 compared to the first three quarters of 2022 were largely due to the same factors as the third quarter. The continued recovery of the commercial market increased OEM program sales by $86 million and aftermarket sales by $34 million. Within our military programs, sales decreased across both our OEM and aftermarket programs due mostly to the same factors as the third quarter.

Operating margin was relatively unchanged in the third quarter of 2023 compared to the same period of 2022. Both periods included small amounts of impairment and restructuring charges. Our sales mix drove the margin decline as higher amounts of lower-margin commercial OEM sales were mostly offset by higher amounts of higher-margin foreign military and commercial aftermarket sales.

Operating margin increased in the first three quarters of 2023 compared to the first three quarters of 2022. Adjustments in the first three quarters of 2023 included $2 million of restructuring and impairment charges, whereas the same period of 2022 included $19 million of impairments and restructuring charges and a $16 million gain associated with a divested business. Excluding these charges, the adjusted operating margins in the first three quarters of 2023 and 2022 were 10.0% and 9.9%, respectively. The resulting slight increase in adjusted operating margin is due to incremental sales volumes and $5 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 July 1, 2023 | July 2, 2022 | $ Variance | % Variance | Nine Months Ended July 1, 2023 | July 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $242 | $224 | $19 | 8% | $706 | $655 | $51 | 8% |
| Operating profit | $19 | $25 | $(7) | (27%) | $66 | $71 | $(4) | (6%) |
| Operating margin | 7.7% | 11.3% |  |  | 9.4% | 10.8% |  |  |

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

In the third quarter of 2023, sales increased $11 million in our defense programs and $8 million in our space programs. Within our defense market, sales increased $13 million for our RIwP turret program, which achieved full-rate production in the first quarter of 2023. Within our space market, accelerated activity on satellite avionics and components programs increased sales $5 million.

The sales increases in the first three quarters of 2023 compared to the first three quarters of 2022 were largely due to the same factors as the third 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 decreased in the third quarter of 2023 compared to the third quarter of 2022. We incurred $14 million, or 500 basis points, of additional charges on our space vehicle development programs in the quarter. This was partially offset by benefits associated with higher sales and improvements in the core business.

Excluding $2 million of restructuring and impairment charges in the first three quarters of 2023, adjusted operating margin was 9.7%. Excluding $3 million of restructuring and inventory write-down charges in the first three quarters of 2022, adjusted operating margin was 11.3%. The resulting decline in adjusted operating margin is due to 300 basis points of 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 July 1, 2023 | July 2, 2022 | $ Variance | % Variance | Nine Months Ended July 1, 2023 | July 2, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $253 | $231 | $21 | 9% | $729 | $680 | $48 | 7% |
| Operating profit | $28 | $19 | $9 | 44% | $89 | $57 | $32 | 55% |
| Operating margin | 11.1% | 8.4% |  |  | 12.2% | 8.4% |  |  |

Industrial Systems' net sales increased in the third quarter and in the first three quarters of 2023 compared to the same periods of 2022, primarily due to general market recoveries. Weaker foreign currencies, primarily the Euro relative to the U.S. Dollar, decreased sales $18 million through the first three quarters of 2023. Also, sales decreased $4 million in the third quarter and $10 million in the first three quarters of 2023 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 third quarter and first three quarters of 2023 were 11% and 12%, respectively.

In the third quarter of 2023 compared to the third quarter of 2022, sales increased $13 million in our industrial automation market, driven by higher demand for industrial components and core products, and by new orders for our electrified construction vehicles. Sales also increased $11 million in our simulation and test market due to higher orders for flight simulation products.

In the first three quarters of 2023 compared to the same period of 2022, sales increased across our markets due to recovering demand. Sales increased $37 million for our industrial automation programs, $12 million in our simulation and test market and $2 million in our medical market. Additionally, sales increased $6 million in our energy market excluding the lost sales associated with our divested business.

Operating margin increased in the third quarter of 2023 compared to the third quarter of 2022 due to the benefits of our pricing initiatives. Also, we benefited from the absence of last year's higher operating costs caused by supply chain disruptions and by the pandemic, which impacted our operations in China.

Operating margin in the first three quarters of 2023 included a $10 million gain related to the sales of three buildings and $4 million of restructuring charges as we simplified our operations. Excluding the net impact of the gain and charges, adjusted operating margin in the first three quarters of 2023 was 11.4%. Adjusted operating margin in the first three quarters of 2022 was 9.1% after excluding $5 million of similar charges. The resulting increase in adjusted operating margin was driven by the same benefits as the third quarter.

### CONSOLIDATED SEGMENT OUTLOOK

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

| Net sales: | 2023 Outlook | 2022 | 2023 vs. 2022 $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Aircraft Controls | $1,355 | $1,256 | $99 | 8% |
| Space and Defense Controls | 930 | 872 | 58 | 7% |
| Industrial Systems | 965 | 907 | 58 | 6% |
|  | $3,250 | $3,036 | $214 | 7% |
| Operating profit: |  |  |  |  |
| Aircraft Controls | $145 | $124 | $22 | 17% |
| Space and Defense Controls | 96 | 87 | 9 | 11% |
| Industrial Systems | 116 | 72 | 44 | 60% |
|  | $358 | $283 | $75 | 26% |
| Operating margin: |  |  |  |  |
| Aircraft Controls | 10.7% | 9.8% |  |  |
| Space and Defense Controls | 10.3% | 10.0% |  |  |
| Industrial Systems | 12.0% | 8.0% |  |  |
|  | 11.0% | 9.3% |  |  |
| Net earnings | $186 | $155 |  |  |
| Diluted earnings per share | $5.82 | $4.83 |  |  |

***Total Company –*** We expect higher sales in 2023, driven by the continued recoveries in commercial aircraft and in 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 three quarters of 2023, we expect our sales growth to be 9%. We expect operating margin will increase due to the benefits of our initiatives and 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 10.9%, 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 $5.65 and $5.85, with a midpoint of $5.75. 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 both of our military OEM and aftermarket programs. We expect operating margin in 2023 will increase due to the benefits of our pricing initiatives and due to improved factory utilization from the higher sales volume.

***Space and Defense Controls –*** In 2023, we anticipate sales increases in our space programs from the higher activity on our satellite programs and for our integrated space vehicle 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 turret program. We expect operating margin will increase slightly in 2023. The benefits of the incremental margin from higher sales volume and from the absence of charges from our security business sale will be mostly offset by the charges associated with our space vehicle programs in the first three quarters of 2023. Excluding the restructuring and impairment charges, adjusted operating margin will decrease slightly.

***Industrial Systems –*** In 2023, we anticipate sales increases across our markets due to recovering demand for our products. 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 benefits of our pricing and simplification activities.

### LIQUIDITY AND CAPITAL RESOURCES

### Consolidated Statement of Cash Flows

*(dollars in millions)*

| Net cash provided (used) by: | Nine Months Ended July 1, 2023 | July 2, 2022 | $ Variance |
| --- | ---: | ---: | ---: |
| Operating activities | $(17) | $184 | $(201) |
| Investing activities | (114) | (85) | (29) |
| Financing activities | 133 | (98) | 231 |

### Operating activities

Net cash was used by operating activities in the first three quarters of 2023 compared to providing cash in the first three quarters of 2022. Accounts receivable used $105 million more of cash, as last year included a $100 million benefit from the RPA program. Also, inventory used $96 million more of cash as all of our segments continue to work through supply chain challenges, staffing shortages and production inefficiencies preventing the release of products. We continue to maintain material flow to reduce the risk of shipment delays.

We expect cash from operations in 2023 to be $105 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 three quarters of 2023 included $125 million of capital expenditures, including a $28 million building purchase, as we continue to prioritize internal investments to support core business growth. The first three quarters of 2023 also included $21 million of proceeds from the sales of buildings and businesses.

Net cash used by investing activities in the first three quarters of 2022 included $107 million for capital expenditures, as we increased investments in facilities to support growth. Also, the first three quarters of 2022 included $12 million for the acquisition of TEAM Accessories. These cash outflows were partially offset by the proceeds from the sale of the NAVAIDS 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 three quarters of 2023 included $175 million of net borrowings on our credit facilities. Partially offsetting the borrowings was the use of $25 million cash for dividend payments.

Net cash used by financing activities in the first three quarters of 2022 included $48 million of net payments on our credit facilities. Additionally, financing activities in the first three quarters of 2022 included $25 million of cash dividends and $21 million of share repurchases.

### 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 July 1, 2023, our cash balances were $125 million, which includes $113 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 outstanding credit facility borrowings was 6.72% and is based on SOFR plus the applicable margin, which was 1.60% at July 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 7.36% as of July 1, 2023 and is based on SOFR plus a margin of 2.23%.

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 6.22% as of July 1, 2023.

At July 1, 2023, we had $573 million of unused capacity, including $557 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 $510 million as of July 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 aligning with our customers' growing demand. While domestic travel has recovered, global international travel remains slightly 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.

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 including the Textron Bell V-280 Valor. 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. 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 is close to 2019 levels. 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. We have seen a recovery in the demand volume for our maintenance services and spare parts after the COVID-19 pandemic.

The space market is comprised of three customer markets: the civil market, the U.S. Department of Defense market and the commercial 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.

### 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 nine 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 $25 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, 1,235 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 July 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 Jul 28, 2023.
Source: SEC EDGAR, the filing index for accession 0000067887-23-000080. Last ingested by Listed: Nov 4, 2026, 09:57 ET. No prices; not investment advice.