Moog Inc.: Form 10-Q for the period ended Mar 30, 2024

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 September 30, 2023. 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 and components for military aircraft, turreted weapon systems, tactical and strategic missile steering controls and various defense product components.
• Commercial aircraft market - primary and secondary flight controls and components for commercial aircraft.
• Space market - satellite avionics, positioning controls and components, launcher thrust vector controls and components, as well as integrated space vehicles.

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

• Industrial market - various components and systems used in various applications including: heavy industrial machinery used for metal forming and pressing, flight simulation motion control systems, energy exploration and generation products, material and automotive structural and fatigue testing systems, as well as for the electrification of construction vehicles.
• 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 four segments, Space and Defense, Military Aircraft, Commercial Aircraft and Industrial. 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 March 30, 2024, using the cost-to-cost method of accounting. The over-time method of revenue recognition is predominantly used in Space and Defense, Military Aircraft and Commercial Aircraft. 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 March 30, 2024, 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. 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.

Our products and technologies affect the lives of millions of people around the world. Our solutions are critical to preserving national security, ensuring safe air transportation, reducing factory emissions and enhancing patient's lives all while driving innovation. Our engineers collaboratively design and manufacture the most advanced motion control products, to the highest quality standards, for use in demanding applications. By capitalizing on these core foundational strengths, we believe we have achieved a leadership position in the high performance, precision controls market and are "Shaping The Way Our World Moves™."

By leveraging our engineering heritage and by focusing on customer intimacy to solve our customers' most demanding technical problems, we have been able to expand our control product franchise to multiple markets; organically growing from a high-performance components manufacturer to a high-performance systems designer, manufacturer and integrator. In addition, we continue to expand our content positions on our current platforms, seeking to be the 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, while focusing on talent development to strengthen our employee operational performance.

Our fundamental long-term strategies that will help us achieve our financial objectives center around pricing and simplification initiatives. Our pricing initiatives focus on receiving recognition for the value we deliver to our customers across all of our markets. Our simplification initiatives include:

• utilizing 80/20 processes to unlock and capture value,
• shaping our product and business portfolio to invest in growth areas and to divest those that no longer fit,
• rationalizing our footprint to align with current and future business levels,
• focusing our factories so that individual sites meet the unique needs of a specific market, and
• investing in automation and technologies to improve business operations.

We focus on improving shareholder value through strategic revenue growth, both organic and acquired, improving operating efficiencies and manufacturing initiatives and 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 and 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 October 20, 2023, we acquired Data Collection Limited ("DCL") based in Auckland, New Zealand for a purchase price, net of acquired cash, of $6 million. DCL specializes in manufacturing and operating pavement surveying equipment and providing innovative solutions for measuring and managing pavements. This operation is included in our Military Aircraft segment.The purchase price allocation is subject to adjustments as we obtain additional information for our estimates during the measurement period.

Divestitures

On September 30, 2022, we sold a sonar business based in the United Kingdom previously included in our Industrial 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 December 3, 2021, we sold the assets of our Navigation Aids ("NAVAIDS") business based in Salt Lake City, Utah previously included in our Military Aircraft segment to Thales USA Inc. We have cumulatively received net proceeds of $37 million and recorded a gain of $15 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)

Net sales increased across all of our segments in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023.

Gross margin increased in the second quarter of 2024 compared to the second quarter of 2023. In the second quarter of 2024, we benefited $14 million from the Employee Retention Credit associated with the CARES Act. Also, improved performance on our space vehicle development programs and the results of our simplification initiatives in Military Aircraft increased gross margin. Gross margin the first half of 2024 increased due to the same factors as the second quarter. These increases were partially offset by the absence of a favorable sales mix last year in Commercial Aircraft.

Research and development expenses in the first half of 2024 increased compared to the same period of 2023. Activity supporting our new growth programs in both Space and Defense and in Industrial increased research and development expense $11 million, and was partially offset by a $3 million reduction in Military Aircraft.

Selling, general and administrative expenses as a percentage of sales decreased in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023, reflecting the higher sales volume.

Interest expense increased in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023 due to higher debt balances, as well as higher rates on those outstanding debt balances.

As we continue to simplify our operations and product portfolios, we incurred charges for impairments and for various restructuring activities in 2024 and 2023. In the second quarter of 2024, we incurred $6 million of impairments in Military Aircraft and $8 million of restructuring and other charges in Industrial and Military Aircraft. The second quarter of 2023 included $3 million of charges for various restructuring activities and impairments across all of our segments. The first half of 2024 included the first quarter's restructuring charges from Industrial. The first half of 2023 included the gain from the sale of three buildings in Industrial, partially offset by restructuring and other charges, primarily in Industrial.

Twelve-month backlog increased in the second quarter of 2024 compared with the second quarter of 2023. Within Commercial Aircraft, we had higher orders in our aftermarket and OEM programs. In Space and Defense, we had higher orders for our new space vehicle programs, as well as across our U.S. and European defense programs. In Military Aircraft, we also had higher orders across various legacy programs as well as for the F-35 program. Partially offsetting these increases was a decline in Industrial's twelve-month backlog due to lower orders across our industrial automation and our medical device programs.

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, headcount 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.

Space and Defense

(dollars in millions)

Space and Defense net sales increased in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023 driven primarily by higher demand for defense applications.

In the second quarter of 2024, sales increased $19 million in our defense programs and $2 million in our space programs. Within our defense market, the ramp of new defense pursuits serving European needs, as well as emerging U.S. defense priorities, increased sales. We also had higher demand for our defense components products. Within our space market, higher activity for launch vehicles was partially offset by lower activity across our space vehicle programs.

The sales increases in the first half of 2024 compared to the first half of 2023 were largely due to the same factors as the second quarter. The continued strong defense application demand across most of our programs increased sales $28 million in our defense programs and $6 million in our space programs.

Operating margin increased in the second quarter and in the first half of 2024 compared to the same periods of 2023. The increases are associated with improved performance on space vehicle programs and the benefit associated with the Employee Retention Credit. Also, the benefits of our pricing initiatives and the profit associated with the higher sales volume more than offset higher research and development expense associated with activity on new growth programs.

Military Aircraft

(dollars in millions)

Military Aircraft net sales increased in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023.

In the second quarter of 2024 compared to the second quarter of 2023, military OEM sales increased $15 million and military aftermarket sales increased $5 million. The ramp-up of activity continued on the FLRAA program, which increased OEM sales compared to the second quarter of 2023. Also, higher production sales on the F-35 program was mostly offset by lower amounts of funded development program activity. In military aftermarket, sales increased due to the sale of a mature product line as part of our simplification efforts.

The sales increases in the first half of 2024 compared to the first half of 2023 were largely due to the same factors as the second quarter. Sales increased $24 million in military OEM programs and increased $5 million in military aftermarket programs.

Operating margin decreased in the second quarter of 2024 compared to the second quarter of 2023. The current quarter's impairment and restructuring charges more than offset the gain from the sale of a mature product line. Excluding $6 million of impairment charges and $4 million of restructuring charges in the second quarter of 2024, adjusted operating margin was 13.4%. Excluding $1 million of impairment charges in the second quarter of 2023, adjusted operating margin was 9.4%. The resulting growth in adjusted operating margin was due to the product line sale and, to a lesser extent, the Employee Retention Credit.

Operating margin increased in the first half of 2024 compared to the first half of 2023. In addition to the factors in the second quarter, we also benefited from increased activity on the FLRAA program as we achieved full staffing levels, and we benefited from a more favorable sales mix.

Commercial Aircraft

(dollars in millions)

Commercial Aircraft net sales increased in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023 driven by the continued market demand for our widebody and other programs.

In the second quarter of 2024 compared to the second quarter of 2023, commercial OEM sales increased $29 million and commercial aftermarket sales increased $14 million. Most of the growth in both markets is due to the growth on Boeing and Airbus widebody programs. Also, sales increased across our broader OEM and aftermarket commercial book of business, including for business jets.

The sales increases in the first half of 2024 compared to the first half of 2023 were due to the same factors as the second quarter. Sales increased $78 million in commercial OEM programs and increased $27 million in commercial aftermarket programs.

Operating margin increased in the second quarter of 2024 compared to the second quarter of 2023 due to the benefits from our pricing initiatives and due to higher volumes across our entire book of business.

Operating margin increased in the first half of 2024 compared to the first half of 2023 due largely to the same factors as the second quarter. Partially offsetting the operating margin is the absence of favorable retrofit activity from last year.

Industrial

(dollars in millions)

Industrial net sales increased in the second quarter and in the first half of 2024 compared to the second quarter and the first half of 2023.

In the second quarter of 2024 compared to the second quarter of 2023, sales increased $13 million in our simulation and test market, primarily driven by demand for flight simulation systems supporting increased pilot training demand. Sales also increased $6 million in our energy market due to higher demand for our products and the timing of shipments. Partially offsetting the increase was a $10 million decline in industrial automation sales, reflecting the slowdown in orders we have seen in recent quarters.

The sales increases in the first half of 2024 compared to the first half of 2023 were largely due to the same factors as the second quarter. Sales increased $22 million in our simulation and test market and $7 million in our energy market. Partially offsetting the increases was a $4 million decrease in our industrial automation market.

Operating margin increased in the second quarter of 2024 compared to the second quarter of 2023, as the Employee Retention Credit and the benefits from our pricing initiatives were partially offset by higher amounts of restructuring charges. Excluding $4 million of restructuring charges in the second quarter of 2024 and $1 million of restructuring and other charges in the second quarter of 2023, adjusted operating margins were 12.5% and 10.4%, respectively.

Operating margin decreased in the first half of 2024 compared to the first half of 2023 as last year included a $10 million gain related to the sales of three buildings as we consolidated operations. Excluding this gain and restructuring and other charges, adjusted operating margin in the first half of 2023 was 11.3%. Adjusted operating margin in the first half of 2024 was 12.5% after excluding $6 million of restructuring and other charges. The resulting increase in adjusted operating margin was driven by the benefits from our pricing initiatives as well as the Employee Retention Credit. These increases more than offset higher research and development expense associated with activity on new growth programs.

CONSOLIDATED SEGMENT OUTLOOK

(dollars in millions, except per share data)

2024 Outlook – We expect higher sales in 2024, driven by the continued growth in our aerospace and defense markets. However in Industrial, a slowdown of orders will reduce sales. We also expect operating margin will increase due to the continued benefits of our pricing and simplification initiatives, as well as the Employee Retention Credit. Partially offsetting the incremental profit is expected higher interest expense and a higher tax rate. Excluding the impairment and restructuring charges in the first half of 2024, we expect adjusted diluted earnings per share will range between $7.05 and $7.45, with a midpoint of $7.25. Management believes that the adjusted outlook may be useful in evaluating the financial condition and results of operations of the Company.

2024 Outlook for Space and Defense – In 2024, we expect sales growth across both of our space and defense markets, primarily driven by the increased investment in defense spending in the U.S and in Europe. We expect operating margin will increase due to improved performance in our space vehicle programs and the benefit of the Employee Retention Credit.

2024 Outlook for Military Aircraft – In 2024, we expect sales growth in our OEM programs, in particular sales for the FLRAA program. We expect operating margin will increase due to having a full year of activity on the FLRAA program, the lower amounts of charges associated with funded development contracts which are winding down and the benefit from the sale of a mature product line. Partially offsetting the increase in operating margin are the higher amounts of impairment and restructuring charges in 2024 compared to 2023.

2024 Outlook for Commercial Aircraft – In 2024, we expect sales growth from our widebody OEM and aftermarket programs as build rates continue to ramp and as airlines increase their spares demand. We expect operating margin will decrease due to an unfavorable sales mix from higher amounts of lower margin OEM sales and as the prior year's favorable retrofit sales will not repeat.

2024 Outlook for Industrial – In 2024, we expect a decrease in sales in our industrial automation market consistent with the reduction in incoming orders. We expect operating margin will increase due to the benefits of our pricing initiatives, the savings from our simplified operations and the benefit of the Employee Retention Credit.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows

(dollars in millions)

Operating activities

Net cash from operating activities increased in the first half of 2024 compared to the first half of 2023. Accounts receivable provided $28 million more of cash, primarily due to the expansion of our Receivables Purchase Agreement by $25 million. Also, net earnings provided more cash. Partially offsetting these sources of cash were unbilled receivables and inventory, which together, used $25 million more of cash, driven primarily by Commercial Aircraft's business growth.

Investing activities

Net cash used by investing activities in the first half of 2024 included $78 million of capital expenditures and $6 million associated with the acquisition of DCL.

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.

Financing activities

Net cash provided by financing activities in the first half of 2024 included $85 million of net borrowings on our credit facilities. Financing activities also included $18 million of cash dividends.

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.

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 March 30, 2024, our cash balances were $60 million, all of which was 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 6.85% and is principally based on SOFR plus the applicable margin, which was 1.60% at March 30, 2024.

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 October 26, 2025. Interest was 7.56% as of March 30, 2024 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.

At March 30, 2024, we had $679 million of unused capacity, including $646 million from the U.S. revolving credit facility after considering standby letters of credit and other limitations.

Our Receivables Purchase Agreement, which matures on December 11, 2026, allows the Receivables Subsidiary to sell receivables to the Purchasers in amounts up to a $125 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 6.38% as of March 30, 2024.

We are in compliance with all covenants under each of our financing arrangements. See Note 4 - Receivables and 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 September 30, 2023. 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 aerospace and defense businesses represented 70% of our 2023 sales. Within the defense market, our programs are directly affected by funding levels, which has recently increased. Our commercial aircraft market, which represented 20% of our 2023 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 2023 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 turret programs, and we strive to embed our technologies within these high-performance military programs of the future, including the Textron Bell FLRAA. 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. Domestic air travel has recovered from the impact of the COVID-19 pandemic, and international travel utilizing primarily widebody aircraft is close to 2019 levels. Boeing and Airbus continue to increase their widebody aircraft production rates with the post-pandemic air traffic volumes, and any adjustments to their ramp schedules affects the 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. Since there were very few new A350 and 787 entries into service during the pandemic, our sales that are generated after the warranty period were delayed. However, the recent surge in demand for spares and repairs, driven by increased fleet utilization and limited availability of new aircraft, is increasing our aftermarket activity.

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 defense-related satellite 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 driven by demand for small satellites, which offer new innovative space applications, including the support of broadband internet connectivity. Trends for this market, as well as for commercial launch vehicles, follow demand for increased capacity. Our launch vehicle and satellite components and systems, as well as our new space vehicle programs, will continue to benefit from increased investments in these markets.

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. We experienced challenges from changing demands from customers that have changed their industrial product orders.

Our simulation and test products operate in markets that were largely affected by the same factors and investment challenges as our commercial aircraft market. However, we have seen stronger order demand for flight simulation systems as the airline training market recovers in line with domestic and foreign flight hours.

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.

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. Advances in medical technology and treatments have resulted in the greater need for medical services, which drive the demand for our medical devices and components programs.

Foreign Currencies

We are affected by the movement of foreign currencies compared to the U.S. dollar, particularly in Industrial, Military Aircraft and Commercial Aircraft. About one-sixth of our 2023 sales were denominated in foreign currencies. During the first six months of 2024, average foreign currency rates generally strengthened against the U.S. dollar compared to 2023. The translation of the results of our foreign subsidiaries into U.S. dollars increased sales by $5 million compared to the same period one year ago.

Cautionary Statement

Information included or incorporated by reference in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by words such as: “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume,” “assume” and other words and terms of similar meaning (including their negative counterparts or other various or comparable terminology). These forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995, are neither historical facts nor 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.

Although it is not possible to create a comprehensive list of all factors that may cause our 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 are described in Item 1A “Risk Factors” of our Annual Report on Form 10-K and in our other periodic filings with the Securities and Exchange Commission (“SEC”) and include, but are not limited to, risks relating to: (i) our operation in highly competitive markets with competitors who may have greater resources than we possess; (ii) our operation in cyclical markets that are sensitive to domestic and foreign economic conditions and events; (iii) our heavy dependence on government contracts that may not be fully funded or may be terminated; (iv) supply chain constraints and inflationary impacts on prices for raw materials and components used in our products; (v) failure of our subcontractors or suppliers to perform their contractual obligations; and (vi) our accounting estimations for over-time contracts and any changes we need to make thereto. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

While we believe we have identified and discussed in our SEC filings 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 we make 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 applicable law.

Refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2023 for a complete discussion of our market risk. There have been no material changes in the current year regarding this market risk information.

(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 March 30, 2024 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.

Refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2023 for a complete discussion of our risk factors. There have been no material changes in the current year regarding our risk factors.