MOOG INC. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended October 1, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _________ to _________
Commission file number 1-05129
MOOG Inc.
(Exact name of registrant as specified in its charter)
| New York | 16-0757636 | |||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 400 Jamison Road | East Aurora, | New York | 14052-0018 | |||||||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
(716) 652-2000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A common stock | MOG.A | New York Stock Exchange | ||||||
| Class B common stock | MOG.B | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the common stock on the New York Stock Exchange on April 1, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2,679 million.
The number of shares outstanding of each class of common stock as of November 7, 2022 was:
Class A common stock, 28,711,352 shares
Class B common stock, 3,018,196 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Moog Inc.'s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates (the "2022 Proxy Statement") are incorporated by reference into Part III of this Form 10-K.
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FORM 10-K INDEX
PART I | ||||||||
PART II | ||||||||
PART III | ||||||||
PART IV | ||||||||
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PART I
The Registrant, Moog Inc., a New York corporation formed in 1951, is referred to in this report as “Moog” or the "Company" or in the nominative “we” or the possessive “our.”
Unless otherwise noted or the context otherwise requires, all references to years in this report are to fiscal years.
Item 1. | Business. | |||||||
Description of the Business. Moog is a worldwide designer, manufacturer and systems integrator of high performance precision motion and fluid controls and controls systems for a broad range of applications in aerospace and defense and industrial markets. We have three operating segments: Aircraft Controls, Space and Defense Controls and Industrial Systems.
Additional information describing the business and comparative segment revenues, operating profits and related financial information for 2022, 2021 and 2020 are provided in Note 21 - Segments, of Item 8, Financial Statements and Supplementary Data, of this report.
Distribution. Our sales and marketing organization consists of individuals possessing highly specialized technical expertise. This expertise is required in order to effectively evaluate a customer’s precision control requirements and to facilitate communication between the customer and our engineering staff. Our sales staff is the primary contact with customers. Manufacturers’ representatives are used to cover certain domestic aerospace markets. Distributors are used selectively to cover certain industrial and medical markets.
Industry and Competitive Conditions. We experience considerable competition in our aerospace and defense and industrial markets. We believe that the principal points of competition in our markets are product quality, reliability, price, design and engineering capabilities, product development, conformity to customer specifications, timeliness of delivery, effectiveness of the distribution organization and quality of support after the sale. We believe we compete effectively on all of these bases. Competitors in our three operating segments include:
•Aircraft Controls: Curtiss-Wright, Liebherr, Nabtesco, Parker-Hannifin, Raytheon Technologies and Woodward.
•Space and Defense Controls: Aerojet Rocketdyne, Airbus, Altra Industrial Motion Corp, Beyond Gravity, Cobham, Curtiss-Wright, Eaton, Elbit Systems LTD, EOS Defense Systems USA, Inc., Everaxis, General Atomics, General Dynamics, Glenair, Honeywell, John Cockerill Group, Kongsberg, Mottrol, Rafael Advanced Defense Systems, Raytheon Technologies, Schleifring, SEAKR, VACCO, Vincorion, Wittenstein Group and Woodward.
•Industrial Systems: Allied Motion, Baumüller, Atos S.p.A, Bosch Rexroth, Cardinal Health, Eaton, ebm-papst, Eitan Medical LTD, ICU Medical, Inc., MTS Systems, Nidec, Parker-Hannifin, Schleifring, Shinano Kenshi, Wittenstein Group and Woodward.
Government Contracts. All United States ("U.S.") Government contracts are subject to termination by the U.S. Government. In 2022, sales under U.S. Government contracts represented 42% of total sales and were primarily within our Aircraft Controls and Space and Defense Controls segments.
Backlog. Our twelve-month backlog represents confirmed orders we believe will be recognized as revenue within the next twelve months. As noted in Item 6, Selected Financial Data of this report, as of October 1, 2022, our twelve-month backlog was $2.3 billion, an increase of 10% compared to October 2, 2021. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report for a discussion on the various business drivers and conditions contributing to the twelve-month backlog change.
Raw Materials. Materials, supplies and components are purchased from numerous suppliers. We believe the loss of any one supplier, although potentially disruptive in the short-term, would not materially affect our operations in the long-term.
Working Capital. See the discussion on operating cycle in Note 1 - Summary of Significant Accounting Policies, of Item 8, Financial Statements and Supplementary Data, of this report.
Seasonality. Our business is generally not seasonal; however, certain products and systems, such as those in the energy market of our Industrial Systems segment, do experience seasonal variations in sales levels.
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Patents. We maintain a patent portfolio of issued or pending patents and patent applications worldwide that generally includes the U.S., Europe, China, Japan and India. The portfolio includes patents that relate to electrohydraulic, electromechanical, electronics, hydraulics, components and methods of operation and manufacture as related to motion control and actuation systems. The portfolio also includes patents related to wind turbines, robotics, vibration control and medical devices. We do not consider any one or more of these patents or patent applications to be material in relation to our business as a whole. The patent portfolio related to certain medical devices is significant to our position in this market as several of these products work exclusively together, and provide us future revenue opportunities.
Research Activities. Research and development activity has been, and continues to be, significant for us. Research and development expense was at least $110 million in each of the last three years and represented approximately 4% of sales in 2022.
Human Capital Resources. Moog possesses a unique culture that fuels our business success. Our nearly 14,000 employees across over 20 countries work closely together, driven by a shared sense of purpose and a desire to do the right thing. We value our ground-breaking, challenging work and what we stand for. We value the skill and commitment of our talented workforce above all else. Whether it’s enabling a Mars Rover to land safely or helping to support breakthrough advances in healthcare, together, we solve our customers’ most difficult challenges.
Although we are a successful, global business, our employees feel like they are amongst friends and are comfortable being themselves. We empower them to find innovative ways of accomplishing things, and the scale of our business means that careers can develop in exciting and unexpected directions. For prospective employees looking for inspiring and meaningful work in a warm, respectful, family-like environment, Moog will feel like home.
In order to ensure we live our values and our culture stays unique and strong, our Board of Directors and executive team put significant focus on our human capital resources. These are some of the key aspects of Moog’s human capital strategy:
Employee Recruitment
Moog actively seeks to attract the best talent from a diverse range of sources and industries in order to meet the current and future demands of our business. We have established relationships with trade schools, world-class universities, professional associations, and industry groups to proactively attract talent.
In 2022, we hired 1,792 new regular employees throughout the world.
Diversity, Equity and Inclusion
Moog aspires to be diverse, equitable, and inclusive, where employees are empowered to bring their whole, authentic selves to work every day. We believe being diverse, equitable and inclusive is better for all of our employees, customers and shareholders.
During 2022, we continued to make progress toward our Diversity, Equity and Inclusion ("DE&I") strategy. In support of this strategy, we:
•Grew our DE&I curriculum to continue to help our employees understand the value of inclusivity, the very different experiences people have, and the role we all must play in creating an inclusive and welcoming environment at Moog.
•Honored employees from different backgrounds and helped increase understanding through a variety of monthly celebrations, including, but not limited, to Black History Month, International Women’s Day, and Pride Month.
•Expanded our pilot of Employee Resource Groups ("ERGs") to include Veterans and LGBTQ+. Our ERGs are voluntary, employee-led, corporate-supported groups that are organized primarily around a defined characteristic, special interest, or life experience. We currently have five ERG chapters focused on Employees of Color, Women (2 chapters), Veterans and LGBTQ+.
At Moog, we are continuously striving to ensure the diversity of our organization more fully represents the diversity of the communities in which we operate.
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Compensation and Benefits
Moog works to maintain compensation, benefits and rewards programs that enable us to attract, retain, motivate, and reward employees for their contributions to company performance. Our compensation and rewards programs are linked closely to our values of We Are All In This Together, We Try Harder, Competence Is King and Performance And Commitment Should Be Rewarded.
Moog is committed to providing comprehensive benefit options that reflect the differing priorities and needs of our sites globally, governed by an intent to offer plans that will allow our employees and their families to live healthier and more secure lives.
In addition to traditional employee benefits, Moog has a number of innovative initiatives to support the well-being of our employee base, including onsite wellness clinics at a number of locations, online tools that assist employees with their physical and mental health, special events with outside vendors and participants focusing on employee well-being and much more.
Health and Safety
Maintaining a safe and healthy work environment is a key priority and a responsibility for all of our employees. At Moog, we embrace a continuous improvement approach with regard to our global Environment, Health & Safety ("EHS") culture. All Moog businesses strive to operate in a responsible manner that demonstrates our commitment to the health and safety of our employees, customers, suppliers, communities and the environment. Our commitment will not be compromised. We expect our employees, visitors and service providers to follow our EHS standards and practices. We regularly conduct training for all of our employees and work hard to learn lessons from every incident. Additionally, we measure and review our EHS results continuously in each location.
Employee Engagement and Retention
Moog is deeply committed to continuously evolving into an even better place to work. We're built on a strong foundation of mutual trust and the premise that we must engage with employees at different levels to empower our people, enable progress and align efforts.
Moog employs a variety of mechanisms to collect and respond to feedback from our employees. We conduct a regular employee engagement survey. We also leverage focus groups and listening sessions to solicit feedback. In response to employee feedback and in acknowledgment of the changing landscape brought about by the global pandemic, Moog has been piloting a variety of flexible working arrangements, including remote work and hybrid working schedules. We are implementing these changes in a way that allows our employees to collaborate and innovate in the Moog Way that has made us so successful to date.
We see our positive employee engagement coming through in high levels of employee retention. For the last four years, the average of voluntary attrition has been just below 8% of our workforce. That is a competitive attrition figure and a testament to Moog being a great place to work.
Leadership Development and Training
At Moog, we believe that the best leaders are the ones who come from within. These leaders learn with us, grow with us, and reach their potential through challenging job and deliberate learning experiences we provide. Moog's leadership development strategy is to aid in the growth of its leaders at the various stages of leadership. At the foundation of these stages is our Moog Values, Moog Leadership Qualities and our Business Strategy and Processes.
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Moog has carefully designed two leadership development programs to improve the effectiveness of our managers. Our Moog Leadership Program is a two-year program designed to expand, develop, support, and sustain high potential leadership throughout the Company. Our Emerging Leadership Program is a nine-month global, cross-group leadership development program. The goal of this program is to accelerate the development of a pool of global, cross-group top talent in order to help meet the demand for important leadership roles throughout our Company. For their specific leadership needs, the operating groups have leadership programs for those emerging leaders as well, the Aircraft Group Leadership Development Program, the Space and Defense Launch Leadership Development Program and the Industrial Group Leadership Pathway. The goal of these programs is to accelerate the development of our talent in order to meet the demands for important leadership roles within the operating groups. Finally, to establish the foundations of leadership, we have our Leading and Coaching People program, which is a two-day course open to all leaders that provides the foundational framework for engaging, empowering, and coaching employees for optimal performance.
In addition to our leadership development programs, Moog has many other valuable development resources available for employees in order to ensure our people have everything they need to succeed both personally and professionally. These resources include a Global Mentoring Program and a Moog Leadership Qualities Library to help give our leaders guidance and support. Moog facilitates these training opportunities and programs through state-of-the-art learning and talent management systems. Our employees are encouraged to take responsibility for their own development and create learning plans that fit their needs and development goals best.
Succession Planning
Each year Moog conducts an extensive talent review across our global enterprise that includes, among other important topics, a review of succession plans for many of our roles. To ensure the long-term continuity of our business, we actively manage the development of talent to fill the roles that are most critical to the on-going success of our Company.
Corporate Social and Environmental Responsibility
Our values, rooted in trust, integrity, and collaboration, lay the foundation for Moog's commitment to grow as a sustainable corporation. As a developer of advanced motion control products, we believe in momentum and our shared responsibility to protect people and the planet now and for generations to come. At Moog, we are committed to:
•Protecting our planet by minimizing our environmental impact.
•Striving to contribute our time, talent, and resources to strengthen the communities where we do business.
•Engaging in ethical practices.
We are committed to a more inclusive, equitable world which is reflected in our corporate culture, work environment, supply chain and community support around the globe.
Currently, we are assessing our environmental, social and governance impact in all of our locations across 25 countries. Among other areas, we are evaluating our direct and indirect greenhouse emissions, how we operate and our effect on stakeholders. This latest available data will help us establish a baseline and set ambitious sustainability goals across the business. See our First Sustainability Report at https://www.moog.com/sustainability.html. The content of the Sustainability Report and the Company's website are not, and should not, be deemed to be incorporated by reference in this Form 10-K or otherwise filed with the Securities and Exchange Commission ("SEC").
We're all in this together. Moog and its employees live this mantra with countless initiatives focused on supporting our sustainability strategy and communities. Some recent examples of Moog’s “responsibility in action” include:
•Environmental Innovation: Bobcat contacted Moog's innovation team to design components for an all-electric compact loader prototype. The concept vehicle is proving that electric solutions can replace traditional hydraulics and diesel power on some construction vehicle models.
•Our Wolverhampton, United Kingdom ("UK") site has transitioned 90% of its electric lighting to LED bulbs; in doing so, the site will save over 13,000 kWh each year.
•Our U.S. and UK organizations piloted a “direct giving program” that allows our employees to contribute funds and volunteer time to local charities that are meaningful to them.
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Business Ethics
Moog is fully dedicated to conducting ourselves by the letter and in the spirit of the many laws and standards that apply to our business. Ethics are deeply embedded in our values and business processes. We regularly re-enforce our commitment to ethics and integrity in employee communications, in our everyday actions and in processes and controls. As a part of our on-going efforts to ensure our employees conduct business with the highest levels of ethics and integrity, Moog has compliance training programs in multiple languages. We also maintain two ethics related hotlines, through which individuals can anonymously raise concerns they have about business behavior they do not feel comfortable discussing personally with business operations managers or human resources personnel. The Company's general confidential ethics hotline is administered by internal company counsel designated as Moog's ethics advocate. In addition, we maintain a separate hotline for cases wherein an employee believes that the Company's financial statements are materially misstated as a result of intentional acts or material weaknesses in the systems of internal control. This hotline is administered by the Company's corporate Secretary.
Customers. Our principal customers are Original Equipment Manufacturers ("OEMs"), and end users for whom we provide aftermarket support. Aerospace and defense OEM customers collectively represented 58% of 2022 sales. The majority of these sales are to a small number of large companies. Due to the long-term nature of many of the programs, many of our relationships with aerospace and defense OEM customers are based on long-term agreements. Our industrial OEM sales, which represented 30% of 2022 sales, are to a wide range of global customers and are normally based on lead times of 90 days or less. We also provide aftermarket support, consisting of spare and replacement parts and repair and overhaul services, for all of our products. Our major aftermarket customers are the U.S. Government and commercial airlines. In 2022, aftermarket sales accounted for 12% of total sales.
Significant customers in our three operating segments include:
•Aircraft Controls: Boeing, Lockheed Martin, Airbus, Northrup Grumman, Raytheon Technologies, Japan Aerospace, General Dynamics, Honeywell, Bell Helicopter, Bombardier Aerospace and the U.S. Government.
•Space and Defense Controls: Lockheed Martin, DRS Sustainment Systems, Northrup Grumman, L3 Harris Technologies, Raytheon Technologies, Boeing, Aerojet Rocketdyne, General Dynamics, United Launch Alliance, Honeywell and the U.S. Government.
•Industrial Systems: CAE, Philips Healthcare, TurboChef Technologies, MacArtney, Flight Safety, Husky Energy, Mitsubishi Hitachi Power Systems, Oceaneering, Nutricia and Arburg.
International Operations. Our operations outside the United States are conducted primarily through wholly-owned foreign subsidiaries and are located predominantly in Europe and the Asia-Pacific region. See Note 21 - Segments, of Item 8, Financial Statements and Supplementary Data of this report for information regarding sales by geographic area and Exhibit 21 of Item 15, Exhibits and Financial Statement Schedules of this report for a list of subsidiaries. Our international operations are subject to the usual risks inherent in international trade, including currency fluctuations, local government contracting regulations, local governmental restrictions on foreign investment and repatriation of profits, exchange controls, regulation of the import and distribution of foreign goods, as well as changing economic and social conditions in countries in which our operations are conducted.
Environmental Matters. See the discussion in Note 23 - Commitments and Contingencies, of Item 8, Financial Statements and Supplementary Data, of this report.
Website Access to Information. Our internet address is www.moog.com. The information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the SEC. We make our annual reports on Form 10‑K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports, available on the investor relations portion of our website. The reports are free of charge and are available as soon as reasonably practicable after they are filed with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Moog.
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Information about our Executive Officers. Other than the changes noted below, the principal occupations of our executive officers for the past five years have been their employment with us in the same positions they currently hold.
On December 1, 2021, Patrick Roche was named Executive Vice President and Chief Operating Officer. Previously, he was Group Vice President and President, Industrial Group, positions he held since 2012.
On December 1, 2021, Stuart Mclachlan was named Vice President and President, Industrial Group. Previously, he was Group Vice President and Chief Business Officer to the Aircraft Group, a position he held since 2019. Prior to that, he was the Group Vice President for Aircraft Control Components.
On January 2, 2020, Jennifer Walter was named Chief Financial Officer. Previously, she was Vice President - Finance, a position she held since January 5, 2018. Prior to that she was Controller and Principal Accounting Officer, a position she held since 2008.
On December 1, 2017, Paul Wilkinson was named Vice President and Chief Human Resources Officer. Previously, he was a Group Vice President and Global Human Resources Director, Aircraft Group.
Executive Officers | Age | Year First Elected Officer | ||||||||||||
John R. Scannell | ||||||||||||||
Director; Chairman of the Board; Chief Executive Officer | 59 | 2006 | ||||||||||||
Patrick J. Roche | ||||||||||||||
Executive Vice President; Chief Operating Officer | 59 | 2012 | ||||||||||||
Jennifer Walter | ||||||||||||||
Vice President; Chief Financial Officer | 51 | 2008 | ||||||||||||
Maureen M. Athoe | ||||||||||||||
Vice President | 64 | 2015 | ||||||||||||
Stuart Mclachlan | ||||||||||||||
Vice President | 51 | 2022 | ||||||||||||
Mark J. Trabert | ||||||||||||||
Vice President | 63 | 2015 | ||||||||||||
Paul Wilkinson | ||||||||||||||
Vice President | 42 | 2017 | ||||||||||||
Disclosure Regarding Forward-Looking Statements
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 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. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” New factors, risks and uncertainties may emerge from time to time 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. We disclaim any obligation to update the forward-looking statements made in this report, except as required by law.
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Item 1A. | Risk Factors. | |||||||
Our business, financial condition and results of operations face many risks, many of which are not exclusively within our control. The known, material risks to our business summarized below should be carefully considered together with all of the other information included in this report, including the financial statements and related notes. Any of the risks discussed below, elsewhere in this report or in our other SEC filings could have a material impact on our business, financial condition or results of operations. Although the risks summarized below are organized by heading, and each risk is summarized separately, many of the risks are interrelated. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties not currently known to us or that we currently consider immaterial that may materially adversely affect our business, financial condition or results of operations in the future and may require significant management time and attention.
STRATEGIC RISKS
We operate in highly competitive markets with competitors who may have greater resources than we possess. Many of our products are sold in highly competitive markets. Some of our competitors, especially in our industrial markets and medical markets, are larger, more diversified and have greater financial, marketing, production and research and development resources. Within the aerospace and defense industries, suppliers have consolidated to widen their product offerings and to secure long-term sole-source positions. As a result, these competitors may be better able to withstand the effects of periodic economic downturns, including withstanding the COVID-19 pandemic. In addition, our competitors' wins could increase their market share, which would reduce the total number of viable suppliers. Our sales and operating margins will be negatively impacted if our competitors:
•develop products that are superior to our products,
•develop products of comparable quality and performance that are more competitively priced than our products,
•develop more efficient and effective manufacturing methods for their products and services, or
•adapt more quickly than we do to technological innovations or evolving customer requirements.
We believe that the principal points of competition in our markets are product quality, reliability, design and engineering capabilities, price, innovation, conformity to customers' specifications, timeliness of delivery, effectiveness of the distribution organization and quality of support after the sale. Maintaining or improving our competitive position requires continued investment in manufacturing, engineering, quality standards, marketing, customer service and support and our distribution networks. If we do not maintain sufficient resources to make these investments, are not successful in meeting our quality or delivery standards or are not successful in maintaining our competitive position, we could face pricing pressures or loss in market share, causing our operations and financial performance to suffer.
Our research and development and innovation efforts are substantial and may not be successful, which could reduce our sales and earnings. Our products and technological capabilities have undergone, and in the future may undergo, significant changes. In order to maintain a leadership position in the high-performance, precision controls market in the future, we have incurred, and we expect to continue to incur, expenses associated with research and development and innovation activities during the introduction of new products. Our technology has been developed through customer-funded and internally-funded research and development investments, as well as through business acquisitions. If we fail to predict customers' preferences or fail to provide viable technological solutions, we may experience inefficiencies that could delay or prevent the acceptance of new products or product innovations. Also, incurred research and development expenses may exceed our cost estimates and the new products we develop may not generate sales sufficient to offset our investments. Additionally, our competitors may develop technologies or products that have more competitive advantages than ours and render our technology noncompetitive or obsolete.
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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. Protecting our intellectual property is critical in order to maintain a competitive advantage. We therefore rely on internally developed and acquired patents, trademarks, copyrights, trade secrets, proprietary know-how to establish and protect our technologies and products. However, these measures afford only limited protection, and our patent rights and other intellectual property protections have been in the past, and may be in the future, infringed, misappropriated, misrepresented, copied without authorization, circumvented or invalidated in the U.S. or in foreign countries that do not offer the same level of intellectual property protections. Also, as our patents and other intellectual property protections expire, we may face increased competition. Additionally, we cannot be assured that our existing or planned products do not, or will not, infringe on the intellectual property rights of others or that others will not claim such infringement. When others infringe on our intellectual property rights, the value of our products is diminished, and we may incur substantial litigation costs to enforce our rights. Litigation could also divert management's focus and resources away from operations. If we are unable to adequately enforce and protect our intellectual property or defend against assertions of infringement, we could face reputational harm and our inability to defend against these scenarios could have an adverse effect on our competitive position, our business operations and financial condition.
Our sales and earnings may be affected if we cannot identify, acquire or integrate strategic acquisitions, or as we conduct divestitures. Acquisitions are an element of our growth strategy as we opportunistically make investments in our businesses. Our historical growth has depended, and our future growth is likely to depend, in part, on our ability to successfully identify, acquire and integrate acquired businesses. We intend to seek additional acquisition opportunities throughout the world, both to expand into new markets and to enhance our position in existing markets. Growth by acquisition involves risk that could adversely affect our financial condition and operating results. We may not know the potential exposure to unanticipated liabilities. Additionally, the expected benefits or synergies might not be fully realized, integrating operations and personnel may be slowed and key employees, suppliers or customers of the acquired business may depart. As a result of our ongoing operational assessment, we may continue to divest assets or businesses if we deem the operations as non-strategic or no longer support the level of customer demand. Also, divestitures could adversely affect our profitability and, under certain circumstances, require us to record impairment charges or losses as a result of a transaction. In pursuing acquisition opportunities, integrating acquired businesses or divesting business operations, management's time and attention may be diverted from our core business, while consuming resources and incurring expenses for these activities.
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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. The markets we serve are sensitive to fluctuations in general business cycles, global pandemics, domestic and foreign governmental tariffs, trade and monetary policies and economic conditions and events, and are facing varying levels of pressure from the COVID-19 pandemic. The COVID-19 pandemic drastically reduced air traffic as travel restrictions and social distancing measures were implemented to help control the spread of the virus. While U.S. domestic air travel has recovered, international travel utilizing wide-body aircraft will take longer to fully recover. Furthermore, as companies and employees become accustomed to working remotely, business travel and the associated flight hours may not reach the pre-pandemic levels. As such, we believe The Boeing Company, or Boeing, and Airbus may continue to directionally match their wide-body aircraft production rates with the reduced, albeit recovering, air traffic volume, which has lowered their demand for our flight control systems. Other factors influencing our business, including our defense and our space programs, are largely contingent on U.S. Department of Defense investment funding, which can fluctuate. Our industrial product demand depends upon several factors including levels of capital investment, the pace of product innovations and technology upgrades, changing economic conditions and the current and forecasted price of oil and natural gas. If the COVID-19 pandemic and related economic uncertainties deteriorate, our operations could be negatively impacted through declines in our sales, profitability and cash flows as a result of lower orders, payment delays and price pressures for our products.
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. Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our business. In 2022, sales under U.S. Government contracts represented 42% of our total sales, primarily within Aircraft Controls and Space and Defense Controls. Sales to foreign governments represented 8% of our total sales. Funding for government programs can be structured into a series of individual contracts and depend on cyclical annual congressional appropriations. 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 are uncertain and subject to congressional debate and spending prioritization. Any reduction in future Department of Defense spending levels could adversely impact our sales, operating profit and our cash flow. We have resources applied to specific government contracts and if any of those contracts are rescheduled or terminated, we may incur substantial costs redeploying those resources.
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. We provide Boeing with controls for both military and commercial applications, as well as controls for space and defense applications, which totaled 11% of our 2022 sales. We provide Lockheed Martin similar products for military, space and defense applications, which totaled 9% of our 2022 sales. Sales to Boeing's commercial airplane group are generally made under long-term supply agreements. Boeing operates in a competitive environment and continues to evaluate the size, scope and cost of their supplier base. Also, Boeing continues to match their commercial production rates to the resized global air traffic volume due to the residual impacts of the COVID-19 pandemic. As a portion of our sales to Boeing and Lockheed Martin is tied to varying levels of government defense spending, a reduction in future Department of Defense spending levels could adversely impact our sales, operating profit and cash flow. Furthermore, a loss of Boeing or Lockheed Martin as a customer could reduce our sales and earnings.
We may not realize the full amounts reflected in our backlog as revenue, which could adversely affect our future revenue and growth prospects. As of October 1, 2022, our total backlog was $5.2 billion, which represents confirmed orders we believe will be recognized as revenue. There is no assurance that our customers will purchase all the orders represented in our backlog. A significant portion of our backlog relates to commercial aircraft programs. We believe Boeing and Airbus will continue to directionally match their wide-body aircraft production rates with the resized international air traffic volume in response to the COVID-19 impacts, which have lowered their demand for our flight control systems and may cause us to never realize the full amounts included in our commercial backlog. Also, given the uncertain nature of our contracts with the U.S. Government and other foreign governments, in part due to governments' abilities to modify, curtail or terminate major programs, we may not realize the full revenue value of the orders included in our backlog. If this occurs, our future revenue and growth prospects may be adversely affected.
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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. Constraints in our supply chain, due both to worldwide demand for electronics and components across several end markets and the continued impacts of the COVID-19 pandemic, has affected our business. We are occasionally experiencing shortages and delays in materials and components necessary in our manufacturing processes, preventing us from completing and shipping our final products on time. As a result of these interruptions and long lead times that we expect to continue, we are selectively purchasing, in advance, certain raw materials and third-party provided components and sub-assemblies that we are concerned might otherwise be delayed. Additionally, the prices for materials and components used in our products has increased, adding additional pressures to our operating margins. We may be unable to raise our prices for our products equal to the rate of inflation, and if our constrained supply chain continues, our operating profit and balance sheet may be negatively impacted.
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. The spread of the COVID-19 pandemic, and the associated pandemic-related responses, disrupted businesses on a global scale, led to significant volatility in financial markets and affected the aviation and industrial industries. As a result, we experienced, and may continue to experience, lower levels of customer demand for our products, particularly in our commercial aircraft market. To-date, substantially all of our operations and production activities have remained operational. However, the impacts of the pandemic have placed labor and supply chain pressures on our business and we have been impacted by localized lockdowns. While our backlog continues to grow across our end markets as economic activity recovers, ongoing COVID-19 disruptions continue to challenge our business. We will continue to monitor the situation, assessing further possible implications on our operations, labor force, supply chain, liquidity, cash flow and customer orders, and will continue taking actions in an effort to mitigate adverse consequences.
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. With respect to many of our contracts, we rely on other companies to perform portions of the manufacturing process of our products. While we actively manage our supply chain establishing alternate sources, some business conditions cause us to obtain certain components and sub-assemblies from a single supplier or a limited group of suppliers. There are risks that we may have disputes with our subcontractors regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract or our hiring of personnel of a subcontractor. Failure by our sole-sourced or group of subcontractors to satisfactorily provide on a timely basis the agreed-upon, defect-free supplies, or perform the agreed-upon services, may materially and adversely impact our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer terminating our contract for default, which could expose us to liability and substantially impair our ability to compete for future orders.
We face, and may continue to face risks related to information systems interruptions, intrusions and or new software implementations, which may adversely affect our business operations. We rely extensively on various information technologies throughout our company supporting nearly every business activity. In doing so, we work with sensitive data types including proprietary business information, intellectual property and confidential employee data. Handling and storage of this data, either onsite or managed by authorized third parties, may be subject to privacy, security, or other regulatory requirements. Business operations face risks, and may continue to face risks, due to information system errors, equipment failures, or ever-evolving cyber-attacks. Unauthorized access or tampering via cybersecurity incidents may result in potential data corruption, exposure of proprietary or confidential information and work stoppages. Our vulnerability to cybersecurity risks may have also increased after adopting a hybrid working policy in response to the COVID-19 pandemic, empowering employees to work productively outside of the office when appropriate. Additionally, we have and expect to incur additional costs to comply with our customers' increased cybersecurity protections and standards, including those of the U.S. Government. We have embarked on multi-year business information system transformation and standardization projects. These endeavors are complex and company-wide, involving new technologies and may introduce risk to our cybersecurity infrastructure. While we are investing significant resources throughout the planning, project managing and deployment processes, unanticipated delays could occur and could adversely affect our financial results. Any of these cybersecurity issues may cause operational stoppages, increased operational costs, fines, penalties and diminished competitive advantages through reputational damages.
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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. We must continuously improve product development and manufacturing processes and systems to ensure we deliver high-quality, technically advanced products. Due to growth in operations, there is a risk our current manufacturing processes and systems are unable to maintain our high-quality and on-time delivery standards for our customers. If we are unable to maintain these standards, we could experience late deliveries and penalties, recalls, increased warranty costs, order cancellations and litigation.
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. Defects in the design and manufacture of our products or our subcontractors' products may necessitate a product recall. We include complex system designs and components in our products that could contain errors or defects, particularly when we incorporate new technologies into our products. If any of our products are defective, we could be required to redesign or recall those products, pay substantial damages or warranty claims and face actions by regulatory bodies and government authorities. Such an event could result in significant expenses, delay sales, inflate inventory, cause reputational damage or cause us to withdraw from certain markets. We are also exposed to product liability claims. Many of our products are used in applications where their failure or misuse could result in significant property loss and serious personal injury or death. We carry product liability insurance consistent with industry norms. However, these insurance coverages may not be sufficient to fully cover the payment of any potential claim. A product recall or a product liability claim not covered by insurance could have a material adverse effect on our business, financial condition and results of operations.
FINANCIAL RISKS
We make estimates in accounting for over-time contracts, and changes in these estimates may have significant impacts on our earnings. We have over-time contracts with some of our customers, predominantly in our aerospace and defense markets. We recognize revenue using an input method that uses costs incurred to date to measure progress toward completion ("cost-to-cost"). Changes in these required estimates could have a material adverse effect on sales and profits. Any adjustments are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting. For contracts with anticipated losses at completion, we establish a provision for the entire amount of the estimated remaining loss and charge it against income in the period in which the loss becomes known and can be reasonably estimated. Amounts representing performance incentives, penalties, contract claims or impacts of scope change negotiations are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Due to the substantial judgments involved with this process, our actual results could differ materially or could be settled unfavorably from our estimates. See Note 2 - Revenue from Contracts with Customers of Item 8, Financial Statements and Supplementary Data, of this report.
We enter into fixed-price contracts, which could subject us to losses if we have cost overruns. In 2022, fixed-price contracts represented 90% of our sales that were accounted for using the cost-to-cost method. On fixed-price contracts, we agree to perform the scope of work specified in the contract for a predetermined price. Depending on the fixed price negotiated, these contracts may provide us with an opportunity to achieve higher profits based on the relationship between our total contract costs and the contract's fixed price. However, we bear the risk that increased or unexpected costs may reduce our profit or cause us to incur a loss on the contract, which would reduce our net earnings. Although we closely monitor all programs and continuously seek opportunities, in coordination with our customers and suppliers, to mitigate future material impacts on profitability resulting from higher costs for labor or material, we may be unsuccessful in these efforts and our net earnings may be reduced. Contract loss reserves are most commonly associated with fixed-price contracts that involve the design and development of innovative control systems to meet the customer's specifications.
Our indebtedness and restrictive covenants under our credit facilities and indenture governing our senior notes could limit our operational and financial flexibility. We have incurred significant indebtedness and may incur additional debt as we invest in operations, research and development, capital expenditures and acquisitions. Our ability to make scheduled interest and principal payments could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These changes could increase our cost of debt, limiting our ability to meet operational and capital needs, delaying our reactions to changes in market conditions and pursuing acquisitions, thereby placing us at a competitive disadvantage. In addition, the restrictive covenants under both our credit facilities and the indenture governing our senior notes could limit our operational and financial flexibility, which could also impact our ability to operate our business.
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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. Pension costs and obligations are determined using actual results as well as actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality tables. Other assumptions include salary increases and retirement age. Some of these assumptions, such as the discount rate and return on pension assets, are reflective of economic conditions and largely out of our control. Despite our largest pension plan being essentially fully funded, changes in the pension assumptions could adversely affect our earnings, equity and 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. Goodwill and other intangible assets are a substantial portion of our assets. At October 1, 2022, goodwill was $805 million and other intangible assets were $85 million of our total assets of $3.4 billion. Our goodwill and other intangible assets may increase in the future since our growth strategy includes acquisitions. However, we may have to write off all or part of our goodwill or other intangible assets if their value becomes impaired. Although this write-off would be a non-cash charge, it could reduce our earnings and our financial condition significantly. We review whether goodwill or other intangible assets have been impaired annually, or more frequently, if there have been changes in circumstances or conditions.
Unforeseen exposure to additional income tax liabilities may affect our operating results. Our distribution of taxable income is subject to domestic and, as a result of our significant manufacturing and sales presence in foreign countries, foreign tax jurisdictions. Our effective tax rate and earnings may be affected by shifts in our mix of earnings in countries with varying statutory tax rates, changes in the valuation of deferred tax assets and outcomes of any audits performed on previous tax returns. Additionally, any alterations to domestic and foreign government tax regulations or interpretations, global minimum taxes or other tax law changes could have significant impacts on our effective tax rate and on our deferred tax assets and liabilities.
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. We are subject to risks associated with government program contracting, including substantial civil and criminal fines and penalties. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by U.S. and foreign government agencies and authorities. The failure to comply with the terms of our government contracts could harm our business reputation. We also could be subject to withheld progress payments or suspension or debarment from future government contracts, which could have a material effect on our operational and financial results.
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. We have significant manufacturing and sales operations in foreign countries. In addition, our domestic operations sell to foreign customers. Our financial results may be adversely affected by fluctuations in foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S. dollars. Both the sales from international operations and export sales are subject to varying degrees of risks inherent in doing business outside of the United States. Such risks include the possibility of unfavorable circumstances arising from host country laws, regulations or customs including, but not limited to privacy laws protecting personal data, changes in tariff and trade barriers and import or export licensing requirements. Uncertainty also remains with respect to trade policies and treaties between the United States and other countries including China, where we both source products and have customers. Changes to tariffs or other trade restrictions may result in higher prices for new aircraft, which may negatively impact customer order volume, and restrict our future orders. The potential loss of orders could negatively impact our financial results including lower sales, operating profits and cash flow. For our sales mix by country, see Note 21 - Segments, of Item 8, Financial Statements and Supplementary Data, of this report.
15
Government regulations could limit our ability to sell our products outside the United States and otherwise adversely affect our business. Our failure to obtain, or fully adhere to, the limitations contained in the requisite licenses, meet registration standards or comply with other government export regulations would hinder our ability to generate revenues from the sale of our products outside the United States. In addition, the U.S. Government has established, and from time to time revises, sanctions that restrict or prohibit U.S. companies and their subsidiaries from doing business with certain foreign countries, entities and individuals. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In order to sell our products in European Union countries, we must satisfy certain technical requirements. If we are unable to comply with those requirements, our sales in Europe would be restricted. Doing business internationally also subjects us to numerous U.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, anti-bribery, privacy regulations and anti-boycott provisions. From time to time, we have in the past filed, and may in the future file, voluntary disclosure reports with the U.S. Department of State and the Department of Commerce regarding certain violations of U.S. export laws and regulations discovered by us in the course of our business activities, employee training or internal reviews and audits. To date, our voluntary disclosures have not resulted in a fine, penalty, or export privilege denial or restriction that has materially impacted our financial condition or ability to export. Our failure, or failure by an authorized agent or representative that is attributable to us, to comply with these laws and regulations could result in administrative, civil or criminal liabilities. In the extreme case, these failures could result in financial penalties, suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on us. For our sales mix by country, see Note 21 - Segments, of Item 8, Financial Statements and Supplementary Data, of this report..
We are involved in various legal proceedings, the outcome of which may be unfavorable to us. Our business may be adversely impacted by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty. We estimate loss contingencies and establish reserves based on our assessment when liability is deemed probable and reasonably estimable given the facts and circumstances known to us at a particular point in time. Subsequent developments may affect our assessment and estimates of the loss contingencies recognized as liabilities.
Our operations are subject to environmental laws and complying with those laws may cause us to incur significant costs. Our operations and facilities are subject to numerous stringent environmental laws and regulations. Although we believe that we are in material compliance with these laws and regulations, future changes in these laws, regulations or interpretations of them, or changes in the nature of our operations may require us to make significant capital expenditures to ensure compliance. We have been, and are currently involved in, environmental remediation activities. The cost of these activities may become significant depending on the discovery of additional environmental exposures at sites that we currently own or operate, at sites that we formerly owned or operated, or at sites to which we have sent hazardous substances or wastes for treatment, recycling or disposal.
We may face reputational, regulatory or financial risks from a perceived, or an actual, failure to achieve our sustainability goals. The increased focus on sustainability practices and disclosures is rapidly evolving, as is the criteria to measure our sustainability performance; both of which could result in greater expectations and may cause us to undertake costly initiatives to satisfy the evolving criteria. As we advance our sustainable business model, we are pursuing programs that we believe will improve our environmental practices, social engagement and how we govern ourselves. We periodically publish information about our sustainability goals, standards and frameworks. Achievement of these objectives is subject to risks and uncertainties, many of which are outside of our direct control, and it is possible we may fail, or be perceived to have failed, in the achievement of our sustainability goals. Also, certain customers, associates, shareholders, investors, suppliers, business partners, government agencies and non-governmental organizations may not be satisfied with our sustainability efforts. A failure or perceived failure of our sustainability goals could negatively affect our reputation and our results of operations.
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GENERAL RISKS
Future terror attacks, war, natural disasters or other catastrophic events beyond our control could negatively impact our business. Terror attacks, war or other civil disturbances, natural disasters and other catastrophic events could lead to economic instability and decreased demand for commercial products, which could negatively impact our business, financial condition, results of operations and cash flows. From time to time, terrorist attacks worldwide have caused instability in global financial markets and in the aviation industry. Also, our facilities and suppliers are located throughout the world and could be subject to damage from fires, floods, earthquakes or other natural or man-made disasters. Although we carry third party property insurance covering these and other risks, our inability to meet customers' schedules as a result of a catastrophe may result in the loss of customers or significantly increase costs, including penalty claims under customer contracts.
Our performance could suffer if we cannot maintain our culture as well as attract, retain and engage our employees. We believe our culture is our strongest asset and is the foundation of our business. Our culture focuses on trust, respect, collaboration, confidence and empowerment. Our strong culture allows us to recruit and retain top-level talent. Focusing on talent in the organization is one of our three company-wide initiatives, along with lean and innovation. We believe our employees and our experienced leadership group are competitive advantages, as the best people, over time, produce the best results. If we are unable to carry these values forward by not attracting the most talented candidates, by not retaining and engaging our global workforce including our senior management team, or by not investing in their talent and personal development, our operational and financial performances could suffer.
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Item 1B. | Unresolved Staff Comments. | |||||||
None.
Item 2. | Properties. | |||||||
On October 1, 2022, we occupied 5,428,000 square feet of space, distributed by segment as follows:
Square Feet | ||||||||||||||||||||
Owned | Leased | Total | ||||||||||||||||||
| Aircraft Controls | 1,476,000 | 382,000 | 1,858,000 | |||||||||||||||||
| Space and Defense Controls | 927,000 | 527,000 | 1,454,000 | |||||||||||||||||
| Industrial Systems | 1,383,000 | 713,000 | 2,096,000 | |||||||||||||||||
| Corporate Headquarters | 20,000 | — | 20,000 | |||||||||||||||||
| Total | 3,806,000 | 1,622,000 | 5,428,000 | |||||||||||||||||
We have principal manufacturing facilities in the United States and countries throughout the world in the following locations:
•Aircraft Controls - U.S., Philippines, United Kingdom and Ireland.
•Space and Defense Controls - U.S., Ireland, United Kingdom and Australia.
•Industrial Systems - U.S., Germany, India, Italy, Japan, Czech Republic, United Kingdom, China, Netherlands, Costa Rica, Luxembourg, Canada, Lithuania and Philippines.
Our corporate headquarters is located in East Aurora, New York.
We believe that our properties have been adequately maintained, are generally in good condition and will be able to accommodate our capacity needs to meet current levels of demand. We continuously review our anticipated requirements for facilities and on the basis of that review, may from time to time acquire additional facilities, expand or dispose of existing facilities. Leases for our properties expire at various times from 2023 through 2093. Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases for alternative locations at market terms.
Item 3. | Legal Proceedings. | |||||||
From time to time, we are involved in legal proceedings. We are not a party to any pending legal proceedings that management believes will result in a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. | Mine Safety Disclosures. | |||||||
Not applicable.
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PART II
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | |||||||
Our two classes of common shares, Class A common stock and Class B common stock, are traded on the New York Stock Exchange ("NYSE") under the ticker symbols MOG.A and MOG.B.
The number of registered shareholders of our Class A common stock and Class B common stock was 539 and 311, respectively, as of November 7, 2022.
The following table summarizes our purchases of our common stock for the quarter ended October 1, 2022.
Issuer Purchases of Equity Securities
| Period | (a) Total Number of Shares Purchased (1)(2) | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) | (d) Maximum Number (or Approx. Dollar Value) of Shares that May Yet Be Purchased Under Plans or Programs (3) | |||||||||||||||||||
| July 3, 2022 - July 30, 2022 | 78,684 | $ | 79.04 | — | 2,467,857 | ||||||||||||||||||
| July 31, 2022 - September 3, 2022 | 67,597 | 80.55 | 35,510 | 2,432,347 | |||||||||||||||||||
| September 4, 2022 - October 1, 2022 | 164,746 | 73.01 | 162,417 | 2,269,930 | |||||||||||||||||||
| Total | 311,027 | $ | 76.17 | 197,927 | 2,269,930 | ||||||||||||||||||
(1)Reflects purchases by the Moog Inc. Stock Employee Compensation Trust Agreement ("SECT") of shares of Class B common stock from the Moog Inc. Retirement Savings Plan ("RSP") and the Employee Stock Purchase Plan ("ESPP") as follows: 6,285 shares at $79.20 per share during July; 30,372 shares at $87.71 per share during August and 2,227 shares at $82.52 per share during September.
(2)In connection with the exercise of equity-based compensation awards, we accept delivery of shares to pay for the exercise price and withhold shares for tax withholding obligations. In July, we accepted delivery of 1,379 Class A shares at $80.22 and 6 Class B shares at $78.00; In August, we accepted delivery of 843 Class A shares at $87.41 per share and 193 Class B shares at $88.61; In September, we accepted delivery of 102 Class A shares at $71.42 per share. In connection with the issuance of shares to the ESPP, we purchased 71,007 Class B shares at $79.00 per share from the SECT in July. In connection with the issuance of equity-based awards, we purchased 7 Class B shares at $79.00 per share in July and 679 Class B shares at $79.16 in August from the SECT.
(3)The Board of Directors has authorized a share repurchase program that permits the purchase of up to 3 million common shares of Class A or Class B common stock in open market or privately negotiated transactions at the discretion of management. In August, we purchased 35,510 Class A shares at an average price of $74.25 and in September, we purchased 162,417 Class A shares at an average price of $72.88.
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Performance Graph
The following graph and tables show the performance of the Company's Class A common stock compared to the NYSE Composite-Total Return Index and the S&P Aerospace & Defense Index for a $100 investment made on September 30, 2017, including reinvestment of any dividends.
| 9/17 | 9/18 | 9/19 | 9/20 | 9/21 | 9/22 | |||||||||||||||||||||||||||||||||
| Moog Inc. - Class A Common Stock | $ | 100.00 | $ | 103.69 | $ | 99.01 | $ | 78.28 | $ | 95.11 | $ | 88.93 | ||||||||||||||||||||||||||
| NYSE Composite - Total Return Index | 100.00 | 109.81 | 112.03 | 112.19 | 145.72 | 124.47 | ||||||||||||||||||||||||||||||||
| S&P Aerospace & Defense Index | 100.00 | 123.71 | 131.76 | 94.50 | 122.46 | 115.54 | ||||||||||||||||||||||||||||||||
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Item 6. | Selected Financial Data. | |||||||
For a more detailed discussion of 2020 through 2022, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and Item 8, Financial Statements and Supplementary Data of this report.
| (dollars in thousands, except per share data) | 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||
| RESULTS FROM OPERATIONS | |||||||||||||||||
| Net sales | $ | 3,035,783 | $ | 2,851,993 | $ | 2,884,554 | $ | 2,904,663 | $ | 2,709,468 | |||||||
| Net earnings | 155,177 | 157,220 | 9,205 | 174,548 | 95,240 | ||||||||||||
| Net earnings per share | |||||||||||||||||
| Basic | $ | 4.85 | $ | 4.90 | $ | 0.28 | $ | 5.01 | $ | 2.67 | |||||||
| Diluted | $ | 4.83 | $ | 4.87 | $ | 0.28 | $ | 4.96 | $ | 2.64 | |||||||
| Weighted-average shares outstanding | |||||||||||||||||
| Basic | 31,977,482 | 32,112,589 | 33,257,684 | 34,854,614 | 35,661,638 | ||||||||||||
| Diluted | 32,117,028 | 32,297,956 | 33,437,801 | 35,178,968 | 36,052,307 | ||||||||||||
| OTHER FINANCIAL DATA | |||||||||||||||||
| Cash and cash equivalents | $ | 103,895 | $ | 99,599 | $ | 84,583 | $ | 89,702 | $ | 125,584 | |||||||
| Acquisitions of businesses, net of cash acquired | 11,832 | 77,600 | 54,265 | — | 48,382 | ||||||||||||
| Research and development | 109,527 | 125,528 | 110,865 | 126,453 | 129,838 | ||||||||||||
| Share repurchase programs | 35,626 | 29,446 | 215,776 | 23,358 | 27 | ||||||||||||
| Total backlog | 5,200,000 | 4,800,000 | 2,600,000 | 2,200,000 | n/a | ||||||||||||
| Twelve-month backlog | 2,300,000 | 2,100,000 | 1,700,000 | 1,500,000 | 1,500,000 | ||||||||||||
| Net debt to capitalization | 33 | % | 36 | % | 40 | % | 36 | % | 38 | % | |||||||
Notes and definitions for the above table:
•All periods include the effects of our share repurchase programs. See the Consolidated Statements of Shareholders' Equity, Consolidated Statements of Cash Flow and Note 17 - Shareholders' Equity, of Item 8, Financial Statements and Supplementary Data, of this report.
•All periods include the effects of acquisitions and divestitures. See Note 3 - Acquisitions, Divestitures and Equity Method Investments, of Item 8, Financial Statements and Supplementary Data, of this report.
•2020-2022 includes long-lived asset impairment charges. See the Consolidated Statements of Earnings, Note 1 - Summary of Significant Accounting Policies, of Item 8, Financial Statements and Supplementary Data, of this report.
•2020 includes the effect of a pension settlement in our qualified U.S. defined benefit pension plan. See the Consolidated Statements of Earnings, Note 1 - Summary of Significant Accounting Policies and Note 14 - Employee Benefit Plans, of Item 8, Financial Statements and Supplementary Data, of this report.
•Net earnings and net earnings per share represents amounts attributable to common shareholders.
•Twelve-month backlog is defined as confirmed orders we believe will be recognized as revenue within the next twelve months.
•Net debt to capitalization is computed as net debt (total debt less cash and cash equivalents) divided by capitalization (the sum of net debt and shareholders’ equity).
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | |||||||
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing elsewhere in this report.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Item 1A of this report.
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 launch vehicles and hypersonic applications.
In the industrial market, our products are used in a wide range of applications including:
•Industrial automation market - components and systems for injection and blow molding machinery, heavy industry applications for steel and aluminum production, metal forming presses, flight simulation motion control systems and material and automotive structural and fatigue testing systems.
•Medical market - components and systems for enteral clinical nutrition and infusion therapy pumps, CT scan medical equipment, ultrasonic sensors and surgical handpieces and sleep apnea equipment.
•Energy market - control and safety components for steam and gas power generation turbines and oil and gas exploration components and systems.
We operate under three segments, Aircraft Controls, Space and Defense Controls and Industrial Systems. Our principal manufacturing facilities are located in the United States, Philippines, United Kingdom, Germany, Italy, Costa Rica, China, Netherlands, Luxembourg, Japan, Czech Republic, Canada, India and Lithuania.
Under ASC 606, 64% of revenue was recognized over time for the year ended October 1, 2022, 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 year ended October 1, 2022, 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 around the world, delivering capabilities for mission-critical solutions. These core operational principles are necessary as our products are applied in demanding applications, "When Performance Really Matters®." By capitalizing on these core foundational strengths, 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.
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By focusing on customer intimacy and commitment to solving 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 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 fundamental long-term strategies to achieve our goals center around talent, lean and innovation and include:
•a strong leadership team that has positioned the Company for growth,
•utilizing our global capabilities and strong engineering heritage to innovate,
•maintaining our technological excellence by solving our customers’ most demanding technical problems in applications "When Performance Really Matters®,"
•continuing to invest in talent development to strengthen employee performance, and
•maximizing customer value by implementing lean enterprise principles.
These fundamentals will help us achieve our financial objective of increasing shareholder value with sustainable competitive advantages across our segments. In doing so, we expect to maintain a balanced, diversified portfolio in terms of markets served, product applications, customer bases and geographic presence.
We focus on improving shareholder value through strategic revenue growth, both organic and acquired, through improving operating efficiencies and manufacturing initiatives and through utilizing low cost manufacturing facilities without compromising quality. Historically, we have taken a balanced approach to capital deployment in order to maximize shareholder returns over the long term. These activities have included strategic acquisitions, share buybacks and dividend payments. Today, we believe we can create long term value for our shareholders by continuing to invest in our business through both capital expenditures, as well as investments in new market opportunities. We will also continue exploring opportunities to make strategic acquisitions and return capital to shareholders.
COVID-19 impacts on our business
Substantially all of our operations and production activities have, to-date, remained operational. However, the residual effects of the COVID-19 pandemic, including constraints and inflated prices within our supply chain, and localized lockdowns in China, impacted our business. While our backlog continues to grow across our end markets, ongoing COVID-19 disruptions continue to challenge our business. As economic activity continues to recover, we will continue to monitor the situation, assessing further possible implications on our operations, supply chain, liquidity, cash flow and customer orders.
Acquisitions, Divestitures and Equity Method Investments
All of our acquisitions are accounted for under the purchase method and, accordingly, the operating results for the acquired companies are included in the Consolidated Statements of Earnings from the respective dates of acquisition. Under purchase accounting, we record assets and liabilities at fair value and such amounts are reflected in the respective captions on the Consolidated Balance Sheets. The purchase price described for each acquisition below is net of any cash acquired, includes debt issued or assumed and the fair value of contingent consideration.
Acquisitions
On February 21, 2022, we acquired TEAM Accessories Limited ("TEAM") based in Dublin, Ireland for a purchase price, net of acquired cash, of $15 million, consisting of $12 million in cash and contingent consideration with an initial fair value of $3 million. TEAM specializes in Maintenance, Report and Overhaul ("MRO") of engine and airframe components. This operation is included in our Aircraft Controls segment. The purchase price allocation is subject to adjustments as we obtain additional information for our estimates during the measurement period.
On December 18, 2020, we acquired Genesys Aerosystems Group, Inc. ("Genesys"), headquartered in Mineral Wells, Texas for a purchase price of $78 million, net of acquired cash. Genesys designs and manufactures a full suite of electronic flight instrument systems and autopilot solutions. This operation is included in our Aircraft Controls segment.
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Divestitures
On September 30, 2022, we sold a sonar business based in the United Kingdom previously included in our Industrial Systems segment. We received net proceeds of $12 million and recorded a loss of $15 million, net of transaction costs. The loss 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 received net proceeds of $10 million and recorded a loss of $4 million, net of transaction costs. The loss 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. We received net proceeds of $36 million and recorded a gain of $16 million, net of transaction costs. The gain is subject to adjustments associated with amounts currently held in escrow.
In the fourth quarter of 2021, we sold a non-core business of our Industrial Systems segment. We received net proceeds of $11 million and recorded a loss of $2 million.
In the first quarter of 2021, we sold a non-core business of our Aircraft Controls segment for $2 million in net consideration and recorded a minimal loss.
Equity Method Investments
On August 31, 2022, we contributed $1 million to Suffolk Technologies Fund 1, L.P., a limited partnership that invests in startups to transform the construction, real estate and property maintenance industries in the U.S. As we are a limited partner in this investment, we are accounting for it using the equity method. We have a remaining on-call capital commitment of up to $7 million. This operation is included in our Industrial Systems segment.
On June 3, 2022, we increased our investment in NOVI LLC ("NOVI") by $1 million and now hold a 42.5% ownership interest. NOVI specializes in applying machine learning algorithms to space situational awareness. We are accounting for this investment using the equity method. This operation is included in our Space and Defense Controls segment.
For further information, refer to Note 3 - Acquisitions, Divestitures and Equity Method Investments, of Item 8, Financial Statements and Supplementary Data, of this report
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 1 - Summary of Significant Accounting Policies, of Item 8, Financial Statements and Supplementary Data, of this report. We believe the accounting policies discussed below are the most critical in understanding and evaluating our financial results. These critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.
Revenue Recognition on Over-Time Contracts
We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606. For contracts that qualify for over time treatment, we recognize revenue as control of the promised goods or services is being transferred to the customer. Revenue recognized over time for the year ended October 1, 2022 was 64% of total revenue. The cost-to-cost method of accounting as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. We believe this is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting. Revenue and cost estimates for substantially all over-time contract performance obligations are reviewed and updated quarterly. For further information, refer to Note 2 - Revenue from Contracts with Customers and Note 21 - Segments, of Item 8, Financial Statements and Supplementary Data, of this report.
Contract Reserves
At October 1, 2022, we had contract reserves of $47 million. Contract reserves are comprised of contract loss reserves, recall reserves, and contract-related reserves. Contract loss reserves are recorded for open contracts where it is anticipated that contract costs will be greater than contract income and are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. In accordance with ASC 606, we calculate contract losses at the contract level, versus the performance obligation level. Recall reserves are recorded when additional work is needed on completed products for them to meet contract specifications. Contract-related reserves are recorded for other reasons, such as delivery issues outside of the ordinary scope of the contract. For all three types of reserves, a provision for the entire amount of the loss is charged against income in the period in which the loss becomes known and can be reasonably estimated by management. For further information, refer to Note 2 - Revenue from Contracts with Customers, of Item 8, Financial Statements and Supplementary Data, of this report.
Reserves for Inventory Valuation
At October 1, 2022, we had net inventories of $588 million, or 33% of current assets. Reserves for inventory were $141 million, or 19% of gross inventories. Inventories are stated at the lower of cost or net realizable value with cost determined primarily on the first-in, first-out method of valuation.
We record valuation reserves to provide for slow-moving or obsolete inventory by principally using a formula-based method that increases the valuation reserve as the inventory ages. We also take specific circumstances into consideration. We consider overall inventory levels in relation to firm customer backlog in addition to forecasted demand including aftermarket sales. Changes in these and other factors, such as low demand and technological obsolescence, could cause us to increase our reserves for inventory valuation, which would negatively impact our gross margin. As we record provisions within cost of sales to increase inventory valuation reserves, we establish a new, lower cost basis for the inventory.
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Reviews for Impairment of Goodwill
At October 1, 2022, we had $805 million of goodwill, or 23% of total assets. We test goodwill for impairment for each of our reporting units at least annually, during our fourth quarter, and whenever events occur or circumstances change, such as changes in the business climate, poor indicators of operating performance or the sale or disposition of a significant portion of a reporting unit. We also test goodwill for impairment when there is a change in reporting units.
We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We aggregate certain components based upon an evaluation of the facts and circumstances, including the nature of products and services and the extent of shared assets and resources. As a result, we have four reporting units.
Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units. Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we consider in determining whether to perform a quantitative test.
When we evaluate the potential for goodwill impairment using a qualitative assessment, we consider factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.
Quantitative testing first requires a comparison of the fair value of each reporting unit to its carrying value. We principally use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash flows based on each reporting unit's current business, expected developments and operational strategies typically over a five-year period. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.
In measuring the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit's assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
The determination of our assumptions is subjective and requires significant estimation. Changes in these estimates and assumptions could materially affect the results of our reviews for impairment of goodwill.
For our annual test of goodwill for impairment in 2022, we performed a quantitative assessment for each of our four reporting units.
We evaluated the potential for goodwill impairment by considering macroeconomic conditions, industry and market conditions, cost factors, both current and future expected financial performance, and relevant entity-specific events for each of the reporting units. We also considered our overall market performance discretely as well as in relation to our peers. The results of our quantitative assessment indicated that is more likely than not that the fair value of each of the reporting units exceed its carrying value; and therefore, goodwill was not impaired.
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Reviews for Impairment of Long-Lived Assets
Long-lived assets held for use, which primarily includes finite-lived intangible assets, property, plant and equipment and right-of-use assets, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. For further information, refer to Note 6 - Property, Plant and Equipment and Note 8 - Goodwill and Intangible Assets, of Item 8, Financial Statements and Supplementary Data, of this report.
Pension Assumptions
We maintain various defined benefit pension plans covering employees at certain locations. In 2022, pension expense for all defined benefit plans was $30 million. For further information, refer to Note 14 - Employee Benefit Plans, of Item 8, Financial Statements and Supplementary Data, of this report. Pension obligations and the related costs are determined using actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality rates. Other assumptions include salary increases and retirement age.
We use the spot rate approach to estimate the service and interest cost components of the net periodic benefit cost for most of our plans. Under this approach the service cost is determined by applying the discount rates along the yield curve to the specific service cost cash flows to determine the present value. The interest cost component is computed by using each assumed discount rate along the curve. The discount rates used in determining expense for the U.S. Employees’ Retirement Plan, our largest plan, in 2022 were 3.3% for service cost and 2.7% for interest cost, compared to 3.1% and 2.6%, respectively, in 2021. A 50 basis point decrease in the discount rates would decrease our annual pension expense by $1 million. The discount rates are used to state expected future cash flows at present value. Using a higher discount rate typically decreases the present value of pension obligations and decreases pension expense. We use the Aon Hewitt AA Above Median yield curve to determine the discount rate for our U.S. defined benefit plans at year end. We believe that the Aon Hewitt AA Above Median yield curve best mirrors the yields of bonds that would be selected by management if actions were taken to settle our obligation.
Mortality rates are used to estimate the life expectancy of plan participants during which they are expected to receive benefit payments. We use a modified version of the mortality table and projection scale published by the Society of Actuaries, which reflects improvements consistent with the Social Security Administration, as a basis for our mortality assumptions for our U.S. plans. We believe the use of this modified table and projection scale best reflects our demographics and anticipated plan outcomes.
The long-term expected return on assets assumption reflects the average rate of return expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. In determining the long-term expected return on assets assumption, we consider our current and target asset allocations. We consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future benefit payment requirements. In determining the 2022 expense for our largest plan, we used a 5.0% return on assets assumption, which was the same for 2021. A 25 basis point decrease in the long-term expected return on assets assumption would increase our annual pension expense by $1 million.
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Income Taxes
Our annual tax rate is based on our earnings before tax by jurisdiction, applicable statutory tax rates, the impacts of permanent differences, tax incentives and tax planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions.
An estimated annual effective tax rate is applied to our quarterly ordinary operating results. For certain significant, unusual or infrequent events, we recognize the tax impact in the quarter in which it occurs.
We record reserves against tax benefits when it’s more likely than not that we will not sustain a position if the appropriate taxing jurisdiction had full information and examined our position. We adjust these reserves when facts and circumstances change, such as when progress is made by taxing authorities in their review of our position. There is a considerable amount of judgment in making these assessments. There were no significant reserves taken in 2022.
Valuation allowances associated with deferred tax assets is another area that requires judgment. We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. We consider recent earnings projections, allowable tax carryforward periods, tax planning strategies and historical earnings performance to determine the amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would impact our income tax expense when we determine that these factors have changed.
At October 1, 2022, we had gross deferred tax assets of $151 million and deferred tax asset valuation allowances of $9 million. The deferred tax assets principally relate to benefit accruals, inventory obsolescence, tax benefit carryforwards, contract reserves and lease liabilities. The deferred tax assets include $11 million related to tax benefit carryforwards associated with net operating losses and tax credits, for which $9 million of deferred tax asset valuation allowances are recorded. For further information, refer to Note 15 - Income Taxes, of Item 8, Financial Statements and Supplementary Data, of this report.
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CONSOLIDATED RESULTS OF OPERATIONS
The following is a discussion of our results of operations in 2022 compared to 2021. A discussion of our 2021 results of operations compared to 2020 results can be found within Part II, Item 7. Management's Discussion and Analysis within our 2021 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on November 15, 2021.
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||
| (dollars and shares in millions, except per share data) | 2022 | 2021 | 2020 | $ Variance | % Variance | $ Variance | % Variance | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,036 | $ | 2,852 | $ | 2,885 | $ | 184 | 6 | % | $ | (33) | (1 | %) | |||||||||||||||||||||||||||
| Gross margin | 27.0 | % | 27.2 | % | 25.8 | % | |||||||||||||||||||||||||||||||||||
| Research and development expenses | $ | 110 | $ | 126 | $ | 111 | $ | (16) | (13 | %) | $ | 15 | 13 | % | |||||||||||||||||||||||||||
| Selling, general and administrative expenses as a percentage of sales | 14.8 | % | 14.4 | % | 13.8 | % | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 37 | $ | 34 | $ | 39 | $ | 3 | 8 | % | $ | (5) | (13 | %) | |||||||||||||||||||||||||||
| Asset impairment | $ | 18 | $ | 2 | $ | 38 | $ | 17 | n/a | $ | (36) | (96 | %) | ||||||||||||||||||||||||||||
| Restructuring expense | $ | 10 | $ | — | $ | 11 | $ | 10 | n/a | $ | (11) | (100 | %) | ||||||||||||||||||||||||||||
| Loss on sale of businesses | $ | 3 | $ | 2 | $ | — | $ | 2 | 118 | % | $ | 2 | n/a | ||||||||||||||||||||||||||||
| Gain on sale of building | $ | (9) | $ | — | $ | — | $ | (9) | n/a | $ | — | n/a | |||||||||||||||||||||||||||||
| Pension settlement | $ | — | $ | — | $ | 121 | $ | — | — | % | $ | (121) | (100 | %) | |||||||||||||||||||||||||||
| Other | $ | 1 | $ | (3) | $ | 21 | $ | 4 | (146 | %) | $ | (23) | (112 | %) | |||||||||||||||||||||||||||
| Effective tax rate | 23.6 | % | 22.8 | % | (69.9) | % | |||||||||||||||||||||||||||||||||||
| Net earnings | $ | 155 | $ | 157 | $ | 9 | $ | (2) | (1 | %) | $ | 148 | n/a | ||||||||||||||||||||||||||||
| Diluted average common shares outstanding | 32 | 32 | 33 | — | (1 | %) | (1) | (3 | %) | ||||||||||||||||||||||||||||||||
| Diluted earnings per share | $ | 4.83 | $ | 4.87 | $ | 0.28 | $ | (0.04) | (1 | %) | $ | 4.59 | n/a | ||||||||||||||||||||||||||||
| Total backlog | $ | 5,200 | $ | 4,800 | $ | 2,600 | $ | 400 | 9 | % | $ | 2,200 | 88 | % | |||||||||||||||||||||||||||
| Twelve-month backlog | $ | 2,300 | $ | 2,100 | $ | 1,700 | $ | 200 | 10 | % | $ | 400 | 24 | % | |||||||||||||||||||||||||||
Net sales increased in 2022 compared to 2021 across all of our segments, particularly in our commercial aircraft programs and our defense programs. Also in 2022, weaker foreign currencies, primarily the Euro, the British Pound and the Japanese Yen relative to the U.S. Dollar, decreased sales $44 million compared to 2021.
Gross margin decreased slightly in 2022 compared to 2021. The additional costs associated with our constrained supply chain and $4 million of inventory write-down charges together offset the incremental margin from higher sales volumes across all three segments.
Research and development expenses decreased in 2022 compared to 2021. Aircraft Controls reduced research and development spend by $11 million primarily due to the redeployment of engineering activity to funded development programs. Industrial Systems also reduced research and development spend by $3 million.
Selling, general and administrative expense as a percentage of sales increased in 2022 compared to 2021. Across all of our segments, we had higher expenses to support customer interactions as we emerged from COVID-19 lockdowns, as well as increased investments in operations.
Interest expense increased in 2022 compared to 2021 due to higher interest rates on our outstanding debt throughout the year.
In 2022, we incurred charges for asset impairments and restructuring in all of our segments as we continued our business resizing and portfolio shaping activities, primarily in the second quarter of 2022. The benefits associated with these activities have averaged, and are expected to average, $4 million per quarter. Also, the first quarter of 2022 included a $16 million gain from the sale of our NAVAIDS business, and the fourth quarter of 2022 included a $9 million gain on the sale of a building. However, these gains were offset by losses associated with two business sales in Industrial Systems and in Space and Defense Controls in the fourth quarter of 2022, totaling $19 million.
Other in 2021 included a $6 million pension curtailment gain associated with the termination of a foreign pension plan, which did not repeat in 2022.
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The effective tax rate in 2022 increased modestly compared to the tax rate in 2021. The effective tax rate in 2022 included the benefit of favorable adjustments for tax credits associated with last year's tax return. The effective tax rate in 2021 included charges associated with the revaluation of deferred tax liabilities in the U.K., mostly offset by adjustments to the previous year's provision in the U.S.
The twelve-month backlog at October 1, 2022 increased as compared with the twelve-month backlog at October 2, 2021. The twelve-month backlog increased in Industrial Systems due to recovering demand for our flight simulation products and from orders for our new construction products. Also, backlog increased within Space and Defense Controls driven by our RIwP turret program. Backlog was unchanged within Aircraft Controls, as higher commercial OEM and aftermarket orders were offset by declines across various military programs.
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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 21 - Segments, of Item 8, Financial Statements and Supplementary Data, of this report.
Aircraft Controls
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2022 | 2021 | 2020 | $ Variance | % Variance | $ Variance | % Variance | ||||||||||||||||||||||||||||||||||
| Net sales - military aircraft | $ | 745 | $ | 782 | $ | 721 | $ | (37) | (5 | %) | $ | 61 | 8 | % | |||||||||||||||||||||||||||
| Net sales - commercial aircraft | 511 | 379 | 485 | 132 | 35 | % | (105) | (22 | %) | ||||||||||||||||||||||||||||||||
| $ | 1,256 | $ | 1,161 | $ | 1,206 | $ | 95 | 8 | % | $ | (45) | (4 | %) | ||||||||||||||||||||||||||||
| Operating profit | $ | 124 | $ | 97 | $ | 35 | $ | 27 | 28 | % | $ | 62 | 179 | % | |||||||||||||||||||||||||||
| Operating margin | 9.8 | % | 8.3 | % | 2.9 | % | |||||||||||||||||||||||||||||||||||
Aircraft Controls' net sales increased in 2022 compared to 2021, driven primarily by recoveries from the COVID-19 pandemic in our commercial OEM and aftermarket aircraft programs.
In 2022 compared to 2021, sales increased $70 million in our commercial OEM programs. We benefited from higher sales volumes across our main programs, increasing sales $26 million for our business jets programs, $21 million for our Boeing programs and $16 million for our Airbus programs. Additionally, in 2022 compared to 2021, sales increased $62 million in our commercial aftermarket programs. Higher spares volumes and repair demand, reflecting recovering flight-hour levels, increased sales a combined $30 million across our 787 and A350 programs. Also, sales increased an additional $18 million on our 787 aftermarket program due to one-time, retrofit sales.
Partially offsetting these sales increases in 2022 compared to 2021, was a $34 million sales decrease in our military OEM programs. The timing of orders and delayed material receipts on the F-35 program decreased sales $29 million, lower volumes for foreign military programs decreased sales $19 million and the sales associated with our divested NAVAIDS business decreased sales $17 million. Partially offsetting these reductions were $16 million of higher sales across our helicopter programs, $5 million of Genesys sales and $4 million of increased activity on funded development programs. Additionally in 2022 compared to 2021, sales decreased $2 million for our military aftermarket programs. Lower orders for the F-18 program and supply chain constraints affecting other legacy aircraft programs was mostly offset by higher spares and repair activity on the V-22 and the F-15 programs.
Operating margin increased in 2022 compared to 2021. Included in this increase was the $16 million gain associated with the divestiture of our NAVAIDS business. This gain was offset by $15 million of impairment and $4 million of restructuring expenses, in our second quarter of 2022, as we resized our business and continued our portfolio shaping activities. The benefits from these actions have averaged, and are expected to average, $3 million per quarter. Excluding both the gain and charges, adjusted operating margin in 2022 was 10.1%. The adjusted margin increase as compared to 2021 was driven by a favorable sales mix in commercial aftermarket, $11 million of reduced research and development spend and incremental margin from higher commercial sales volumes.
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Space and Defense Controls
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | 2022 | 2021 | 2020 | $ Variance | % Variance | $ Variance | % Variance | ||||||||||||||||||||||||||||||||||
Net sales | $ | 872 | $ | 799 | $ | 770 | $ | 73 | 9 | % | $ | 29 | 4 | % | |||||||||||||||||||||||||||
Operating profit | $ | 87 | $ | 88 | $ | 102 | $ | (1) | (2 | %) | $ | (13) | (13 | %) | |||||||||||||||||||||||||||
Operating margin | 10.0 | % | 11.1 | % | 13.2 | % | |||||||||||||||||||||||||||||||||||
Space and Defense Controls' net sales increased in 2022 compared to 2021, driven by continued growth within both our defense and space markets.
In 2022 compared to 2021, sales increased $68 million in our defense market. The main driver was the production ramp on our RIwP turret program, which increased sales $69 million. Also, sales for our defense components programs increased $11 million; however, this was offset by $6 million of lower international defense vehicle sales due to continued supply chain constraints and by $5 million of lower naval system sales due to the wind-down of development projects.
Additionally in 2022 compared to 2021, sales increased $5 million in our space market. Higher activity on our integrated space vehicle and advanced mission programs, and on our satellite avionics programs increased sales $24 million and $13 million, respectively. These increases were mostly offset by the wind-down of hypersonic development activity and by lower legacy launch vehicle sales.
Operating margin decreased in 2022 compared to 2021. Throughout 2022, we incurred $4 million of restructuring and inventory write-down charges as we continued our portfolio refinement activities and resized our business. We also incurred a $4 million loss associated with the divestiture of a security business. In the last quarter of 2021, we incurred $3 million of similar portfolio refinement charges. Excluding these charges in both years, the adjusted operating margins were 10.9% in 2022 and 11.4% in 2021. The resulting decline in adjusted operating margin was due to additional costs associated with our constrained supply chain and due to the COVID-19 related direct labor inefficiencies we experienced in the first half of 2022.
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Industrial Systems
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2022 | 2021 | 2020 | $ Variance | % Variance | $ Variance | % Variance | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 907 | $ | 892 | $ | 909 | $ | 15 | 2 | % | $ | (17) | (2 | %) | |||||||||||||||||||||||||||
| Operating profit | $ | 72 | $ | 86 | $ | 80 | $ | (14) | (16 | %) | $ | 6 | 7 | % | |||||||||||||||||||||||||||
| Operating margin | 8.0 | % | 9.6 | % | 8.8 | % | |||||||||||||||||||||||||||||||||||
Industrial Systems' net sales increased in 2022 compared to 2021 despite the adverse impacts of foreign currencies. Weaker foreign currencies, primarily the Euro and the Japanese Yen relative to the U.S. Dollar, decreased sales $33 million in 2022 when compared to 2021. Excluding the impact of foreign currencies, sales increased in all of our markets except for medical.
In 2022 compared to 2021 net sales increased $10 million in our simulation and test market driven mostly by increased demand for flight training simulators. Sales also increased $8 million in our industrial automation market driven by higher demand for factory automation equipment, particularly in Europe, and sales increased $5 million in our energy market. These increases were partially offset by $8 million of lower sales for medical devices due both to supply chain constraints and as the post COVID-19 demand surge winds-down for our medical pumps and sets.
Operating margin decreased in 2022 compared to 2021. Throughout 2022, we incurred $8 million of restructuring, inventory write-downs and asset impairment charges. These charges were a result of our continued portfolio refinement activities as we resized our business, and from assets associated with Russian actions in Ukraine. In our fourth quarter of 2022, we also incurred a $15 million loss associated with the divestiture of a sonar business, which was partially offset by a $9 million gain on the sale of a building. In the last quarter of 2021, we incurred $4 million of similar portfolio refinement charges. Excluding these charges in both years, the adjusted operating margins were 9.5% in 2022 and 10.1% in 2021. The resulting decline in adjusted operating margin was due to additional costs and inflated pressures associated with our constrained supply chain.
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SEGMENT OUTLOOK
| 2023 vs. 2022 | |||||||||||||||||||||||
(dollars in millions) | 2023 | 2022 | $ Variance | % Variance | |||||||||||||||||||
Net sales: | |||||||||||||||||||||||
Aircraft Controls | $ | 1,330 | $ | 1,256 | $ | 74 | 6 | % | |||||||||||||||
Space and Defense Controls | 930 | 872 | 58 | 7 | % | ||||||||||||||||||
Industrial Systems | 915 | 907 | 8 | 1 | % | ||||||||||||||||||
| $ | 3,175 | $ | 3,036 | $ | 139 | 5 | % | ||||||||||||||||
Operating profit: | |||||||||||||||||||||||
Aircraft Controls | $ | 137 | $ | 124 | $ | 13 | 11 | % | |||||||||||||||
Space and Defense Controls | 115 | 87 | 28 | 32 | % | ||||||||||||||||||
Industrial Systems | 96 | 72 | 24 | 33 | % | ||||||||||||||||||
| $ | 348 | $ | 283 | $ | 65 | 23 | % | ||||||||||||||||
Operating margin: | |||||||||||||||||||||||
Aircraft Controls | 10.3 | % | 9.8 | % | |||||||||||||||||||
Space and Defense Controls | 12.4 | % | 10.0 | % | |||||||||||||||||||
Industrial Systems | 10.5 | % | 8.0 | % | |||||||||||||||||||
| 11.0 | % | 9.3 | % | ||||||||||||||||||||
Net earnings | $ | 182 | $ | 155 | |||||||||||||||||||
Diluted earnings per share | $5.50 - $5.90 | $ | 4.83 | ||||||||||||||||||||
2023 Outlook – We expect higher sales in 2023, driven by continued market recoveries in commercial OEM and industrial programs and by investments in new products across our segments. However, expected weaker foreign currencies and the lost sales associated with our divestitures in 2022 will moderate our sales growth. We expect operating margin will increase due to operational improvements within all segments, combined with the absence of charges related to restructuring, impairments and losses associated with the sales of businesses in 2022. Excluding these charges, we also expect adjusted operating margin will increase. Net earnings in 2023 are expected to benefit from the incremental operating margin, which we expect to be partially offset by higher interest expenses due to the expected higher interest rates on our outstanding debt balances. We expect diluted earnings per share will range between $5.50 and $5.90, with a midpoint of $5.70.
2023 Outlook for Aircraft Controls – In 2023, we anticipate sales increases across all of our commercial OEM programs as the commercial aircraft market recoveries continue and as our customers match the increasing demand with increased orders. We also anticipate a slight sales increase across our military programs as higher activity on funded development programs, the F-35 program and foreign military sales are mostly offset by lower legacy programs. We expect operating margin in 2023 will increase slightly as improved factory utilization from the higher sales volume is partially offset by the absence of 2022's favorable sales mix in commercial aftermarket.
2023 Outlook for Space and Defense Controls – In 2023, we anticipate sales increases in our space programs from the continued higher activity for integrated space vehicles programs and for our launch vehicle programs. Excluding the impact of lost sales associated with our security business divestiture, we expect sales increases across our defense programs, primarily driven by the continued production ramp of our RIwP program and by defense components programs. We expect operating margin will increase in 2023 resulting from the incremental margin from higher sales volume, in addition to the absences of charges from portfolio refinements, our business sale and our incremental costs associated with our constrained supply chain.
2023 Outlook for Industrial Systems – In 2023, we anticipate sales increases across our markets, excluding an expected negative impact from continued weaker foreign currencies relative to the U.S. Dollar, and excluding the lost sales associated with our sonar business divestiture. The underlying organic sales growth is expected primarily in our flight simulation products, driven by the continued demand for flight training simulators, and in our medical device products. We expect operating margin will increase in 2023 resulting from the higher sales volumes and due to the absence of charges from our portfolio refinements, impairments and business sale.
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FINANCIAL CONDITION AND LIQUIDITY
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2022 | 2021 | 2020 | $ Variance | % Variance | $ Variance | % Variance | ||||||||||||||||||||||||||||||||||
| Net cash provided (used) by: | |||||||||||||||||||||||||||||||||||||||||
| Operating activities | $ | 247 | $ | 293 | $ | 279 | $ | (46) | (16 | %) | $ | 14 | 5 | % | |||||||||||||||||||||||||||
| Investing activities | (83) | (191) | (146) | 108 | (56 | %) | (45) | 31 | % | ||||||||||||||||||||||||||||||||
| Financing activities | (135) | (87) | (143) | (48) | 55 | % | 56 | (39 | %) | ||||||||||||||||||||||||||||||||
Our available borrowing capacity and our cash flow from operations provide us with the financial resources needed to run our operations, reinvest in our business and make strategic acquisitions.
At October 1, 2022, our cash balances were $119 million which was primarily held outside of the U.S. Cash flow from our U.S. operations, together with borrowings on our credit facility, fund on-going activities, debt service requirements and future growth investments.
Operating activities
Net cash provided by operating activities decreased in 2022 compared to 2021. In 2022, accounts receivable generated $13 million less cash than the previous year, driven in part by the 787 program, where we maintained steady production levels that were higher than the rate at which Boeing took deliveries. This was mostly offset by a $100 million benefit from our Receivables Purchase Agreement ("RPA") program. Also in 2022, supply chain constraints, particularly in Industrial Systems, contributed to inventory using $48 million more in cash. Partially offsetting the increased uses of cash was a $23 million benefit from accounts payable, due to timing of payments.
We expect cash from operations in 2023 to be $280 million, an increase compared to 2022, driven primarily due to improved cash generation from net working capital.
Investing activities
Net cash used by investing activities in 2022 included $139 million of capital expenditures, as we increased investments in facilities to support growth and provide next generation manufacturing capabilities. Also 2022 included $12 million for the acquisition of TEAM Accessories. These cash outflows were partially offset by $71 million of proceeds from the sales of two businesses and a building in 2022.
Net cash used by investing activities in 2021 included $78 million for our acquisition of Genesys and $129 million for capital expenditures.
We expect capital expenditures in 2023 to be $150 million, as we continue to invest in facilities and infrastructure to support future growth and operational improvements.
Financing activities
Net cash used by financing activities in 2022 included $68 million of net payments on our credit facilities. Additionally, financing activities included $33 million of share repurchases and $33 million of cash dividends.
Net cash used by financing activities in 2021 included $32 million of cash dividends, $30 million for share repurchases and $28 million of net payments on our credit facilities.
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CAPITAL STRUCTURE AND RESOURCES
We maintain bank credit facilities to fund our short and long-term capital requirements, including acquisitions. From time to time, we also sell debt and equity securities to fund acquisitions or take advantage of favorable market conditions.
Our U.S. revolving credit facility, which matures on October 15, 2024, 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 U.S. revolving credit facility had an outstanding balance of $321 million at October 1, 2022. The weighted-average interest rate on the majority of the outstanding credit facility borrowings was 4.16% and is principally based on LIBOR plus the applicable margin, which was 1.5% at October 1, 2022. The credit facility is secured by substantially all of our U.S. assets. See Note 24 - Subsequent Events, for information related to the amended and restated U.S. revolving credit facility.
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. We are in compliance with all covenants. 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.
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. In recent years, 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.
The SECT has a revolving credit facility with a borrowing capacity of $35 million, maturing on July 26, 2024. Interest was 5.16% as of October 1, 2022 and is based on LIBOR plus a margin of 2.13%. As of October 1, 2022, there were $20 million of outstanding borrowings.
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, which commenced on June 15, 2020. 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. We are in compliance with all covenants. The aggregate net proceeds were used to repay indebtedness under our U.S. bank facility, thereby increasing the unused portion of our U.S. revolving credit facility.
On November 4, 2021, we amended and restated our Receivables Purchase Agreement, which matures on November 4, 2024, allowing 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. As of October 1, 2022, the amount sold to the Purchasers and derecognized was $100 million. Each Purchaser’s share of capital accrues yield at a variable rate plus an applicable margin, which totaled 4.04% as of October 1, 2022.
Previously, we securitized certain trade receivables that were accounted for as secured borrowings (the "Securitization Program"). The Securitization Program was extended on October 29, 2021 and matured on December 29, 2021, providing up to $80 million of borrowing capacity and lowered our cost to borrow funds as compared to the U.S. revolving credit facility. Under the Securitization Program, we sold certain trade receivables and related rights to an affiliate, which in turn sold an undivided variable percentage ownership interest in the trade receivables to a financial institution, while maintaining a subordinated interest in a portion of the pool of trade receivables. The Securitization Program had a minimum borrowing requirement equal to the lesser of either 80% of our borrowing capacity or 100% of our borrowing base, which was a subset of the trade receivables sold under this agreement. Interest on the secured borrowings under the Securitization Program was based on 30-day LIBOR plus an applicable margin.
At October 1, 2022, we had $788 million of unused capacity, including $762 million from the U.S. revolving credit facility after considering standby letters of credit and other limitations. Our leverage ratio covenant limits our unused borrowing capacity to $664 million as of October 1, 2022.
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Net debt to capitalization was 33% at October 1, 2022 and 36% at October 2, 2021. The decrease in net debt to capitalization is primarily due to our net earnings, which has increased the total capitalization.
We declared and paid cash dividends of $1.03 per share on our Class A and Class B common stock in 2022.
The Board of Directors authorized a share repurchase program that authorizes repurchases for both Class A and Class B common stock, and allows us to buy up to an aggregate 3 million common shares. Under this program, since inception we have purchased approximately 730,000 shares for $55 million.
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
For further information on our contractual obligations and commitments as of October 1, 2022, see the notes referenced below, of Item 8, Financial Statements and Supplementary Data, of this report.
Right-of-use lease liabilities - See Note 7 - Leases, for details on obligations and timing of expected future payments, including a five-year maturity schedule.
Debt Obligations and Interest Payments - See Note 9 - Indebtedness, for details of our debt and timing of expected future principal and interest payments. Our current and long-term interest obligation on fixed-rate debt is $21 million and $89 million, respectively. Interest on variable-rate long-term debt, assuming the rate and outstanding balances do not change from those at October 1, 2022, would be approximately $17 million annually.
Employee Benefit Plans - See Note 14 - Employee Benefit Plans, for details on our obligations and timing of expected future payments under these plans. In 2023, we have no minimum funding requirements. However, we anticipate making contributions to defined benefit pension plans of $12 million, of which approximately $5 million is for a non-qualified U.S. plan. We are unable to determine minimum funding requirements beyond 2022. We have made no discretionary incremental contributions to our defined benefit plans in excess of minimum funding requirements. We do not plan to make additional contributions for the foreseeable future.
Income Taxes - We are unable to determine if and when any unrecognized tax benefits, which are not material, will be settled, nor can we estimate any potential changes to the unrecognized tax benefits. See Note 15 - Income Taxes, for additional details of tax obligations.
Commitments - Our current and long-term obligations for non-cancelable purchase commitments are $936 million and $178 million, respectively. See Note 23 - Commitments and Contingencies, for additional details.
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ECONOMIC CONDITIONS AND MARKET TRENDS
We operate within the aerospace and defense and industrial markets. Our businesses are facing varying levels of supply chain and production level 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 have remained relatively stable. Our commercial aircraft market, which represented 18% of our 2022 sales, is still recovering from the initial, dramatic, reductions in air travel at the onset of the COVID-19 pandemic. While domestic travel has recovered, global international travel remains below pre-pandemic levels.
Within our industrial markets, which represented 30% of our 2022 sales, our programs benefited from increased order demand within industrial automation, simulation and test and energy markets. However, as customer demand increases across these markets, we are now experiencing supply chain pressures.
A common factor throughout our markets is the continuing demand for technologically advanced products.
Aerospace and Defense
Within aerospace and defense, we serve three end markets: defense, commercial aircraft and space.
The defense market is dependent on military spending for development and production programs. We have a growing development program order book for future generation aircraft and hypersonic missiles, and we strive to embed our technologies within these high-performance military programs of the future. Aircraft production programs are typically long-term in nature, offering predictable capacity needs and future revenues. We maintain positions on numerous high priority programs, including the Lockheed Martin F-35 Lightning II and V-22 Osprey. The large installed base of our products leads to attractive aftermarket sales and service opportunities. The tactical and strategic missile, missile defense and defense controls markets are dependent on many of the same market conditions as military aircraft, including overall military spending and program funding levels. At times when there are perceived threats to national security, U.S. defense spending can increase; at other times, defense spending can decrease. Future levels of defense spending are uncertain, subject to presidential and congressional approval, and could increase in the near-term given the current global tensions.
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 will take longer to fully recover. Furthermore, as companies and employees become accustomed to working remotely, business travel and the associated flight hours may not fully reach the pre-pandemic levels. As such, we believe Boeing and Airbus will continue to directionally match their wide-body aircraft production rates with the reduced, albeit recovering, air traffic volume, which has lowered their demand for our flight control systems. We believe the commercial OEM market's recovery is heavily dependent on the return to pre-COVID-19 global international air traffic activity levels, and therefore will face pressures for a prolonged period of time.
The commercial aftermarket is driven by usage and the age of the existing aircraft fleet for passenger and cargo aircraft, which drives the need for maintenance and repairs. While there were initial dramatic reductions in flight hours at the onset of the COVID-19 pandemic, we have seen a recovery in the demand volume for our maintenance services and spare parts.
The space market is comprised of four customer markets: the civil market, the U.S. Department of Defense market, the commercial space market and the new space market. The civil market, namely NASA, is driven by investment for commercial and exploration activities, including NASA's return to the moon. The U.S. Department of Defense market is driven by governmental-authorized levels of defense spending, including funding for hypersonic defense technologies. Levels of U.S. defense spending could increase as there is growing emphasis on space as the next frontier of potential future conflicts. The commercial space market is comprised of large satellite customers, which traditionally sell to communications companies. Trends for this market, as well as for commercial launch vehicles, follow demand for increased capacity. This, in turn tends to track with underlying demand for increased consumption of telecommunication services, satellite replacements and global navigation needs. The new space market is driven by investments to increase the speed and access to space through smaller satellites at reduced cost.
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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 2022, average foreign currency rates generally weakened against the U.S. dollar compared to 2021. The translation of the results of our foreign subsidiaries into U.S. dollars decreased sales by $44 million compared to one year ago. During 2021, average foreign currency rates generally strengthened against the U.S. dollar compared to 2020. The translation of the results of our foreign subsidiaries into U.S. dollars increased 2021 sales by $34 million compared to 2020.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 - Summary of Significant Accounting Policies, included in Item 8, Financial Statements and Supplementary Data, of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates ("ASU").
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| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. | |||||||
In the normal course of business, we are exposed to interest rate risk from our long-term debt and foreign exchange rate risk related to our foreign operations and foreign currency transactions. To manage these risks, we may enter into derivative instruments such as interest rate swaps and foreign currency contracts. We do not hold or issue financial instruments for trading purposes. In 2022, our derivative instruments consisted of foreign currency contracts.
At October 1, 2022, we had $341 million of borrowings subject to variable interest rates. At October 1, 2022, we had no outstanding interest rate swaps. During 2022, our average borrowings subject to variable interest rates were $366 million and, therefore, if interest rates had been one percentage point higher during 2022, our interest expense would have been $4 million higher.
We also enter into forward contracts to reduce fluctuations in foreign currency cash flows related to third party purchases and revenue, intercompany product shipments and to reduce exposure on intercompany balances that are denominated in foreign currencies. We have foreign currency contracts with notional amounts of $138 million outstanding at October 1, 2022 that mature at various times through March 1, 2024. These include notional amounts of $108 million outstanding where the U.S. dollar is one side of the trade. The net fair value of all of our foreign currency contracts involving the U.S. dollar was a $3 million net liability at October 1, 2022. A hypothetical 10% increase in the value of the U.S. dollar against all currencies would decrease the fair value of our foreign currency contracts at October 1, 2022 by approximately $9 million, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase the fair value of our foreign currency contracts at October 1, 2022 by approximately $11 million. It is important to note that gains and losses indicated in the sensitivity analysis would often be offset by gains and losses on the underlying receivables and payables.
Although the majority of our sales, expenses and cash flows are transacted in U.S. dollars, we have exposure to changes in foreign currency exchange rates such as the Euro and British pound. If average annual foreign exchange rates collectively weakened or strengthened against the U.S. dollar by 10%, our net earnings in 2022 would have decreased or increased by $7 million from foreign currency translation. This sensitivity analysis assumed that each exchange rate would change in the same direction relative to the U.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on actual transactions.
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Item 8. | Financial Statements and Supplementary Data. | |||||||
Consolidated Statements of Earnings
Fiscal Years Ended | ||||||||||||||||||||
| (dollars in thousands, except share and per share data) | October 1, 2022 | October 2, 2021 | October 3, 2020 | |||||||||||||||||
| Net sales | $ | 3,035,783 | $ | 2,851,993 | $ | 2,884,554 | ||||||||||||||
| Cost of sales | 2,211,384 | 2,076,270 | 2,118,150 | |||||||||||||||||
| Inventory write-down | 3,598 | — | 22,708 | |||||||||||||||||
| Gross profit | 820,801 | 775,723 | 743,696 | |||||||||||||||||
| Research and development | 109,527 | 125,528 | 110,865 | |||||||||||||||||
| Selling, general and administrative | 448,531 | 412,028 | 397,947 | |||||||||||||||||
| Interest | 36,757 | 33,892 | 38,897 | |||||||||||||||||
| Asset impairment | 18,053 | 1,500 | 37,839 | |||||||||||||||||
| Restructuring | 9,509 | — | 10,700 | |||||||||||||||||
| Loss on sale of businesses | 3,346 | 1,536 | — | |||||||||||||||||
| Gain on sale of building | (9,075) | — | — | |||||||||||||||||
| Pension settlement | — | — | 121,324 | |||||||||||||||||
| Other | 1,174 | (2,535) | 20,707 | |||||||||||||||||
| Earnings before income taxes | 202,979 | 203,774 | 5,417 | |||||||||||||||||
| Income taxes (benefit) | 47,802 | 46,554 | (3,788) | |||||||||||||||||
| Net earnings | $ | 155,177 | $ | 157,220 | $ | 9,205 | ||||||||||||||
| Net earnings per share | ||||||||||||||||||||
| Basic | $ | 4.85 | $ | 4.90 | $ | 0.28 | ||||||||||||||
| Diluted | $ | 4.83 | $ | 4.87 | $ | 0.28 | ||||||||||||||
| Average common shares outstanding | ||||||||||||||||||||
| Basic | 31,977,482 | 32,112,589 | 33,257,684 | |||||||||||||||||
| Diluted | 32,117,028 | 32,297,956 | 33,437,801 | |||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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Consolidated Statements of Comprehensive Income
Fiscal Years Ended | ||||||||||||||||||||
| (dollars in thousands) | October 1, 2022 | October 2, 2021 | October 3, 2020 | |||||||||||||||||
| Net earnings | $ | 155,177 | $ | 157,220 | $ | 9,205 | ||||||||||||||
| Other comprehensive income (loss) ("OCI"), net of tax: | ||||||||||||||||||||
| Foreign currency translation adjustment | (89,035) | 10,005 | 26,405 | |||||||||||||||||
| Retirement liability adjustment | 27,979 | 30,443 | 102,081 | |||||||||||||||||
| Change in accumulated loss (income) on derivatives | (2,426) | (2,555) | 1,538 | |||||||||||||||||
| Other comprehensive income (loss), net of tax | (63,482) | 37,893 | 130,024 | |||||||||||||||||
| Comprehensive income | $ | 91,695 | $ | 195,113 | $ | 139,229 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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Consolidated Balance Sheets
| (dollars in thousands, except per share data) | October 1, 2022 | October 2, 2021 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 103,895 | $ | 99,599 | ||||||||||
| Restricted cash | 15,338 | 1,315 | ||||||||||||
| Receivables, net | 990,262 | 945,929 | ||||||||||||
| Inventories, net | 588,466 | 613,095 | ||||||||||||
| Prepaid expenses and other current assets | 60,349 | 58,842 | ||||||||||||
| Total current assets | 1,758,310 | 1,718,780 | ||||||||||||
| Property, plant and equipment, net | 668,908 | 645,778 | ||||||||||||
| Operating lease right-of-use assets | 69,072 | 60,355 | ||||||||||||
| Goodwill | 805,320 | 851,605 | ||||||||||||
| Intangible assets, net | 85,410 | 106,095 | ||||||||||||
| Deferred income taxes | 8,630 | 17,769 | ||||||||||||
| Other assets | 36,191 | 32,787 | ||||||||||||
| Total assets | $ | 3,431,841 | $ | 3,433,169 | ||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Current installments of long-term debt | $ | 916 | $ | 80,365 | ||||||||||
| Accounts payable | 232,104 | 200,602 | ||||||||||||
| Accrued compensation | 93,141 | 112,703 | ||||||||||||
| Contract advances | 296,899 | 263,686 | ||||||||||||
| Accrued liabilities and other | 215,376 | 212,005 | ||||||||||||
| Total current liabilities | 838,436 | 869,361 | ||||||||||||
| Long-term debt, excluding current installments | 836,872 | 823,355 | ||||||||||||
| Long-term pension and retirement obligations | 140,602 | 162,728 | ||||||||||||
| Deferred income taxes | 63,527 | 64,642 | ||||||||||||
| Other long-term liabilities | 115,591 | 112,939 | ||||||||||||
| Total liabilities | 1,995,028 | 2,033,025 | ||||||||||||
| Shareholders’ equity | ||||||||||||||
| Common stock - par value $1.00 | ||||||||||||||
| Class A - Authorized 100,000,000 shares | 43,807 | 43,803 | ||||||||||||
| Issued 43,806,835 and outstanding 28,767,243 shares at October 1, 2022 | ||||||||||||||
| Issued 43,803,236 and outstanding 29,220,367 shares at October 2, 2021 | ||||||||||||||
| Class B - Authorized 20,000,000 shares. Convertible to Class A on a one-for-one basis | 7,473 | 7,477 | ||||||||||||
| Issued 7,472,878 and outstanding 3,014,475 shares at October 1, 2022 | ||||||||||||||
| Issued 7,476,477 and outstanding 2,870,372 shares at October 2, 2021 | ||||||||||||||
| Additional paid-in capital | 516,123 | 509,622 | ||||||||||||
| Retained earnings | 2,360,055 | 2,237,848 | ||||||||||||
| Treasury shares | (1,047,012) | (1,007,506) | ||||||||||||
| Stock Employee Compensation Trust | (73,602) | (79,776) | ||||||||||||
| Supplemental Retirement Plan Trust | (58,989) | (63,764) | ||||||||||||
| Accumulated other comprehensive loss | (311,042) | (247,560) | ||||||||||||
| Total shareholders’ equity | 1,436,813 | 1,400,144 | ||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,431,841 | $ | 3,433,169 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
43
Consolidated Statements of Shareholders’ Equity
Fiscal Years Ended | ||||||||||||||||||||
| (dollars in thousands) | October 1, 2022 | October 2, 2021 | October 3, 2020 | |||||||||||||||||
| COMMON STOCK | ||||||||||||||||||||
Beginning and end of year | $ | 51,280 | $ | 51,280 | $ | 51,280 | ||||||||||||||
| ADDITIONAL PAID-IN CAPITAL | ||||||||||||||||||||
| Beginning of year | 509,622 | 472,645 | 510,546 | |||||||||||||||||
| Issuance of treasury shares | 11,570 | 7,478 | 142 | |||||||||||||||||
| Equity-based compensation expense | 7,460 | 6,859 | 5,661 | |||||||||||||||||
| Adjustment to market - SECT and SERP | (12,529) | 22,640 | (43,704) | |||||||||||||||||
| End of year | 516,123 | 509,622 | 472,645 | |||||||||||||||||
| RETAINED EARNINGS | ||||||||||||||||||||
| Beginning of year | 2,237,848 | 2,112,734 | 2,128,739 | |||||||||||||||||
| Net earnings | 155,177 | 157,220 | 9,205 | |||||||||||||||||
Dividends (1) | (32,970) | (32,106) | (25,210) | |||||||||||||||||
| End of year | 2,360,055 | 2,237,848 | 2,112,734 | |||||||||||||||||
| TREASURY SHARES AT COST | ||||||||||||||||||||
| Beginning of year | (1,007,506) | (990,783) | (769,569) | |||||||||||||||||
| Class A and B shares issued related to compensation | 11,326 | 14,139 | 11,887 | |||||||||||||||||
| Class A and B shares purchased | (50,832) | (30,862) | (233,101) | |||||||||||||||||
| End of year | (1,047,012) | (1,007,506) | (990,783) | |||||||||||||||||
| STOCK EMPLOYEE COMPENSATION TRUST ("SECT") | ||||||||||||||||||||
| Beginning of year | (79,776) | (64,242) | (111,492) | |||||||||||||||||
| Issuance of shares | 13,250 | 679 | 28,768 | |||||||||||||||||
| Purchase of shares | (14,830) | (4,239) | (6,774) | |||||||||||||||||
| Adjustment to market | 7,754 | (11,974) | 25,256 | |||||||||||||||||
| End of year | (73,602) | (79,776) | (64,242) | |||||||||||||||||
| SUPPLEMENTAL RETIREMENT PLAN ("SERP") TRUST | ||||||||||||||||||||
| Beginning of year | (63,764) | (53,098) | (71,546) | |||||||||||||||||
| Adjustment to market | 4,775 | (10,666) | 18,448 | |||||||||||||||||
| End of year | (58,989) | (63,764) | (53,098) | |||||||||||||||||
| ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||||||||||
| Beginning of year | (247,560) | (285,453) | (415,477) | |||||||||||||||||
| Other comprehensive income (loss) | (63,482) | 37,893 | 130,024 | |||||||||||||||||
| End of year | (311,042) | (247,560) | (285,453) | |||||||||||||||||
| TOTAL SHAREHOLDERS’ EQUITY | $ | 1,436,813 | $ | 1,400,144 | $ | 1,243,083 | ||||||||||||||
(1) Cash dividends were $1.03, $1.00 and $0.75 per share for the fiscal years ended October 1, 2022, October 2, 2021, and October 3, 2020, respectively.
44
Consolidated Statements of Shareholders’ Equity, Shares
| Fiscal Years Ended | ||||||||||||||||||||
| (share data) | October 1, 2022 | October 2, 2021 | October 3, 2020 | |||||||||||||||||
| COMMON STOCK - CLASS A | ||||||||||||||||||||
Beginning of year | 43,803,236 | 43,799,229 | 43,794,935 | |||||||||||||||||
| Conversion of Class B to Class A | 3,599 | 4,007 | 4,294 | |||||||||||||||||
End of year | 43,806,835 | 43,803,236 | 43,799,229 | |||||||||||||||||
| COMMON STOCK - CLASS B | ||||||||||||||||||||
Beginning of year | 7,476,477 | 7,480,484 | 7,484,778 | |||||||||||||||||
| Conversion of Class B to Class A | (3,599) | (4,007) | (4,294) | |||||||||||||||||
End of year | 7,472,878 | 7,476,477 | 7,480,484 | |||||||||||||||||
| TREASURY SHARES - CLASS A COMMON STOCK | ||||||||||||||||||||
Beginning of year | (14,157,721) | (13,959,998) | (11,101,512) | |||||||||||||||||
| Class A shares issued related to compensation | 45,201 | 39,227 | 31,943 | |||||||||||||||||
| Class A shares purchased | (501,924) | (236,950) | (2,890,429) | |||||||||||||||||
End of year | (14,614,444) | (14,157,721) | (13,959,998) | |||||||||||||||||
| TREASURY SHARES - CLASS B COMMON STOCK | ||||||||||||||||||||
Beginning of year | (3,179,055) | (3,344,877) | (3,345,489) | |||||||||||||||||
| Class B shares issued related to compensation | 333,200 | 346,585 | 215,040 | |||||||||||||||||
| Class B shares purchased | (174,436) | (180,763) | (214,428) | |||||||||||||||||
End of year | (3,020,291) | (3,179,055) | (3,344,877) | |||||||||||||||||
| SECT - CLASS A COMMON STOCK | ||||||||||||||||||||
Beginning and end of period | (425,148) | (425,148) | (425,148) | |||||||||||||||||
| SECT - CLASS B COMMON STOCK | ||||||||||||||||||||
Beginning of year | (600,880) | (557,543) | (886,300) | |||||||||||||||||
| Issuance of shares | 165,592 | 8,683 | 408,641 | |||||||||||||||||
| Purchase of shares | (176,654) | (52,020) | (79,884) | |||||||||||||||||
End of year | (611,942) | (600,880) | (557,543) | |||||||||||||||||
| SERP - CLASS B COMMON STOCK | ||||||||||||||||||||
Beginning and end of year | (826,170) | (826,170) | (826,170) | |||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
45
Consolidated Statements of Cash Flows
Fiscal Years Ended | ||||||||||||||||||||
| (dollars in thousands) | October 1, 2022 | October 2, 2021 | October 3, 2020 | |||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||
| Net earnings | $ | 155,177 | $ | 157,220 | $ | 9,205 | ||||||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation | 75,238 | 76,671 | 74,243 | |||||||||||||||||
| Amortization | 13,151 | 13,488 | 12,729 | |||||||||||||||||
| Deferred income taxes | 11,739 | 8,162 | (40,845) | |||||||||||||||||
| Equity-based compensation expense | 8,882 | 7,461 | 5,661 | |||||||||||||||||
| Loss on sale of businesses | 3,346 | 1,536 | — | |||||||||||||||||
| Asset impairment and Inventory write-down | 21,651 | 1,500 | 60,547 | |||||||||||||||||
| Pension settlement | — | — | 121,324 | |||||||||||||||||
| Other | (2,257) | (791) | 9,636 | |||||||||||||||||
| Changes in assets and liabilities providing (using) cash: | ||||||||||||||||||||
| Receivables | (86,867) | (73,459) | 111,525 | |||||||||||||||||
| Inventories | (28,677) | 19,576 | (99,015) | |||||||||||||||||
| Accounts payable | 43,349 | 20,520 | (84,065) | |||||||||||||||||
| Contract advances | 42,097 | 59,298 | 65,680 | |||||||||||||||||
| Accrued expenses | (4,445) | 2,290 | (3,516) | |||||||||||||||||
| Accrued income taxes | 3,070 | 4,653 | (17,964) | |||||||||||||||||
| Net pension and post retirement liabilities | 18,093 | 12,503 | 33,305 | |||||||||||||||||
| Other assets and liabilities | (26,745) | (17,402) | 20,727 | |||||||||||||||||
| Net cash provided by operating activities | 246,802 | 293,226 | 279,177 | |||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||||
| Acquisitions of businesses, net of cash acquired | (11,832) | (77,600) | (54,265) | |||||||||||||||||
| Purchase of property, plant and equipment | (139,431) | (128,734) | (88,284) | |||||||||||||||||
| Net proceeds from businesses and buildings sold | 70,612 | 14,675 | 971 | |||||||||||||||||
| Other investing transactions | (2,668) | 502 | (4,615) | |||||||||||||||||
| Net cash used by investing activities | (83,319) | (191,157) | (146,193) | |||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||
| Proceeds from revolving lines of credit | 840,475 | 799,950 | 1,151,550 | |||||||||||||||||
| Payments on revolving lines of credit | (827,801) | (838,936) | (1,187,159) | |||||||||||||||||
| Proceeds from long-term debt | — | 78,700 | 15,128 | |||||||||||||||||
| Payments on long-term debt | (80,364) | (68,080) | (74,470) | |||||||||||||||||
| Proceeds from senior notes, net of issuance costs | — | — | 491,769 | |||||||||||||||||
| Payments on senior notes | — | — | (300,000) | |||||||||||||||||
| Payments on finance lease obligations | (2,524) | (2,156) | (1,167) | |||||||||||||||||
| Payment of dividends | (32,970) | (32,106) | (25,210) | |||||||||||||||||
| Proceeds from sale of treasury stock | 18,414 | 10,866 | 7,014 | |||||||||||||||||
| Purchase of outstanding shares for treasury | (48,558) | (31,673) | (232,290) | |||||||||||||||||
| Proceeds from sale of stock held by SECT | 13,250 | 679 | 24,721 | |||||||||||||||||
| Purchase of stock held by SECT | (14,830) | (4,239) | (6,774) | |||||||||||||||||
| Other financing transactions | — | — | (5,878) | |||||||||||||||||
| Net cash used by financing activities | (134,908) | (86,995) | (142,766) | |||||||||||||||||
| Effect of exchange rate changes on cash | (10,256) | 768 | 2,306 | |||||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 18,319 | 15,842 | (7,476) | |||||||||||||||||
Cash, cash equivalents and restricted cash at beginning of year | 100,914 | 85,072 | 92,548 | |||||||||||||||||
Cash, cash equivalents and restricted cash at end of year | $ | 119,233 | $ | 100,914 | $ | 85,072 | ||||||||||||||
46
Consolidated Statements of Cash Flows, continued | ||||||||||||||||||||
Fiscal Years Ended | ||||||||||||||||||||
| October 1, 2022 | October 2, 2021 | October 3, 2020 | ||||||||||||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||||||||
| Interest paid | $ | 34,765 | $ | 35,220 | $ | 38,420 | ||||||||||||||
| Income taxes paid, net of refunds | 24,047 | 44,043 | 59,053 | |||||||||||||||||
| Treasury shares issued as compensation | 4,482 | 10,751 | 9,063 | |||||||||||||||||
| Equipment and property acquired through lease financing | 36,897 | 14,894 | 24,904 | |||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
47
Notes to Consolidated Financial Statements (dollars in thousands, except per share data) | ||||||||||||||
Note 1 - Summary of Significant Accounting Policies
Consolidation: The consolidated financial statements include the accounts of Moog Inc. and all of our U.S. and foreign subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year: Our fiscal year ends on the Saturday that is closest to September 30. The consolidated financial statements include 52 weeks for the year ended October 1, 2022, 52 weeks for the year ended October 2, 2021 and 53 weeks for the year ended October 3, 2020.
Operating Cycle: Consistent with industry practice, aerospace and defense related inventories, unbilled recoverable costs and profits on over-time contract receivables, customer advances, warranties and contract reserves include amounts relating to contracts having long production and procurement cycles, portions of which are not expected to be realized or settled within one year.
Foreign Currency Translation: Assets and liabilities of subsidiaries that prepare financial statements in currencies other than the U.S. dollar are translated using rates of exchange as of the balance sheet date and the statements of earnings are translated at the average rates of exchange for each reporting period.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Revenue Recognition: We recognize revenue from contracts with customers using an over-time, cost-to-cost method of accounting or at the point in time that control transfers to the customer. For additional discussion on revenue recognition, see Note 2 - Revenue from Contracts with Customers.
Shipping and Handling Costs: Shipping and handling costs are included in cost of sales.
Research and Development: Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs depreciation and amortization.
Bid and Proposal Costs: Bid and proposal costs are expensed as incurred and classified as selling, general and administrative expenses.
Equity-Based Compensation: Our equity-based compensation plans allow for various types of equity-based incentive awards. The types and mix of these incentive awards are evaluated on an on-going basis and may vary based on our overall strategy regarding compensation. Equity-based compensation expense is based on awards that are ultimately expected to vest over the requisite service periods and are based on the fair value of the award measured on the grant date. Vesting requirements vary for directors, officers and key employees. In general, awards granted to officers and key employees principally vest over three years, in equal annual installments for time-based awards and in three years cliff vest for performance-based awards. We have elected to account for forfeitures when the forfeiture of the underlying awards occur. Equity-based compensation expense is included in selling, general and administrative expenses.
Cash and Cash Equivalents: All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
Restricted Cash: Restricted cash principally represents funds held for capital expenditures and to satisfy supplemental retirement obligations.
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Allowance for Credit Losses: The allowance for credit losses is based on our assessment of the collectibility of customer accounts. The allowance is determined by considering factors such as historical experience, credit quality, age of the accounts receivable, current economic conditions and reasonable forecasted financial information that may affect a customer’s ability to pay.
Inventories: Inventories are stated at the lower of cost or net realizable value with cost determined primarily on the first-in, first-out (FIFO) method of valuation.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Plant and equipment are depreciated principally using the straight-line method over the estimated useful lives of the assets, generally ranging from 15 to 40 years for buildings and improvements, 5 to 15 years for machinery and equipment and 3 to 10 years for computer equipment and software. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the asset, whichever is shorter.
Goodwill: We test goodwill for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that indicate that the fair value of a reporting unit is likely to be below its carrying amount. We also test goodwill for impairment when there is a change in reporting units.
We may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for all or selected reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative test. We may also elect to perform a quantitative test instead of a qualitative assessment for any or all of our reporting units. We performed a qualitative test for all reporting units in 2021 and 2020.
Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We typically use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the weighted-average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. To determine the amount of the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit's assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess. We performed a quantitative test for all reporting units in 2022.
There were no goodwill impairment charges recorded in 2022, 2021 or 2020.
Acquired Intangible Assets: Acquired identifiable intangible assets are recorded at cost and are amortized over their estimated useful lives.
49
Impairment of Long-Lived Assets: Long-lived assets, including acquired identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We use undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows.
In 2022, we recorded impairment charges on long-lived assets in our Aircraft Controls and Industrial Systems segment. These charges relate to property, plant and equipment that experienced a significant decline in value due to the slower than expected recovery of our commercial aircraft business. In addition, we recorded impairment charges on intangible assets associated with a product line we are no longer pursuing. These charges are included in asset impairment in the Consolidated Statements of Earnings.
In 2021, we recorded impairment charges on long-lived assets in our Space and Defense Controls segment. These charges relate to property, plant and equipment and intangibles assets that experienced a decline in value. These charges are included in asset impairment in the Consolidated Statements of Earnings.
In 2020, we recorded impairment charges on long-lived assets primarily in our Aircraft Controls and Industrial Systems segments. These charges relate to property, plant and equipment, right-of-use-assets and intangible assets that experienced significant decline in value due to economic impacts of the COVID-19 pandemic. These charges are included in asset impairment in the Consolidated Statements of Earnings.
See Note 4 - Receivables, Note 5 - Inventories, Note 6 - Property, Plant and Equipment, Note 7 - Leases, Note 8 - Goodwill and Intangible Assets and Note 12 - Fair Value for additional disclosures relating to impairment charges recorded.
Product Warranties: In the ordinary course of business, we warrant our products against defect in design, materials and workmanship typically over periods ranging from twelve to sixty months. We determine warranty reserves needed by product line based on historical experience and current facts and circumstances.
Financial Instruments: Our financial instruments consist primarily of cash and cash equivalents, restricted cash, receivables, notes payable, accounts payable, long-term debt, interest rate swaps and foreign currency contracts. The carrying values for our financial instruments approximate fair value with the exception at times of long-term debt. We do not hold or issue financial instruments for trading purposes.
We carry derivative instruments on the Consolidated Balance Sheets at fair value, determined by reference to quoted market prices. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. Our use of derivative instruments is generally limited to cash flow hedges of certain interest rate risks and minimizing foreign currency exposure on foreign currency transactions, which are typically designated in hedging relationships, and intercompany balances, which are not designated as hedging instruments. Cash flows resulting from forward contracts are accounted for as hedges of identifiable transactions or events and classified in the same category as the cash flows from the items being hedged.
Reclassifications: Certain prior year amounts have been reclassified to conform to current year's presentation, which management does not consider to be material.
Recent Accounting Pronouncements:
Recent Accounting Pronouncements Adopted
There have been no accounting pronouncements adopted for the year ended October 1, 2022.
Recent Accounting Pronouncements Not Yet Adopted
We consider the applicability and impact of all Accounting Standard Updates ("ASU"). ASUs not listed were assessed and determined to be either not applicable, or had or are expected to have an immaterial impact on our financial statements and related disclosures.
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Note 2 - Revenue from Contracts with Customers
We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606. The first step is identifying the contract. The identification of a contract with a customer requires an assessment of each party’s rights and obligations regarding the products or services to be transferred, including an evaluation of termination clauses and presently enforceable rights and obligations. Each party’s rights and obligations and the associated terms and conditions are typically determined in purchase orders. For sales that are governed by master supply agreements under which provisions define specific program requirements, purchase orders are issued under these agreements to reflect presently enforceable rights and obligations for the units of products and services being purchased.
Contracts are sometimes modified to account for changes in contract specifications and requirements. When this occurs, we assess the modification as prescribed in ASC 606 and determine whether the existing contract needs to be modified (and revenue cumulatively caught up), whether the existing contract needs to be terminated and a new contract needs to be created, or whether the existing contract remains and a new contract needs to be created. This is determined based on the rights and obligations within the modification as well as the associated transaction price.
The next step is identifying the performance obligations. A performance obligation is a promise to transfer goods or services to a customer that is distinct in the context of the contract, as defined by ASC 606. We identify a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of our assessment, we consider all goods and/or services promised in the contract, regardless of whether they are explicitly stated or implied by customary business practices. The products and services in our contracts are typically not distinct from one another due to their complexity and reliance on each other or, in many cases, we provide a significant integration service. Accordingly, many of our contracts are accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product life cycles. Warranties are provided on certain contracts, but do not typically provide for services beyond standard assurances and are therefore not distinct performance obligations under ASC 606.
The third step is determining the transaction price, which represents the amount of consideration we expect to be entitled to receive from a customer in exchange for providing the goods or services. There are times when this consideration is variable, for example a volume discount, and must be estimated. Sales, use, value-added, and excise taxes are excluded from the transaction price, where applicable.
The fourth step is allocating the transaction price. The transaction price must be allocated to the performance obligations identified in the contract based on relative stand-alone selling prices when available, or an estimate for each distinct good or service in the contract when standalone prices are not available. Our contracts with customers generally require payment under normal commercial terms after delivery. Payment terms are typically within 30 to 60 days of delivery. The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment.
The final step is the recognition of revenue. We recognize revenue as the performance obligations are satisfied. ASC 606 provides guidance to help determine if we are satisfying the performance obligation at a point in time or over time. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative use of the product or service. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.
Revenue is recognized either over time using the cost-to-cost method, or point in time method. 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 as the assets are being created or enhanced. 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. Our over-time contracts are primarily firm fixed price.
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Revenue recognized at the point in time control is transferred to the customer 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 - the entity has a present right to payment; the customer has legal title; the customer has physical possession; the customer has the significant risks and rewards of ownership; and the customer has accepted the asset. When control has transferred to the customer, profit is generated as cost of sales is recorded and as revenue is recognized. Inventory costs include all product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead cost allocations. Shipping and handling costs are considered costs to fulfill a contract and not considered performance obligations. They are included in cost of sales as incurred.
Revenue is recognized on contracts using the cost-to-cost method of accounting as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. We believe that cumulative costs incurred to date as a percentage of estimated total contract costs at completion is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. Estimates are reviewed and updated quarterly for substantially all contracts. In 2022, we recognized lower revenues of $3,518 for adjustments made to performance obligations satisfied (or partially satisfied) in previous periods. In 2021, we recognized revenues of $11,167 for adjustments made to performance obligations satisfied (or partially satisfied) in previous periods. In 2020, we recognized revenues of $15,785 for adjustments made to performance obligations satisfied (or partially satisfied) in previous periods.
Contract costs include only allocable, allowable and reasonable costs which are included in cost of sales when incurred. For applicable U.S. Government contracts, contract costs are determined in accordance with the Federal Acquisition Regulations and the related Cost Accounting Standards. The nature of these costs includes development engineering costs and product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded as a result of the revenue recognized less costs incurred in any reporting period. Variable consideration and contract modifications, such as performance incentives, penalties, contract claims or change orders are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. As of October 1, 2022, revenue recognized on contracts for unresolved claims or unapproved contract change orders was not material.
As of October 1, 2022, we had contract reserves of $46,547. For contracts with anticipated losses at completion, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. Loss reserves are more common on firm fixed-price contracts that involve, to varying degrees, the design and development of new and unique controls or control systems to meet the customers’ specifications. In accordance with ASC 606, we calculate contract losses at the contract level, versus the performance obligation level. Recall reserves are recorded when additional work is needed on completed products for them to meet contract specifications. Contract-related loss reserves are recorded for the additional work needed on completed and delivered products in order for them to meet contract specifications.
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Contract Assets and Liabilities
Unbilled receivables (contract assets) primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. These are included as Receivables on the Consolidated Balance Sheets. Contract advances (contract liabilities) relate to payments received from customers in advance of the satisfaction of performance obligations for a contract. We do not consider contract advances to be significant financing components as the intent of these payments in advance are for reasons other than providing a significant financing benefit and are customary in our industry.
Total contract assets and contract liabilities are as follows:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Unbilled receivables | $ | 614,760 | $ | 546,764 | ||||||||||
| Contract advances | 296,899 | 263,686 | ||||||||||||
| Net contract assets | $ | 317,861 | $ | 283,078 | ||||||||||
The increase in contract assets reflects the net impact of additional unbilled revenues recorded in excess of revenue recognized during the period. The increase in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. As of October 1, 2022, we recognized $180,789 of revenue that was included in the contract liability balance at the beginning of the period.
Remaining Performance Obligations
As of October 1, 2022, the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) was $5,200,000. We expect to recognize approximately 44% of that amount as sales over the next twelve months and the balance thereafter.
Disaggregation of Revenue
See Note 21 - Segments, for disclosures related to disaggregation of revenue.
Note 3 - Acquisitions, Divestitures and Equity Method Investments
Acquisitions
On February 21, 2022, we acquired TEAM Accessories Limited ("TEAM") based in Dublin, Ireland for a purchase price, net of acquired cash, of $14,885, consisting of $11,832 in cash and contingent consideration with an initial fair value of $3,053. TEAM specializes in Maintenance, Repair and Overhaul ("MRO") of engine and airframe components. This operation is included in our Aircraft Controls segment. The purchase price allocation is subject to adjustments as we obtain additional information for our estimates during the measurement period.
On December 18, 2020, we acquired Genesys Aerosystems Group, Inc. ("Genesys"), headquartered in Mineral Wells, Texas for a purchase price of $77,600, net of acquired cash. Genesys designs and manufactures a full suite of electronic flight instrument systems and autopilot solutions. This operation is included in our Aircraft Controls segment.
Divestitures
On September 30, 2022, we sold a sonar business based in the United Kingdom previously included in our Industrial Systems segment. We received net proceeds of $12,401 and recorded a loss of $15,379, net of transaction costs. The loss 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 received net proceeds of $9,823 and recorded a loss of $4,112, net of transaction costs. The loss is subject to adjustments associated with amounts currently held in escrow.
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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. We received net proceeds of $35,550 and recorded a gain of $16,146, net of transaction costs. The gain is subject to adjustments associated with amounts currently held in escrow.
In the fourth quarter of 2021, we sold a non-core business of our Industrial Systems segment. We received net proceeds of $11,285 and recorded a loss of $1,536.
In the first quarter of 2021, we sold a non-core business in our Aircraft Controls segment for $2,081 in net consideration and recorded a loss of $683.
Equity Method Investments
On August 31, 2022, we contributed $1,024 to Suffolk Technologies Fund 1, L.P., a limited partnership that invests in startups to transform the construction, real estate and property maintenance industries in the U.S. As we are a limited partner in this investment, we are accounting for it using the equity method. We have a remaining on-call capital commitment of up to $6,976. This operation is included in our Industrial Systems segment.
On June 3, 2022, we increased our investment in NOVI LLC ("NOVI") by $571 and now hold a 42.5% ownership interest. NOVI specializes is applying machine learning algorithms to space situational awareness. We are accounting for this investment using the equity method. This operation is included in our Space and Defense Controls segment.
Note 4 - Receivables
Receivables consist of:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Accounts receivable | $ | 363,137 | $ | 395,674 | ||||||||||
| Unbilled receivables | 614,760 | 546,764 | ||||||||||||
| Other | 16,973 | 7,842 | ||||||||||||
| Less allowance for credit losses | (4,608) | (4,351) | ||||||||||||
| Receivables, net | $ | 990,262 | $ | 945,929 | ||||||||||
Net receivables disclosed above reflects a non-cash write-down of $642 recorded for the year ended October 1, 2022 associated with Russian activities in Ukraine.
On November 4, 2021, Moog Receivables LLC (the "Receivables Subsidiary"), a wholly owned bankruptcy remote special purpose subsidiary of Moog Inc. (the "Company"), as seller, the Company, as master servicer, Wells Fargo Bank, N.A., as administrative agent (the "Agent") and certain purchasers (collectively, the "Purchasers") entered into an Amended and Restated Receivables Purchase Agreement (the "RPA"). The RPA matures on November 4, 2024 and is subject to customary termination events related to transactions of this type.
Under the RPA, the Receivables Subsidiary may sell receivables to the Purchasers in amounts up to a $100,000 limit. The receivables will be sold to the Purchasers in consideration for the Purchasers making payments of cash, which is referred to as "capital" for purposes of the RPA, to the Receivables Subsidiary in accordance with the terms of the RPA. The Receivables Subsidiary may sell receivables to the Purchasers so long as certain conditions are satisfied, including that, at any date of determination, the aggregate capital paid to the Receivables Subsidiary does not exceed a "capital coverage amount", equal to an adjusted net receivables pool balance minus a required reserve. Each Purchaser's share of capital accrues yield at a variable rate plus an applicable margin.
The parties intend that the conveyance of receivables to the Agent, for the ratable benefit of the Purchasers will constitute a purchase and sale of receivables and not a pledge for security. The Receivables Subsidiary has guaranteed to each Purchaser and Agent the prompt payment of sold receivables, and to secure the prompt payment and performance of such guaranteed obligations, the Receivables Subsidiary has granted a security interest to the Agent, for the benefit of the Purchasers, in all assets of the Receivables Subsidiary. The assets of the Receivables Subsidiary are not available to pay our creditors or any affiliate thereof. In our capacity as master servicer under the RPA, we are responsible for administering and collecting receivables and have made customary representations, warranties, covenants and indemnities. We also provided a performance guarantee for the benefit of the Purchaser.
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The proceeds of the RPA are classified as operating activities in our Consolidated Statement of Cash Flows and were used to pay off the outstanding balance of the Securitization Program. Cash received from collections of sold receivables is used by the Receivables Subsidiary to fund additional purchases of receivables on a revolving basis or to return all or any portion of outstanding capital of the Purchaser. Subsequent collections on the pledged receivables, which have not been sold, will be classified as operating cash flows at the time of collection. Total receivables sold under the RPA were $522,822 for the year ended October 1, 2022. Total cash collections under the RPA were $422,822 for the year ended October 1, 2022. The fair value of the sold receivables approximated book value due to their credit quality and short-term nature, and as a result, no gain or loss on sale of receivables was recorded.
The amount sold to the Purchasers was $100,000 at October 1, 2022, which was derecognized from the Consolidated Balance Sheets. As collateral against sold receivables, the Receivables Subsidiary maintains a certain level of unsold receivables, which was $657,658 at October 1, 2022.
Previously we securitized certain trade receivables in transactions that were accounted for as secured borrowings (the "Securitization Program"). We maintained a subordinated interest in a portion of the pool of trade receivables that were securitized. The retained interest, which is included in Receivables in the Consolidated Balance Sheets, is recorded at fair value, which approximates the total amount of the designated pool of accounts receivable. Refer to Note 9 - Indebtedness, for additional disclosures related to the Securitization Program.
Over-time contract receivables are primarily associated with prime contractors and subcontractors in connection with U.S. Government contracts, as well as commercial aircraft and satellite manufacturers. Amounts billed for over-time contracts to the U.S. Government were $18,750 at October 1, 2022 and $11,330 at October 2, 2021. Unbilled recoverable costs and accrued profits under over-time contracts to be billed to the U.S. Government were $38,020 at October 1, 2022 and $32,245 at October 2, 2021. Unbilled recoverable costs and accrued profits principally represent revenues recognized on contracts that were not billable on the balance sheet date. These amounts will be billed in accordance with contract terms, generally as certain milestones are reached or upon shipment. Unbilled amounts expected to be collected beyond one year are not material. In situations where billings exceed revenues recognized, the excess is included in contract advances.
There are no material amounts of claims or unapproved change orders included in the Consolidated Balance Sheets. There are no material balances billed but not paid by customers under retainage provisions.
Concentrations of credit risk on receivables are limited to those from significant customers who are believed to be financially sound. Receivables from Boeing were $235,405 at October 1, 2022 and $209,653 at October 2, 2021 and receivables from Lockheed Martin were $99,707 at October 1, 2022 and $88,744 at October 2, 2021. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral.
Note 5 - Inventories
Inventories, net of reserves, consist of:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Raw materials and purchased parts | $ | 219,893 | $ | 231,406 | ||||||||||
| Work in progress | 305,328 | 315,762 | ||||||||||||
| Finished goods | 63,245 | 65,927 | ||||||||||||
| Inventories, net | $ | 588,466 | $ | 613,095 | ||||||||||
There are no material inventoried costs relating to over-time contracts where revenue is accounted for using the cost-to-cost method of accounting as of October 1, 2022 and October 2, 2021.
In 2022, we have recorded impairment charges on inventory of $1,907 associated with Russian actions in the Ukraine. See Note 13 - Restructuring for additional disclosures relating to inventory write-downs.
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Note 6 - Property, Plant and Equipment
Property, plant and equipment consists of:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Land | $ | 32,164 | $ | 35,762 | ||||||||||
| Buildings and improvements | 496,632 | 506,450 | ||||||||||||
| Machinery and equipment | 791,980 | 791,984 | ||||||||||||
| Computer equipment and software | 201,960 | 179,066 | ||||||||||||
| Property, plant and equipment, at cost | 1,522,736 | 1,513,262 | ||||||||||||
| Less accumulated depreciation and amortization | (853,828) | (867,484) | ||||||||||||
| Property, plant and equipment, net | $ | 668,908 | $ | 645,778 | ||||||||||
In 2022, we recorded $15,048 of , based on expected cash flows over the remaining life of the assets associated with a slower than expected recovery of our commercial aircraft business. In 2021, we recorded $356 of impairment charges for owned assets, based on expected cash flows over the remaining life of the assets in relation to a decline in the related business. In 2020, we recorded $25,419 of impairment charges for owned and finance lease ROU assets, based on expected cash flows over the remaining life of the assets in relation to the impact of the COVID-19 pandemic.
Note 7 - Leases
We lease certain manufacturing facilities, office space and machinery and equipment globally. At inception we evaluate whether a contractual arrangement contains a lease. Specifically, we consider whether we control the underlying asset and have the right to obtain substantially all the economic benefits or outputs from the asset. If the contractual arrangement contains a lease, we then determine the classification of the lease, operating or finance, using the classification criteria described in ASC 842. We then determine the term of the lease based on terms and conditions of the contractual arrangement, including whether the options to extend or terminate the lease are reasonably certain to be exercised. We have elected to not separate lease components from non-lease components, such as common area maintenance charges and instead, account for the lease and non-lease components as a single component.
Our lease right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments. Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Accrued liabilities and other and Other long-term liabilities on the Consolidated Balance Sheets. Finance lease ROU assets are included in Property, plant and equipment and finance lease liabilities are included in Accrued liabilities and other and Other long-term liabilities on the Consolidated Balance Sheets. Operating lease cost is included in Cost of sales and Selling, general and administrative on the Consolidated Statements of Earnings. Finance lease cost is included in Cost of sales, Selling, general and administrative and Interest on the Consolidated Statements of Earnings.
The ROU assets and lease liabilities for both operating and finance leases are recognized as of the commencement date at the net present value of the fixed minimum lease payments over the term of the lease, using the discount rate described below. Variable lease payments are recorded in the period in which the obligation for the payment is incurred. Variable lease payments based on an index or rate are initially measured using the index or rate as of the commencement date of the lease and included in the fixed minimum lease payments. For short-term leases that have a term of 12 months or less as of the commencement date, we do not recognize a ROU asset or lease liability on our balance sheet; we recognize expense as the lease payments are made over the lease term.
The discount rate used to calculate the present value of our leases is the rate implicit in the lease. If the information necessary to determine the rate implicit in the lease is not available, we use our incremental borrowing rate for collateralized debt, which is determined using our credit rating and other information available as of the lease commencement date.
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The components of lease expense were as follows:
| 2022 | 2021 | 2020 | |||||||||||||||
| Operating lease cost | $ | 28,670 | $ | 30,353 | $ | 27,493 | |||||||||||
| Finance lease cost: | |||||||||||||||||
| Amortization of right-of-use assets | $ | 2,884 | $ | 2,282 | $ | 1,175 | |||||||||||
| Interest on lease liabilities | 1,057 | 736 | 367 | ||||||||||||||
| Total finance lease cost | $ | 3,941 | $ | 3,018 | $ | 1,542 | |||||||||||
Supplemental cash flow information related to leases was as follows:
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flow for operating leases | $ | 28,914 | $ | 29,926 | $ | 24,218 | |||||||||||
| Operating cash flow for finance leases | 1,057 | 736 | 367 | ||||||||||||||
| Financing cash flow for finance leases | 2,524 | 2,156 | 1,167 | ||||||||||||||
| Assets obtained in exchange for lease obligations: | |||||||||||||||||
| Operating leases | 24,659 | 9,426 | 13,738 | ||||||||||||||
| Finance leases | 12,238 | 5,558 | 11,166 | ||||||||||||||
Supplemental balance sheet information related to leases was as follows:
| October 1, 2022 | October 2, 2021 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets | $ | 69,072 | $ | 60,355 | |||||||
| $ | 13,002 | $ | 14,176 | ||||||||
| 66,167 | 57,277 | ||||||||||
| $ | 79,169 | $ | 71,453 | ||||||||
| Finance Leases | |||||||||||
| Property, plant, and equipment, at cost | $ | 30,614 | $ | 19,861 | |||||||
| Accumulated depreciation | (5,606) | (3,375) | |||||||||
| $ | 25,008 | $ | 16,486 | ||||||||
| $ | 3,244 | $ | 2,014 | ||||||||
| 23,529 | 15,904 | ||||||||||
| $ | 26,773 | $ | 17,918 | ||||||||
| Weighted average remaining lease term in years | |||||||||||
| Operating leases | 7.7 | 7.4 | |||||||||
| Finance leases | 16.7 | 15.5 | |||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | 5.0 | % | 4.7 | % | |||||||
| Finance leases | 4.8 | % | 5.0 | % | |||||||
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Maturities of lease liabilities were as follows:
| October 1, 2022 | ||||||||||||||
| Operating Leases | Finance Leases | |||||||||||||
| 2023 | $ | 16,684 | $ | 4,401 | ||||||||||
| 2024 | 14,109 | 4,366 | ||||||||||||
| 2025 | 11,799 | 4,193 | ||||||||||||
| 2026 | 10,917 | 3,929 | ||||||||||||
| 2027 | 9,771 | 3,187 | ||||||||||||
| Thereafter | 35,430 | 26,279 | ||||||||||||
| Total lease payments | 98,710 | 46,355 | ||||||||||||
| Less: imputed interest | (19,541) | (19,582) | ||||||||||||
| Total | $ | 79,169 | $ | 26,773 | ||||||||||
On September 30, 2022, we sold a building located in Murray, Utah and concurrently entered into a lease agreement for the building with an initial term of two years, which also includes the option to extend the terms of the lease for up to two consecutive terms of six months each. The transaction resulted in a net gain of $9,075 which is included in the Consolidated Statements of Earnings.
The operating lease ROU assets and finance leased cost in the disclosures above as of October 2, 2021 reflect write downs of $3,696 and $1,112, respectively, based on expected cash flows over the remaining life of the assets in relation to impairment charges associated with the COVID-19 pandemic.
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Note 8 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
| Aircraft Controls | Space and Defense Controls | Industrial Systems | Total | |||||||||||
| Balance September 28, 2019 | $ | 176,939 | $ | 261,684 | $ | 345,617 | $ | 784,240 | ||||||
| Acquisition | — | — | 25,237 | 25,237 | ||||||||||
| Divestiture | — | — | (635) | (635) | ||||||||||
| Foreign currency translation | 2,582 | 42 | 10,390 | 13,014 | ||||||||||
| Balance at October 3, 2020 | 179,521 | 261,726 | 380,609 | 821,856 | ||||||||||
| Acquisition | 29,123 | — | — | 29,123 | ||||||||||
| Divestitures | (312) | — | (3,092) | (3,404) | ||||||||||
| Foreign currency translation | 2,447 | 41 | 1,542 | 4,030 | ||||||||||
| Balance at October 2, 2021 | 210,779 | 261,767 | 379,059 | 851,605 | ||||||||||
| Acquisition | 5,344 | — | — | 5,344 | ||||||||||
| Divestitures | (6,961) | (2,205) | (4,137) | (13,303) | ||||||||||
| Foreign currency translation | (9,643) | (155) | (28,528) | (38,326) | ||||||||||
| Balance at October 1, 2022 | $ | 199,519 | $ | 259,407 | $ | 346,394 | $ | 805,320 | ||||||
Goodwill in our Space and Defense Controls segment is net of a $4,800 accumulated impairment loss at October 1, 2022. Goodwill in our Medical Devices reporting unit, included in our Industrial Systems segment, is net of a $38,200 accumulated impairment loss at October 1, 2022.
The components of intangible assets are as follows:
| October 1, 2022 | October 2, 2021 | ||||||||||||||||
| Weighted- Average Life (years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Customer-related | 11 | $ | 135,899 | $ | (88,179) | $ | 163,215 | $ | (108,844) | ||||||||
| Technology-related | 9 | 69,856 | (52,951) | 82,716 | (58,119) | ||||||||||||
| Program-related | 23 | 35,305 | (18,817) | 40,211 | (19,707) | ||||||||||||
| Marketing-related | 8 | 21,925 | (17,833) | 28,590 | (22,212) | ||||||||||||
| Other | 10 | 1,693 | (1,488) | 1,963 | (1,718) | ||||||||||||
| Intangible assets | 12 | $ | 264,678 | $ | (179,268) | $ | 316,695 | $ | (210,600) | ||||||||
All acquired intangible assets other than goodwill are being amortized. Customer-related intangible assets primarily consist of customer relationships. Technology-related intangible assets primarily consist of technology, patents, intellectual property and software. Program-related intangible assets consist of long-term programs represented by current contracts and probable follow on work. Marketing-related intangible assets primarily consist of trademarks, trade names and non-compete agreements.
In 2022, we recorded $2,125 in impairment charges on long-lived assets in our Industrial Systems segment. These charges relate to intangibles assets associated with a product line we are no longer pursuing. In 2021, we recorded $1,144 in impairment charges on long-lived assets in our Space and Defense Controls segment, relating to intangibles assets that experienced a decline in value. In 2020, we recorded a $8,723 write down of intangible assets in our Aircraft Controls and Industrial Systems segments based on expected cash flows over the remaining life of the assets in relation to the impairment charges associated with the COVID-19 pandemic. These charges are included in asset impairment in the Consolidated Statements of Earnings.
Amortization of acquired intangible assets is as follows:
| 2022 | 2021 | 2020 | |||||||||
| Acquired intangible asset amortization | $ | 13,106 | $ | 13,454 | $ | 12,524 | |||||
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Based on acquired intangible assets recorded at October 1, 2022, amortization is estimated to be approximately:
| 2023 | 2024 | 2025 | 2026 | 2027 | |||||||||||||
| Estimated future amortization of acquired intangible assets | $ | 11,300 | $ | 10,500 | $ | 9,400 | $ | 9,200 | $ | 8,300 | |||||||
Note 9 - Indebtedness
We maintain short-term line of credit facilities with banks throughout the world that are principally demand lines subject to revision by the banks.
Long-term debt consists of:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| U.S. revolving credit facility | $ | 321,300 | $ | 321,886 | ||||||||||
| SECT revolving credit facility | 20,000 | 7,000 | ||||||||||||
| Senior notes 4.25% | 500,000 | 500,000 | ||||||||||||
| Securitization program | — | 80,000 | ||||||||||||
| Other long-term debt | 916 | 1,280 | ||||||||||||
| Senior debt | 842,216 | 910,166 | ||||||||||||
| Less deferred debt issuance cost | (4,428) | (6,446) | ||||||||||||
| Less current installments | (916) | (80,365) | ||||||||||||
| Long-term debt | $ | 836,872 | $ | 823,355 | ||||||||||
Our U.S. revolving credit facility, which matures on October 15, 2024, has a capacity of $1,100,000 and provides an expansion option, which permits us to request an increase of up to $400,000 to the credit facility upon satisfaction of certain conditions. The credit facility is secured by substantially all of our U.S. assets. The loan agreement contains various covenants which, among others, specify interest coverage and maximum leverage. We are in compliance with all covenants. The weighted-average interest rate on the majority of the outstanding credit facility borrowings is 4.16% and is principally based on LIBOR plus the applicable margin, which was 1.50% at October 1, 2022. See Note 24 - Subsequent Events, for information related to the amended and restated U.S. revolving credit facility.
The SECT has a revolving credit facility with a borrowing capacity of $35,000, maturing on July 26, 2024. Interest is based on LIBOR plus an applicable margin of 2.13%. A commitment fee is also charged based on a percentage of the unused amounts available and is not material.
At October 1, 2022, we had $500,000 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, which commenced on June 15, 2020. 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. We are in compliance with all covenants. The aggregate net proceeds of $491,769 were used to repay indebtedness under our U.S. revolving credit facility, thereby increasing the unused portion of our U.S. revolving credit facility. The effective interest rate for these notes after considering the amortization of deferred debt issuance costs is 4.60%.
The Securitization Program, effectively increasing our borrowing capacity by up to $80,000, was extended on October 29, 2021 and matured on December 29, 2021. Under the Securitization Program, we sold certain trade receivables and related rights to an affiliate, which in turn sold an undivided variable percentage ownership interest in the trade receivables to a financial institution, while maintaining a subordinated interest in a portion of the pool of trade receivables. Interest for the Securitization Program was based on 30-day LIBOR plus an applicable margin. A commitment fee was also charged based on a percentage of the unused amounts available and was not material. The agreement governing the Securitization Program contained restrictions and covenants which included limitations on the making of certain restricted payments, creation of certain liens, and certain corporate acts such as mergers, consolidations and sale of substantially all assets. The Securitization Program had a minimum borrowing requirement equal to the lesser of either 80% of our borrowing capacity or 100% of our borrowing base, which was a subset of the trade receivables sold under this agreement. See Note 4 - Receivables, for information related to the amended and restated RPA, which replaced the Securitization Program.
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Maturities of long-term debt are:
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||
| Long-term debt maturities | $ | 916 | $ | 20,000 | $ | 321,300 | $ | — | $ | — | $ | 500,000 | ||||||||
At October 1, 2022, we had pledged assets with a net book value of $1,485,188 as security for long-term debt.
At October 1, 2022, we had $787,530 of unused short and long-term borrowing capacity, including $762,313 from the U.S. revolving credit facility.
Commitment fees are charged on some of these arrangements and on the U.S. revolving credit facility based on a percentage of the unused amounts available and are not material.
Note 10 - Other Accrued Liabilities
Other accrued liabilities consists of:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Employee benefits | $ | 56,136 | $ | 54,146 | ||||||||||
| Contract reserves | 46,547 | 58,857 | ||||||||||||
| Warranty accrual | 23,072 | 26,602 | ||||||||||||
| Accrued income taxes | 17,776 | 12,908 | ||||||||||||
| Other | 71,845 | 59,492 | ||||||||||||
| Other accrued liabilities | $ | 215,376 | $ | 212,005 | ||||||||||
Activity in the warranty accrual is summarized as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Warranty accrual at beginning of period | $ | 26,602 | $ | 27,707 | $ | 28,061 | ||||||||||||||
| Additions from acquisitions | — | 990 | 767 | |||||||||||||||||
| Warranties issued during current period | 9,227 | 13,937 | 14,820 | |||||||||||||||||
| Adjustments to pre-existing warranties | (764) | (519) | (1,779) | |||||||||||||||||
| Reductions for settling warranties | (10,366) | (15,630) | (14,656) | |||||||||||||||||
| Divestiture adjustment | (618) | — | — | |||||||||||||||||
| Foreign currency translation | (1,009) | 117 | 494 | |||||||||||||||||
| Warranty accrual at end of period | $ | 23,072 | $ | 26,602 | $ | 27,707 | ||||||||||||||
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Note 11 - Derivative Financial Instruments
We principally use derivative financial instruments to manage foreign exchange risk related to foreign operations and foreign currency transactions and interest rate risk associated with long-term debt. We enter into derivative financial instruments with a number of major financial institutions to minimize counterparty credit risk.
Derivatives designated as hedging instruments
We use foreign currency contracts as cash flow hedges to effectively fix the exchange rates on future payments and revenue. To mitigate exposure in movements between various currencies, including the Philippine peso and the British pound, we had outstanding foreign currency contracts with notional amounts of $31,740 at October 1, 2022. These contracts mature at various times through March 1, 2024.
We use forward currency contracts to hedge our net investment in certain foreign subsidiaries. As of October 1, 2022, we had no outstanding net investment hedges.
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swaps are designated as hedges of the amount of future cash flows related to interest payments on variable-rate debt that, in combination with the interest payments on the debt, convert a portion of the variable-rate debt to fixed-rate debt. At October 1, 2022, we had no outstanding interest rate swaps.
Foreign currency contracts, net investment hedges and interest rate swaps are recorded in the Consolidated Balance Sheets at fair value and the related gains or losses are deferred in Shareholders’ Equity as a component of Accumulated Other Comprehensive Income (Loss) ("AOCIL"). These deferred gains and losses are reclassified into the Consolidated Statements of Earnings, as necessary, during the periods in which the related payments or receipts affect earnings. However, to the extent the foreign currency contracts and interest rate swaps are not perfectly effective in offsetting the change in the value of the payments and revenue being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was not material in 2022, 2021 or 2020.
Derivatives not designated as hedging instruments
We also have foreign currency exposure on balances, primarily intercompany, that are denominated in a foreign currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the Consolidated Statements of Earnings. To minimize foreign currency exposure, we have foreign currency contracts with notional amounts of $106,219 at October 1, 2022. The foreign currency contracts are recorded in the Consolidated Balance Sheets at fair value and resulting gains or losses are recorded in the Consolidated Statements of Earnings. We recorded the following gains and losses on foreign currency contracts which are included in other income or expense and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other income or expense:
| Statements of Earnings location | 2022 | 2021 | 2020 | |||||||||||||||||
| Net gain (loss) | ||||||||||||||||||||
| Foreign currency contracts | Other | $ | (10,396) | $ | 648 | $ | 1,306 | |||||||||||||
Summary of derivatives
The fair value and classification of derivatives is summarized as follows:
Balance Sheets location | October 1, 2022 | October 2, 2021 | |||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 562 | $ | 325 | ||||||||||||
| Foreign currency contracts | Other assets | 165 | 104 | ||||||||||||||
| Total asset derivatives | $ | 727 | $ | 429 | |||||||||||||
| Foreign currency contracts | Accrued liabilities and other | $ | 3,877 | $ | 1,235 | ||||||||||||
| Foreign currency contracts | Other long-term liabilities | 751 | 537 | ||||||||||||||
| Total liability derivatives | $ | 4,628 | $ | 1,772 | |||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 679 | $ | 226 | ||||||||||||
| Foreign currency contracts | Accrued liabilities and other | $ | 738 | $ | 480 | ||||||||||||
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Note 12 - Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. The definition of the fair value hierarchy is as follows:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3 – Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.
Our derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market data, such as interest rate yield curves and currency rates, and are classified as Level 2 within the valuation hierarchy.
The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis, all of which are classified as Level 2, except for the acquisition contingent consideration, which is classified as Level 3:
| Balance Sheets location | October 1, 2022 | October 2, 2021 | |||||||||||||||
| Foreign currency contracts | Other current assets | $ | 1,241 | $ | 551 | ||||||||||||
| Foreign currency contracts | Other assets | 165 | 104 | ||||||||||||||
| Total assets | $ | 1,406 | $ | 655 | |||||||||||||
| Foreign currency contracts | Accrued liabilities and other | $ | 4,615 | $ | 1,715 | ||||||||||||
| Foreign currency contracts | Other long-term liabilities | 751 | 537 | ||||||||||||||
| Acquisition contingent consideration | Other long-term liabilities | 3,272 | — | ||||||||||||||
| Total liabilities | $ | 8,638 | $ | 2,252 | |||||||||||||
The changes in financial liabilities classified as Level 3 within the fair value hierarchy are as follows:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Balance at beginning of period | $ | — | $ | — | ||||||||||
| Additions from acquisition | 3,053 | — | ||||||||||||
| Increase in discounted future cash flows recorded as interest expense | 219 | — | ||||||||||||
| Balance at end of period | $ | 3,272 | $ | — | ||||||||||
Our only financial instrument for which the carrying value differs from its fair value is long-term debt. At October 1, 2022, the fair value of long-term debt was $775,900 compared to its carrying value of $842,216. The fair value of long-term debt is classified as Level 2 within the fair value hierarchy and was estimated based on quoted market prices.
Receivables, inventories, property, plant and equipment, ROU assets, and intangible assets have been measured at fair values on a nonrecurring basis using future discounted cash flows and other observable inputs (Level 3) and are not included in the fair value tables above. Impairment losses of $19,960, $1,500 and $37,839 in 2022, 2021 and 2020, respectively, are recorded as a result of these measurements and are described in Note 4 - Receivables, Note 5 - Inventories, Note 6 - Property, Plant and Equipment, Note 7 - Leases and Note 8 - Goodwill and Intangible Assets.
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Note 13 - Restructuring
In 2022, we initiated restructuring actions in relation to portfolio shaping activities in our Space and Defense and Industrial Systems segments and for slower than expected commercial aircraft business recovery in our Aircraft Controls segment. These actions have and will result in workforce reductions, principally in the U.S., China, Europe and the U.K.. The 2022 restructuring charge consists of non-cash charges related to an inventory write-down of $1,692 and equipment of $538 as well as severance and other costs of $8,971.
In 2020, we initiated restructuring actions in relation to impacts of the COVID-19 pandemic. The actions resulted in workforce reductions, primarily in the Philippines, Europe and the U.S. We have recorded a total of $10,466 for severance.
Restructuring activity for severance and other costs by segment and reconciliation to consolidated amounts is as follows:
| Aircraft Controls | Space and Defense Controls | Industrial Systems | Total | |||||||||||
| Balance at September 28, 2019 | $ | — | $ | 27 | $ | 4,096 | $ | 4,123 | ||||||
| Charged to expense - 2020 plan | 3,340 | 185 | 7,175 | 10,700 | ||||||||||
| Non-cash charges - 2020 plan | (234) | — | — | (234) | ||||||||||
| Adjustments to provision | — | (1) | (892) | (893) | ||||||||||
| Cash payments - 2020 plan | (1,859) | (185) | (828) | (2,872) | ||||||||||
| Cash payments - 2018 plan | — | (26) | (705) | (731) | ||||||||||
| Foreign currency translation | — | — | 249 | 249 | ||||||||||
| Balance at October 3, 2020 | 1,247 | — | 9,095 | 10,342 | ||||||||||
| Adjustments to provision | (457) | — | (711) | (1,168) | ||||||||||
| Cash payments - 2020 plan | (611) | — | (2,423) | (3,034) | ||||||||||
| Cash payments - 2018 plan | — | — | (524) | (524) | ||||||||||
| Foreign currency translation | — | — | 49 | 49 | ||||||||||
| Balance at October 2, 2021 | 179 | — | 5,486 | 5,665 | ||||||||||
| Charged to expense - 2022 plan | 3,996 | 3,755 | 3,450 | 11,201 | ||||||||||
| Non-cash charges - 2022 plan | — | (2,230) | — | (2,230) | ||||||||||
| Cash payments - 2022 plan | (3,767) | (1,297) | (613) | (5,677) | ||||||||||
| Cash payments - 2020 plan | (179) | — | (443) | (622) | ||||||||||
| Cash payments - 2018 plan | — | — | (432) | (432) | ||||||||||
| Foreign currency translation | — | — | (770) | (770) | ||||||||||
| Balance at October 1, 2022 | $ | 229 | $ | 228 | $ | 6,678 | $ | 7,135 | ||||||
As of October 1, 2022, the restructuring accrual consists of $2,919 for the 2022 plan, $2,918 for the 2020 plan and $1,298 for the 2018 plan. Restructuring is expected to be paid within a year, except portions classified as long-term liabilities based on the nature of the reserve.
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Note 14 - Employee Benefit Plans
We maintain multiple employee benefit plans, covering employees at certain locations.
Our qualified U.S. defined benefit pension plan is not open to new entrants. New employees are not eligible to participate in the pension plan. Instead, we make contributions for those employees to an employee-directed investment fund in the Moog Inc. Retirement Savings Plan ("RSP"), which consists of two defined contribution options, the RSP and the RSP(+). Effective January 1, 2020, all employees hired prior to January 1, 2019 are eligible to either participate in the new RSP(+) or remain in the existing RSP. All employees hired after January 1, 2019 are automatically enrolled in the new RSP(+). The Company’s contributions to both the RSP and RSP(+) are based on a percentage of the employee’s eligible compensation and age and are in addition to the employer match on voluntary employee contributions. The Company's contributions and the employer match were both enhanced under the new RSP(+).
The RSP and RSP(+) includes an employee stock ownership feature. As one of the investment alternatives, participants in the RSP and RSP(+) can acquire our stock at market value. Shares are allocated and compensation expense is recognized as the employer share match is earned. At October 1, 2022, the participants in the RSP and RSP(+) owned 1,735,412 Class B shares.
Expense for all defined contribution plans consists of:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| U.S. defined contribution plans | $ | 43,550 | $ | 36,131 | $ | 27,698 | ||||||||||||||
| Non-U.S. defined contribution plans | 8,157 | 8,890 | 5,965 | |||||||||||||||||
| Total expense for defined contribution plans | $ | 51,707 | $ | 45,021 | $ | 33,663 | ||||||||||||||
As of January 1, 2021, one of our non-U.S. defined benefit plans was replaced by a defined contribution plan. The transaction eliminated balance sheet exposure for the plan, reducing the projected benefit obligation by $63,333, the fair value of plan assets by $57,643 and resulted in a curtailment gain of $5,830.
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The changes in projected benefit obligations and plan assets and the funded status of the U.S. and non-U.S. defined benefit plans are as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Change in projected benefit obligation: | |||||||||||||||||||||||
| Projected benefit obligation at prior year measurement date | $ | 704,989 | $ | 688,689 | $ | 205,093 | $ | 264,419 | |||||||||||||||
| Service cost | 19,827 | 22,488 | 4,248 | 5,290 | |||||||||||||||||||
| Interest cost | 18,246 | 17,103 | 2,413 | 2,277 | |||||||||||||||||||
| Contributions by plan participants | — | — | 184 | 380 | |||||||||||||||||||
| Actuarial (gains) losses | (198,538) | (13,815) | (48,255) | 2,224 | |||||||||||||||||||
| Foreign currency exchange impact | — | — | (28,435) | 68 | |||||||||||||||||||
| Benefits paid | (12,845) | (8,298) | (5,136) | (5,271) | |||||||||||||||||||
| Curtailments | — | — | — | (5,690) | |||||||||||||||||||
| Settlements | — | — | (2,312) | (58,604) | |||||||||||||||||||
| Other | (733) | (1,178) | (61) | — | |||||||||||||||||||
| Projected benefit obligation at measurement date | $ | 530,946 | $ | 704,989 | $ | 127,739 | $ | 205,093 | |||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Fair value of assets at prior year measurement date | $ | 640,513 | $ | 615,872 | $ | 127,766 | $ | 170,765 | |||||||||||||||
| Actual return on plan assets | (186,536) | 28,718 | (17,686) | 11,552 | |||||||||||||||||||
| Employer contributions | 5,324 | 5,399 | 8,210 | 8,119 | |||||||||||||||||||
| Contributions by plan participants | — | — | 184 | 380 | |||||||||||||||||||
| Benefits paid | (12,845) | (8,298) | (5,136) | (5,271) | |||||||||||||||||||
| Settlements | — | — | (2,312) | (58,604) | |||||||||||||||||||
| Foreign currency exchange impact | — | — | (19,971) | 825 | |||||||||||||||||||
| Other | (733) | (1,178) | (61) | — | |||||||||||||||||||
| Fair value of assets at measurement date | $ | 445,723 | $ | 640,513 | $ | 90,994 | $ | 127,766 | |||||||||||||||
| Funded status and amount recognized in assets and liabilities | $ | (85,223) | $ | (64,476) | $ | (36,745) | $ | (77,327) | |||||||||||||||
| Amount recognized in assets and liabilities: | |||||||||||||||||||||||
| Long-term assets | $ | — | $ | 40,873 | $ | 10,672 | $ | 9,266 | |||||||||||||||
| Current and long-term pension liabilities | (85,223) | (105,349) | (47,417) | (86,593) | |||||||||||||||||||
| Amount recognized in assets and liabilities | $ | (85,223) | $ | (64,476) | $ | (36,745) | $ | (77,327) | |||||||||||||||
| Amount recognized in AOCIL, before taxes: | |||||||||||||||||||||||
| Prior service cost (credit) | $ | — | $ | — | $ | 724 | $ | 940 | |||||||||||||||
| Actuarial losses | 160,659 | 158,445 | 13,209 | 49,196 | |||||||||||||||||||
| Amount recognized in AOCIL, before taxes | $ | 160,659 | $ | 158,445 | $ | 13,933 | $ | 50,136 | |||||||||||||||
Our funding policy is to contribute at least the amount required by law in the respective countries.
The total accumulated benefit obligation as of the measurement date for all defined benefit pension plans was $611,225 in 2022 and $832,053 in 2021. At the measurement date in 2022, our plans had fair values of plan assets totaling $536,717. The following table provides aggregate information for the pension plans, which have accumulated benefit obligations in excess of plan assets:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Accumulated benefit obligation | $ | 130,315 | $ | 223,933 | ||||||||||
| Fair value of plan assets | 11,231 | 48,884 | ||||||||||||
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The following table provides aggregate information for the pension plans, which have projected benefit obligations in excess of plan assets:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Projected benefit obligation | $ | 615,339 | $ | 256,084 | ||||||||||
| Fair value of plan assets | 482,700 | 64,143 | ||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost and weighted-average assumptions used to determine benefit obligations as of the measurement dates are as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||
| Assumptions for net periodic benefit cost: | |||||||||||||||||||||||||||||||||||
| Service cost discount rate | 3.3 | % | 3.1 | % | 3.5 | % | 2.0 | % | 1.5 | % | 1.6 | % | |||||||||||||||||||||||
| Interest cost discount rate | 2.7 | % | 2.6 | % | 2.9 | % | 1.7 | % | 1.2 | % | 1.3 | % | |||||||||||||||||||||||
| Return on assets | 5.0 | % | 5.0 | % | 4.5 | % | 2.9 | % | 3.2 | % | 2.7 | % | |||||||||||||||||||||||
| Rate of compensation increase | 3.5 | % | 3.3 | % | 2.9 | % | 3.0 | % | 2.6 | % | 2.1 | % | |||||||||||||||||||||||
| Assumptions for benefit obligations: | |||||||||||||||||||||||||||||||||||
| Discount rate | 5.5 | % | 3.2 | % | 3.0 | % | 4.4 | % | 1.8 | % | 1.4 | % | |||||||||||||||||||||||
| Rate of compensation increase | 3.8 | % | 3.5 | % | 3.3 | % | 3.1 | % | 2.8 | % | 2.2 | % | |||||||||||||||||||||||
Pension plan investment policies and strategies are developed on a plan specific basis, which varies by country. The overall objective for the long-term expected return on both domestic and international plan assets is to earn a rate of return over time to meet anticipated benefit payments in accordance with plan provisions. The long-term investment objective of both the domestic and international retirement plans is to maintain the economic value of plan assets and future contributions by producing positive rates of investment return after subtracting inflation, benefit payments and expenses. Each of the plan’s strategic asset allocations is based on this long-term perspective and short-term fluctuations are viewed with appropriate perspective.
The U.S. qualified defined benefit plan’s assets are invested for long-term investment results. To accommodate the long-term investment horizon while providing appropriate liquidity, the plan maintains a liquid cash reserve sufficient to allow the plan to meet its benefit payment, fee and expense obligations. Its assets are broadly diversified to help alleviate the risk of adverse returns in any one security or investment class. The international plans’ assets are invested in both low-risk and high-risk investments in order to achieve the long-term investment strategy objective. Investment risks for both domestic and international plans are considered within the context of the entire asset allocation, rather than on a security-by-security basis.
The U.S. qualified defined benefit plan and certain international plans have investment committees that are responsible for formulating investment policies, developing manager guidelines and objectives and approving and managing qualified advisors and investment managers. The guidelines established for each of the plans define permitted investments within each asset class and apply certain restrictions such as limits on concentrated holdings in order to meet overall investment objectives.
Pension obligations and the related costs are determined using actuarial valuations that involve several assumptions. The return on assets assumption reflects the average rate of return expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. In determining the return on assets assumption, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and to provide adequate liquidity to meet immediate and future benefit payment requirements.
In determining our U.S. pension expense for 2022, we assumed an average rate of return on U.S. pension assets of approximately 5.0% measured over a planning horizon with reasonable and acceptable levels of risk. The rate of return was based on the actual asset allocation of 35% in equity securities and 65% in fixed income securities at October 2, 2021. In determining our non-U.S. pension expense for 2022, we assumed an average rate of return on non-U.S. pension assets of approximately 2.9% measured over a planning horizon with reasonable and acceptable levels of risk. The rate of return assumed an average asset allocation of 30% in equity securities and 70% in fixed income securities and other investments.
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The weighted average asset allocations by asset category for the pension plans as of October 1, 2022 and October 2, 2021 are as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| Target | 2022 Actual | 2021 Actual | Target | 2022 Actual | 2021 Actual | ||||||||||||||||||||||||||||||
| Asset category: | |||||||||||||||||||||||||||||||||||
| Equity | 30%-40% | 30% | 35% | 20%-40% | 26% | 32% | |||||||||||||||||||||||||||||
| Fixed Income | 60%-70% | 70% | 65% | 50%-70% | 65% | 63% | |||||||||||||||||||||||||||||
| Other | —% | —% | —% | 5%-15% | 9% | 5% | |||||||||||||||||||||||||||||
The valuation methodologies used for pension plan assets measured at fair value have been applied consistently.
Shares of registered investment companies: Consists of both equity and fixed income mutual funds. Valued at quoted market prices that represent the net asset value ("NAV") of shares held by the plan at year end.
Equity securities: Traded on national exchanges are valued at the last reported sales price. Investments denominated in foreign currencies are translated into U.S. dollars using the last reported exchange rate.
Fixed income securities: Valued using methods, such as dealer quotes, available trade information, spreads, bids and offers provided by a pricing vendor.
Money market funds: Institutional short-term investment vehicles valued daily.
Cash and cash equivalents: Direct cash holdings valued at cost (Level 1) or cash collateral for the initial margin requirements on futures contracts (Level 2) which approximates fair value.
Collective investment trust: NAV of the fund is calculated daily or weekly by the investment manager.
Unit linked life insurance funds: NAV value of the fund is calculated daily by the investment manager.
Investment in insurance contracts: Valued at contract value, which is the fair value of the underlying investment of the insurance company.
Limited partnerships: Valued at NAV of units held. The NAV is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liability. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different from the reported NAV.
Securities or other assets for which market quotations are not readily available or for which market quotations do not represent the value at the time of pricing (including certain illiquid securities) are fair valued in accordance with procedures established under the supervision and responsibility of the Trustee of that investment. Such procedures may include the use of independent pricing services or affiliated advisor pricing, which use prices based upon yields or prices of securities of comparable quality, coupon, maturity and type, indications as to values from dealers, operating data and general market conditions.
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The following tables present the consolidated plan assets using the fair value hierarchy, which is described in Note 12 - Fair Value, as of October 1, 2022 and October 2, 2021.
| U.S. Plans, October 1, 2022 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Investments at fair value: | |||||||||||||||||||||||
| Shares of registered investment companies: | |||||||||||||||||||||||
| Equity funds | $ | 116,598 | $ | — | $ | — | $ | 116,598 | |||||||||||||||
| Fixed income funds | 180,291 | — | — | 180,291 | |||||||||||||||||||
| Money market funds | — | 7,144 | — | 7,144 | |||||||||||||||||||
| Cash and cash equivalents | — | 5,790 | — | 5,790 | |||||||||||||||||||
| Total investments in fair value hierarchy | 296,889 | 12,934 | — | 309,823 | |||||||||||||||||||
| Investments measured at NAV practical expedient (1) | 135,900 | ||||||||||||||||||||||
| Total investments at fair value | $ | 296,889 | $ | 12,934 | $ | — | $ | 445,723 | |||||||||||||||
| Non-U.S. Plans, October 1, 2022 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Investments at fair value: | |||||||||||||||||||||||
| Mutual funds: | |||||||||||||||||||||||
| Equity funds | $ | — | $ | 5,091 | $ | — | $ | 5,091 | |||||||||||||||
| Fixed income funds | — | 6,020 | — | 6,020 | |||||||||||||||||||
| Equity securities | 5,739 | — | — | 5,739 | |||||||||||||||||||
| Fixed income securities | — | 18,515 | — | 18,515 | |||||||||||||||||||
| Collective investment trusts | — | 17,229 | — | 17,229 | |||||||||||||||||||
| Unit linked life insurance funds | — | 35,089 | — | 35,089 | |||||||||||||||||||
| Money market funds | — | 840 | — | 840 | |||||||||||||||||||
| Cash and cash equivalents | 465 | — | — | 465 | |||||||||||||||||||
| Insurance contracts and other | — | — | 2,006 | 2,006 | |||||||||||||||||||
| Total investments at fair value | $ | 6,204 | $ | 82,784 | $ | 2,006 | $ | 90,994 | |||||||||||||||
| U.S. Plans, October 2, 2021 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Investments at fair value: | |||||||||||||||||||||||
| Shares of registered investment companies: | |||||||||||||||||||||||
| Equity funds | $ | 200,929 | $ | — | $ | — | $ | 200,929 | |||||||||||||||
| Fixed income funds | 261,945 | — | — | 261,945 | |||||||||||||||||||
| Money market funds | — | 17,905 | — | 17,905 | |||||||||||||||||||
| Cash and cash equivalents | — | 7,370 | — | 7,370 | |||||||||||||||||||
Total investments in fair value hierarchy | 462,874 | 25,275 | — | 488,149 | |||||||||||||||||||
| Investments measured at NAV practical expedient (1) | 152,364 | ||||||||||||||||||||||
| Total investments at fair value | $ | 462,874 | $ | 25,275 | $ | — | $ | 640,513 | |||||||||||||||
| Non-U.S. Plans, October 2, 2021 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Investments at fair value: | |||||||||||||||||||||||
| Mutual funds: | |||||||||||||||||||||||
| Equity funds | $ | — | $ | 6,971 | $ | — | $ | 6,971 | |||||||||||||||
| Fixed income funds | — | 8,152 | — | 8,152 | |||||||||||||||||||
| Equity securities | 9,843 | — | — | 9,843 | |||||||||||||||||||
| Fixed income securities | — | 18,594 | — | 18,594 | |||||||||||||||||||
| Collective investment trusts | — | 21,681 | — | 21,681 | |||||||||||||||||||
| Unit linked life insurance funds | — | 58,643 | — | 58,643 | |||||||||||||||||||
| Money market funds | — | 542 | — | 542 | |||||||||||||||||||
| Cash and cash equivalents | 349 | — | — | 349 | |||||||||||||||||||
Insurance contracts and other | — | — | 2,991 | 2,991 | |||||||||||||||||||
| Total investments at fair value | $ | 10,192 | $ | 114,583 | $ | 2,991 | $ | 127,766 | |||||||||||||||
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(1)Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total retirement plan assets.
The following is a roll forward of the consolidated plan assets classified as Level 3 within the fair value hierarchy:
| Non-U.S. Plans | ||||||||
| Balance at October 3, 2020 | $ | 56,461 | ||||||
| Return on assets | 2,882 | |||||||
| Purchases from contributions to Plans | 1,914 | |||||||
| Settlements paid in cash | (59,180) | |||||||
Foreign currency translation | 914 | |||||||
| Balance at October 2, 2021 | 2,991 | |||||||
| Return on assets | 36 | |||||||
| Purchases from contributions to Plans | 1,430 | |||||||
| Settlements paid in cash | (1,801) | |||||||
| Foreign currency translation | (650) | |||||||
| Balance at October 1, 2022 | $ | 2,006 | ||||||
The following table summarizes investments measured at fair value based on NAV per share as of October 1, 2022:
| Fair Value | ||||||||||||||||||||||||||||||||
| October 1, 2022 | October 2, 2021 | Unfunded Commitments | Redemption Frequency | Redemption Notice Period | ||||||||||||||||||||||||||||
| Collective investment trusts | $ | 119,470 | $ | 128,941 | $ | — | Daily | 5 days | ||||||||||||||||||||||||
| Limited partnerships (1) | 16,430 | 23,423 | 4,444 | Varies | 10-45 days | |||||||||||||||||||||||||||
| Total | $ | 135,900 | $ | 152,364 | $ | 4,444 | ||||||||||||||||||||||||||
(1)Investments in limited partnerships held by us invest primarily in emerging markets, equity and equity related securities. The strategy for the partnerships is to have exposure to certain markets or to securities that are judged to achieve superior earnings growth and/or judged undervalued relative to intrinsic value.
The preceding methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Expense for all defined benefit plans is as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||
| Service cost | $ | 19,827 | $ | 22,488 | $ | 23,033 | $ | 4,248 | $ | 5,290 | $ | 6,771 | |||||||||||||||||||||||
| 18,246 | 17,103 | 30,597 | 2,413 | 2,277 | 2,785 | ||||||||||||||||||||||||||||||
| (29,803) | (30,543) | (44,084) | (3,401) | (4,102) | (4,577) | ||||||||||||||||||||||||||||||
| — | — | 133 | 58 | 45 | (3) | ||||||||||||||||||||||||||||||
| 15,586 | 13,721 | 25,316 | 3,877 | 5,568 | 4,943 | ||||||||||||||||||||||||||||||
| — | — | — | — | (5,830) | 100 | ||||||||||||||||||||||||||||||
| — | — | 121,324 | 280 | (44) | 676 | ||||||||||||||||||||||||||||||
Total expense for defined benefit plans | $ | 23,856 | $ | 22,769 | $ | 156,319 | $ | 7,475 | $ | 3,204 | $ | 10,695 | |||||||||||||||||||||||
On September 16, 2020, we entered into an agreement to purchase a single premium non-participating group annuity contract and transferred the future benefit obligations and annuity administration for certain retirees and beneficiaries in our qualified U.S defined benefit pension plan. This settlement resulted in a one-time settlement charge of $121,324.
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Benefits expected to be paid to the participants of the plans are:
U.S. Plans | Non-U.S. Plans | |||||||||||||
| 2023 | $ | 16,407 | $ | 7,173 | ||||||||||
| 2024 | 20,225 | 5,888 | ||||||||||||
| 2025 | 23,757 | 6,408 | ||||||||||||
| 2026 | 27,184 | 7,371 | ||||||||||||
| 2027 | 30,192 | 6,678 | ||||||||||||
| Five years thereafter | 195,782 | 38,300 | ||||||||||||
We presently anticipate contributing approximately $5,200 to the SERP Trust for the non-qualified plan and $6,500 to the non-U.S. plans in 2023.
We provide postretirement health care benefits to certain domestic retirees, who were hired prior to October 1, 1989. There are no plan assets. The changes in the accumulated benefit obligation of this unfunded plan for 2022 and 2021 are shown in the following table:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Change in Accumulated Postretirement Benefit Obligation (APBO): | ||||||||||||||
| APBO at prior year measurement date | $ | 6,281 | $ | 9,274 | ||||||||||
| Service cost | 33 | 52 | ||||||||||||
| Interest cost | 90 | 124 | ||||||||||||
| Contributions by plan participants | 559 | 553 | ||||||||||||
| Benefits paid | (478) | (464) | ||||||||||||
| Actuarial (gains) losses | (2,811) | (3,258) | ||||||||||||
| APBO at measurement date | $ | 3,674 | $ | 6,281 | ||||||||||
| Funded status | $ | (3,674) | $ | (6,281) | ||||||||||
| Accrued postretirement benefit liability | $ | 3,674 | $ | 6,281 | ||||||||||
| Amount recognized in AOCIL, before taxes: | ||||||||||||||
| Actuarial gains | 7,579 | 6,042 | ||||||||||||
| Amount recognized in AOCIL, before taxes | $ | 7,579 | $ | 6,042 | ||||||||||
The cost of the postretirement benefit plan is as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Service cost | $ | 33 | $ | 52 | $ | 55 | ||||||||||||||
| 90 | 124 | 211 | ||||||||||||||||||
| — | — | (259) | ||||||||||||||||||
| (1,274) | (513) | (607) | ||||||||||||||||||
| Net periodic postretirement benefit income | $ | (1,151) | $ | (337) | $ | (600) | ||||||||||||||
As of the measurement date, the assumed discount rate used in the accounting for the postretirement benefit obligation was 5.2% in 2022, 2.5% in 2021 and 2.3% in 2020. The assumed service cost discount rate and interest cost discount rate used in the accounting for the net periodic postretirement benefit cost were 2.7% and 1.5%, respectively in 2022, 2.5% and 1.4%, respectively in 2021 and 3.1% and 2.5%, respectively in 2020.
For measurement purposes, a 7.5% annual per capita rate of increase of medical and drug costs were assumed for 2023, gradually decreasing to 4.5% for 2035 and years thereafter.
Employee and management profit sharing reflects a discretionary payment based on our financial performance. Profit share expense was $32,993, $34,257 and $21,968 in 2022, 2021 and 2020, respectively.
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Note 15 - Income Taxes
The reconciliation of the provision for income taxes to the amount computed by applying the U.S. federal statutory tax rate to earnings before income taxes is as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Earnings before income taxes: | ||||||||||||||||||||
| Domestic | $ | 151,870 | $ | 141,665 | $ | 1,126 | ||||||||||||||
| Foreign | 51,109 | 62,109 | 4,291 | |||||||||||||||||
| Total | $ | 202,979 | $ | 203,774 | $ | 5,417 | ||||||||||||||
| Federal statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| Increase (decrease) in income taxes resulting from: | ||||||||||||||||||||
| Impacts of Tax Act | (0.4) | % | (1.2) | % | (96.4) | % | ||||||||||||||
| Revaluation of deferred taxes | — | % | 1.6 | % | (21.6) | % | ||||||||||||||
| Withholding taxes | 0.6 | % | 0.4 | % | 27.5 | % | ||||||||||||||
| Reversal of indefinite reinvestment assertion | — | % | 0.2 | % | (2.9) | % | ||||||||||||||
| R&D and foreign tax credits | (5.4) | % | (4.6) | % | (102.8) | % | ||||||||||||||
| Divestiture impacts | 2.3 | % | — | % | — | % | ||||||||||||||
| Foreign tax rates | 4.5 | % | 4.4 | % | 76.0 | % | ||||||||||||||
| Equity-based compensation | (0.2) | % | (0.1) | % | (6.5) | % | ||||||||||||||
| Change in valuation allowance for deferred taxes | (2.3) | % | (1.6) | % | 21.1 | % | ||||||||||||||
| State taxes, net of federal benefit | 1.9 | % | 2.1 | % | (1.9) | % | ||||||||||||||
| Other | 1.6 | % | 0.6 | % | 16.6 | % | ||||||||||||||
| Effective income tax rate | 23.6 | % | 22.8 | % | (69.9) | % | ||||||||||||||
Our accounting policy is to treat tax on the Global Intangible Low-Tax Income ("GILTI") as a current period cost included in tax expenses the year incurred. As such, we don't measure the impact of the GILTI in our determination of deferred taxes. In 2022, we recorded $443 of GILTI tax and received a benefit of $646 related to the Foreign-Derived Intangible Income deduction. In 2022, we also recorded a tax benefit for provision to return adjustments of $4,871 primarily related to domestic research and development tax credits. In addition, we recorded a current year expense of $1,700 for a total accrual of $9,283 for taxes on undistributed earnings not considered permanently reinvested.
During 2022, 2021 and 2020, we repatriated available unremitted earnings from various foreign subsidiaries that were previously taxed under the Tax Act of $37,986, $41,987 and $23,001, respectively. We no longer indefinitely reinvest unremitted earnings and therefore we record a liability related to the remaining unremitted earnings generated by the foreign subsidiaries in the current year. We continue to be permanently invested in outside basis differences other than the unremitted earnings as we have no plans to liquidate or sell those foreign subsidiaries.
The components of income taxes are as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 6,270 | $ | 9,907 | $ | 14,789 | ||||||||||||||
| Foreign | 26,730 | 23,801 | 18,997 | |||||||||||||||||
| State | 3,063 | 4,684 | 3,271 | |||||||||||||||||
| Total current | 36,063 | 38,392 | 37,057 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | 8,076 | 4,625 | (35,603) | |||||||||||||||||
| Foreign | 1,742 | 2,898 | (1,843) | |||||||||||||||||
| State | 1,921 | 639 | (3,399) | |||||||||||||||||
| Total deferred | 11,739 | 8,162 | (40,845) | |||||||||||||||||
| Income taxes (benefit) | $ | 47,802 | $ | 46,554 | $ | (3,788) | ||||||||||||||
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Realization of deferred tax assets is dependent, in part, upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income, tax planning strategies, carryback opportunities and reversal of existing deferred tax liabilities in making its assessment of the recoverability of deferred tax assets.
The tax effects of temporary differences that generated deferred tax assets and liabilities are as follows:
| October 1, 2022 | October 2, 2021 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Benefit accruals | $ | 65,863 | $ | 68,657 | ||||||||||
| Inventory reserves | 30,053 | 31,900 | ||||||||||||
| Tax benefit carryforwards | 10,885 | 15,434 | ||||||||||||
| Contract reserves not currently deductible | 10,447 | 13,294 | ||||||||||||
| Lease liability | 18,473 | 16,997 | ||||||||||||
| Other accrued expenses | 14,824 | 10,983 | ||||||||||||
| Total gross deferred tax assets | 150,545 | 157,265 | ||||||||||||
| Less valuation allowance | (8,650) | (13,896) | ||||||||||||
| Total net deferred tax assets | $ | 141,895 | $ | 143,369 | ||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Differences in bases and depreciation of property, plant and equipment | $ | 167,990 | $ | 164,591 | ||||||||||
| Pension | 28,802 | 25,661 | ||||||||||||
| Total gross deferred tax liabilities | 196,792 | 190,252 | ||||||||||||
| Net deferred tax liabilities | $ | (54,897) | $ | (46,883) | ||||||||||
Deferred tax assets and liabilities are reported in separate captions on the Consolidated Balance Sheets.
At October 2, 2022, foreign tax loss carryforwards total $19,953 with expirations ranging from 2023 to indefinite life. We have $245 and $5,988 of federal and state tax credit carryforward with expirations of 2031 and 2027 to indefinite life, respectively. The change in the valuation allowance primarily relates to tax benefit carryforwards that were utilized during 2022.
We record unrecognized tax benefits as liabilities and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Further, we record interest and penalties related to unrecognized tax benefits in income tax expense. We expensed interest and penalties of $43 related to $848 of unrecognized tax benefits in 2022.
We are subject to income taxes in the U.S. and in various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require the application of significant judgment. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in significant jurisdictions for tax years before 2020. The statute of limitations in several jurisdictions will expire in the next twelve months and we will have no unrecognized tax benefits recognized if the statute of limitations expires without the relevant taxing authority examining the applicable returns.
The Inflation Reduction Act ("the Act") was signed into law on August 16, 2022. We evaluated the Act and have determined the we do not expect it to have a material impact on our financial statements and related disclosures.
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Note 16 - Earnings per Share
Basic and diluted weighted-average shares outstanding, as well as shares considered to be anti-dilutive, are as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Basic weighted-average shares outstanding | 31,977,482 | 32,112,589 | 33,257,684 | |||||||||||||||||
| Dilutive effect of equity-based awards | 139,546 | 185,367 | 180,117 | |||||||||||||||||
| Diluted weighted-average shares outstanding | 32,117,028 | 32,297,956 | 33,437,801 | |||||||||||||||||
| Anti-dilutive shares from equity-based awards | 50,320 | 50,012 | 136,323 | |||||||||||||||||
Note 17 - Shareholders’ Equity
Class A and Class B common stock share equally in our earnings and are identical with certain exceptions. Other than on matters relating to the election of directors or as required by law where the holders of Class A and Class B shares vote as separate classes, Class A shares have limited voting rights, with each share of Class A being entitled to one-tenth of a vote on most matters, and each share of Class B being entitled to one vote. Class A shareholders are entitled, subject to certain limitations, to elect at least 25% of the Board of Directors (rounded up to the nearest whole number) with Class B shareholders entitled to elect the balance of the directors. No cash dividend may be paid on Class B shares unless at least an equal cash dividend is paid on Class A shares. Class B shares are convertible at any time into Class A shares on a one-for-one basis at the option of the shareholder.
Class A shares and Class B shares reserved for issuance at October 1, 2022 are as follows:
| Shares | |||||
| Conversion of Class B to Class A shares | 7,472,878 | ||||
| Employee Stock Purchase Plan | 1,466,247 | ||||
| 2014 Long Term Incentive Plan | 1,701,956 | ||||
| 2008 Stock Appreciation Rights Plan | 1,083,790 | ||||
| Class A and B shares reserved for issuance | 11,724,871 | ||||
We are authorized to issue up to 10,000,000 shares of preferred stock. The Board of Directors may authorize, without further shareholder action, the issuance of additional preferred stock which ranks senior to both classes of our common stock with respect to the payment of dividends and the distribution of assets on liquidation. The preferred stock, when issued, would have such designations relative to voting and conversion rights, preferences, privileges and limitations as determined by the Board of Directors.
We issue common stock under our equity-based compensation plans from treasury stock or from stock held by the SECT. As of October 1, 2022, in addition to the shares reserved for issuance upon the exercise of outstanding equity awards, there were 737,625 shares authorized for awards that may be granted in the future under the 2014 Long Term Incentive Plan, assuming performance-based awards currently outstanding are all settled at the targeted payout.
On November 20, 2020, the Board of Directors authorized a new share repurchase program to replace the previously existing share repurchase program. This program authorizes repurchases that includes both Class A and Class B common stock, and allows us to buy up to an aggregate 3,000,000 common shares. Shares acquired by the SECT or the SERP Trust are not included in this program. During 2022, we repurchased 486,923 of our Class A and B common stock for $35,626. During 2021, we repurchased 243,147 of our Class A and B common stock for $19,253. As of October 1, 2022, the total remaining authorization for future common share repurchases under our program is 2,269,930 shares.
Previously, the Board of Directors authorized a share repurchase program that was amended from time to time to authorize additional repurchases. Shares acquired by the SECT or the SERP Trust are not included in this program. During 2021, we repurchased 155,963 of our Class A and Class B common stock for $10,193. During 2020, we repurchased 2,881,116 of our Class A and Class B common stock for $215,776. As of October 1, 2022, there are no shares remaining for future common share repurchases under this program.
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Note 18 - Equity-Based Compensation
We have equity-based compensation plans that authorize the issuance of equity-based awards for shares of Class A and Class B common stock to directors, officers and key employees. Equity-based compensation grants are designed to reward long-term contributions to Moog and provide incentives for recipients to remain with Moog.
We have an Employee Stock Purchase Plan ("ESPP") that allows for qualified employees (as defined in the plan) to purchase our common stock at a price equal to 85% of the fair market value at the lower of the beginning or the end of the semi-annual offering period.
The 2014 Long Term Incentive Plan ("2014 Plan") authorizes the issuance of a total of 2,000,000 shares of either Class A or Class B common stock. The 2014 Plan is intended to provide a flexible framework that permits the development and implementation of a variety of equity-based programs that base awards on key performance metrics as well as align our long term incentive compensation with our peers and shareholder interests.
During 2022, we granted awards in the form of stock appreciations rights ("SARs"), performance-based restricted stock units ("PSUs"), time vested restricted stock units ("TVAs") and restricted stock awards ("RSAs"). The compensation cost for employee and non-employee director equity-based compensation programs for all current and prior year awards granted are as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Stock appreciation rights | $ | 2,370 | $ | 2,345 | $ | 2,643 | ||||||||||||||
| Performance-based restricted stock units | 1,718 | 1,151 | 221 | |||||||||||||||||
| Time vested restricted stock units | 1,423 | 602 | — | |||||||||||||||||
| Restricted stock awards | 850 | 730 | 680 | |||||||||||||||||
| Employee stock purchase plan | 2,521 | 2,633 | 2,117 | |||||||||||||||||
| Total compensation cost before income taxes | $ | 8,882 | $ | 7,461 | $ | 5,661 | ||||||||||||||
| Income tax benefit | $ | 970 | $ | 893 | $ | 677 | ||||||||||||||
Stock Appreciation Rights
The fair value of SARs granted was estimated on the date of grant using the Black-Scholes option-pricing model. The following table provides the range of assumptions used to value awards and the weighted-average fair value of the awards granted.
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Expected volatility | 39% - 40% | 38% - 41% | 27% - 28% | |||||||||||||||||
| Risk-free rate | 1.3 | % | 0.4% - 0.5% | 1.7% - 1.8% | ||||||||||||||||
| Expected dividends | 1.2 | % | 1.4 | % | 1.2 | % | ||||||||||||||
| Expected term | 5-6 years | 5-6 years | 5-6 years | |||||||||||||||||
| Weighted-average fair value of awards granted | $ | 27.86 | $ | 23.11 | $ | 21.45 | ||||||||||||||
To determine expected volatility, we generally use historical volatility based on daily closing prices of our Class A and Class B common stock over periods that correlate with the expected terms of the awards granted. The risk-free rate is based on the United States Treasury yield curve at the time of grant for the appropriate expected term of the awards granted. Expected dividends are based on our history and expectation of dividend payouts. The expected term of equity-based awards is based on vesting schedules, expected exercise patterns and contractual terms.
The number of shares received upon the exercise of a SAR is equal in value to the difference between the fair market value of the common stock on the exercise date and the exercise price of the SAR. The term of a SAR may not exceed ten years from the grant date. The exercise price of SARs and options, determined by a committee of the Board of Directors, may not be less than the fair value of the common stock on the grant date.
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SARs are as follows:
| Stock Appreciation Rights | Number of Awards | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Outstanding at October 2, 2021 | 883,423 | $ | 69.37 | |||||||||||||||||||||||
| Granted in 2022 | 91,788 | 83.00 | ||||||||||||||||||||||||
| Exercised in 2022 | (108,390) | 46.72 | ||||||||||||||||||||||||
| Expired in 2022 | (6,963) | 70.15 | ||||||||||||||||||||||||
| Forfeited in 2022 | (1,355) | 80.43 | ||||||||||||||||||||||||
| Outstanding at October 1, 2022 | 858,503 | $ | 73.67 | 5.1 years | $ | 3,085,580 | ||||||||||||||||||||
| Exercisable at October 1, 2022 | 666,816 | $ | 71.65 | 4.2 years | $ | 3,085,580 | ||||||||||||||||||||
The aggregate intrinsic value in the preceding tables represents the total pre-tax intrinsic value, based on our closing price of Class A common stock of $70.35 and Class B common stock of $71.40 as of October 1, 2022. That value would have been effectively received by the SAR holders had all SARs been exercised as of that date.
The intrinsic value of awards exercised and fair value of awards vested are as follows:
| Stock Appreciation Rights | 2022 | 2021 | 2020 | |||||||||||||||||
| Intrinsic value of SARs exercised | $ | 3,777 | $ | 3,833 | $ | 2,665 | ||||||||||||||
| Total fair value of SARs vested | $ | 2,346 | $ | 2,558 | $ | 2,825 | ||||||||||||||
As of October 1, 2022, total unvested compensation expense associated with SARs amounted to $2,663 and will be recognized over a weighted-average period of two years.
Restricted Stock Units
Performance-Based Awards
PSU awards consist of shares of our stock which are payable upon the determination that we achieve certain established performance targets and can range from 0% to 200% of the targeted payout based on the actual results. PSU's granted in 2022 have a performance period of three years. The fair value of each PSU granted is equal to the fair market value of our common stock on the date of grant. PSUs granted generally have a cliff vesting schedule of three years; however, according to the grant agreements, if certain conditions are met, the employee (or beneficiary) will receive a prorated amount of the award based on active employment during the service period.
PSUs are as follows:
| Performance-Based Restricted Stock Units | Number of Awards | Weighted- Average Grant Date Fair Value | ||||||||||||
| Nonvested at October 2, 2021 | 59,505 | $ | 80.12 | |||||||||||
| Granted in 2022 | 30,836 | 83.00 | ||||||||||||
| Vested in 2022 | (31,404) | 85.95 | ||||||||||||
| Forfeited in 2022 | (493) | 79.67 | ||||||||||||
| Nonvested at October 1, 2022 | 58,444 | $ | 78.41 | |||||||||||
As of October 1, 2022, total unvested compensation expense associated with nonvested PSUs amounted to $2,469 and will be recognized over a weighted-average period of two years.
The number of Class B shares to be issued for PSU awards granted in 2020 that vested based on the achievement of performance targets in 2022, will be approximately 14,500 shares.
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Time Vested Awards
TVAs consist of shares of our stock which are payable over a vesting schedule determined at the time the award is granted. TVAs vest in equal fixed dollar tranches over the agreed upon vesting term beginning one year after the date of the grant and will settle using the fair market value of shares on the date of vesting of the tranche. Although it is our intention to settle vested amount in shares, we reserve the right to settle in cash at our discretion.
TVAs are as follows:
| Time Vested Restricted Stock Units | Number of Awards | Weighted- Average Fair Value | ||||||||||||
| Nonvested at October 2, 2021 | 26,702 | $ | 77.18 | |||||||||||
| Granted in 2022 | 30,803 | 83.00 | ||||||||||||
| Vested in 2022 | (8,305) | 83.00 | ||||||||||||
| Forfeited in 2022 | (458) | 76.38 | ||||||||||||
| Period increase (decrease) in 2022 | 5,817 | n/a | ||||||||||||
| Nonvested at October 1, 2022 | 54,559 | $ | 71.40 | |||||||||||
As of October 1, 2022, total unvested compensation expense associated with nonvested TVAs amounted to $2,558 and will be recognized over a weighted-average period of two years.
The number of Class B shares to be issued for TVAs that are expected to vest in 2023 from time based service conditions is approximately 21,400 shares, based on our closing price of Class B common stock of $71.40 as of October 1, 2022.
Restricted Stock Awards
The fair value of each RSA granted is equal to the fair market value of our common stock on the date of grant. These shares vest and are issued upon grant. There were 18,594 RSAs granted and vested in 2022 at a price of $82.79 resulting in a fair value of the RSAs vested of $1,539.
Employee Stock Purchase Plan
Shares and the weighted-average price per share associated with the ESPP are as follows:
| Employee Stock Purchase Plan | 2022 | 2021 | 2020 | |||||||||||||||||
| Shares issued | 139,121 | 141,647 | 119,470 | |||||||||||||||||
| Weighted-average price per share | $ | 67.91 | $ | 58.52 | $ | 58.71 | ||||||||||||||
Note 19 - Stock Employee Compensation Trust and Supplemental Retirement Plan Trust
The SECT assists in administering and provides funding for equity-based compensation plans and benefit programs, including the RSP, RSP(+) and ESPP. The SERP Trust provides funding for benefits under the SERP provisions of the Moog Inc. Plan to Equalize Retirement Income and Supplemental Retirement Income. Both the SECT and the SERP Trust hold shares as investments. The shares in the SECT and SERP Trust are not considered outstanding for purposes of calculating earnings per share. However, in accordance with the trust agreements governing the SECT and SERP Trust, the trustees vote all shares held by the SECT and SERP Trust on all matters submitted to shareholders.
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Note 20 - Accumulated Other Comprehensive Income (Loss)
The changes in AOCIL, net of tax, by component are as follows:
| Accumulated foreign currency translation | Accumulated retirement liability | Accumulated gain (loss) on derivatives | Total | |||||||||||||||||||||||
| AOCIL at October 3, 2020 | $ | (102,994) | $ | (183,653) | $ | 1,194 | $ | (285,453) | ||||||||||||||||||
| OCI before reclassifications | 12,559 | 21,958 | (1,277) | 33,240 | ||||||||||||||||||||||
| Amounts reclassified from AOCIL | (2,554) | 8,485 | (1,278) | 4,653 | ||||||||||||||||||||||
| OCI, net of tax | 10,005 | 30,443 | (2,555) | 37,893 | ||||||||||||||||||||||
| AOCIL at October 2, 2021 | (92,989) | (153,210) | (1,361) | (247,560) | ||||||||||||||||||||||
| OCI before reclassifications | (101,906) | 13,845 | (4,031) | (92,092) | ||||||||||||||||||||||
| Amounts reclassified from AOCIL | 12,871 | 14,134 | 1,605 | 28,610 | ||||||||||||||||||||||
| OCI, net of tax | (89,035) | 27,979 | (2,426) | (63,482) | ||||||||||||||||||||||
| AOCIL at October 1, 2022 | $ | (182,024) | $ | (125,231) | $ | (3,787) | $ | (311,042) | ||||||||||||||||||
Net gains and losses on net investment hedges are recorded in Accumulated foreign currency translation to the extent that the instruments are effective in hedging the designated risk.
The amounts reclassified from AOCIL into earnings are as follows:
| Statements of Earnings location | 2022 | 2021 | ||||||||||||||||||
| Retirement liability: | ||||||||||||||||||||
| Prior service cost | $ | 58 | $ | 45 | ||||||||||||||||
| Actuarial losses | 18,189 | 18,776 | ||||||||||||||||||
| Curtailment gain | — | (5,830) | ||||||||||||||||||
| Settlement (gain) loss | 280 | (44) | ||||||||||||||||||
| Reclassification from AOCIL into earnings | 18,527 | 12,947 | ||||||||||||||||||
| Tax effect | (4,393) | (4,462) | ||||||||||||||||||
| Net reclassification from AOCIL into earnings | $ | 14,134 | $ | 8,485 | ||||||||||||||||
| Derivatives: | ||||||||||||||||||||
| Foreign currency contracts | Sales | $ | 996 | $ | (130) | |||||||||||||||
| Foreign currency contracts | Cost of sales | 1,044 | (1,535) | |||||||||||||||||
| Reclassification from AOCIL into earnings | 2,040 | (1,665) | ||||||||||||||||||
| Tax effect | (435) | 387 | ||||||||||||||||||
| Net reclassification from AOCIL into earnings | $ | 1,605 | $ | (1,278) | ||||||||||||||||
Reclassification from AOCIL into earnings for the Retirement liability are included in the computation of non-service pension expense, which is included in Other on the Consolidated Statements of Earnings.
The effective portion of amounts deferred in AOCIL are as follows:
| 2022 | 2021 | ||||||||||||||||
| Retirement liability: | |||||||||||||||||
| Net actuarial gain during period | $ | 15,521 | $ | 26,157 | |||||||||||||
| Tax effect | (1,676) | (4,199) | |||||||||||||||
| Net deferral in AOCIL of retirement liability | $ | 13,845 | $ | 21,958 | |||||||||||||
| Derivatives: | |||||||||||||||||
| Foreign currency contracts | $ | (5,190) | $ | (1,668) | |||||||||||||
| Net loss | (5,190) | (1,668) | |||||||||||||||
| Tax effect | 1,159 | 391 | |||||||||||||||
| Net deferral in AOCIL of derivatives | $ | (4,031) | $ | (1,277) | |||||||||||||
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Note 21 - Segments
Aircraft Controls. We design, manufacture and integrate primary and secondary flight controls and avionics for military and commercial aircraft and provide aftermarket support. Our systems are used on both development and production programs in large commercial transports, supersonic fighters, multi-role military aircraft, business jets and rotorcraft.
We are currently working on the KC-46 military air refueling tanker, MQ-25 aerial refueling drone and classified military development work on the military side, and the COMAC C919 on the commercial side. Typically development programs require concentrated periods of research and development by our engineering teams, while production programs are generally long-term manufacturing efforts that extend for as long as the aircraft builder receives new orders.
Our large military programs include the F-35 Joint Strike Fighter, F/A-18E/F Super Hornet, the V-22 Osprey tiltrotor and the Black Hawk UH-60/Seahawk SH-60 helicopter, while our large commercial production programs include the full line of Boeing 7-series aircraft, Airbus A320, A330 and A350XWB and a variety of business jets.
Aftermarket sales, which represented 30%, 27% and 30% of 2022, 2021 and 2020 sales, respectively, for this segment consist of the maintenance, repair, overhaul and parts supply for both military and commercial aircraft. Further, we sell spare parts and line replaceable units to both military and commercial customers that they store throughout the world in order to minimize down time.
Space and Defense Controls. We provide solutions for a wide array of space and defense applications including space vehicles, launch vehicles, military vehicles, air defense platforms, naval vessels, as well as tactical, hypersonic, and strategic missiles.
We design, manufacture, and integrate steering and propulsion controls for space launch vehicles, hypersonic missiles, and Missile Defense Agency (MDA) vehicles. Programs of note include Atlas, Vulcan, Space Launch System (SLS), LauncherOne, Minute Man III, Trident, and a variety of other platforms. We have also developed a family of orbital maneuvering vehicles (OMV) and spacecraft bus platforms that have their own avionics, power, propulsion, and communications systems. The Moog Evolved Secondary Payload Adapter (ESPA) is used as the structure of the OMV and has also enabled the rideshare market for many years. Our spacecraft avionics are used for a variety of purposes and missions, including a complete flight control computer, payload data processing, and processing of discrete elements onboard a spacecraft. Mission specific actuation mechanisms control solar array panels, antenna and thrusters. We also provide discrete isolation systems for the entire spacecraft during launch and for vibration sensitive systems during spacecraft operation. Our propulsion and fluid control solutions accelerate the spacecraft for orbit-insertion, station keeping, and attitude control. Our fluid control systems are also used in Environmental Control and Life Support System (ECLSS) for crewed missions, such as the Orion Multi-Purpose Crew Vehicle that is part of NASA’s Artemis program and the Habitation and Logistics Outpost (HALO), both of which will support humans working on the moon.
We produce an innovative turreted weapon system, the Reconfigurable Integrated-weapons Platform (RIwP®), for several military vehicle programs. In addition, we design controls for gun aiming, stabilization and automatic ammunition loading. Our coordinated multi-axis control systems support military vehicles, radars and launchers. We also manufacture controls for steering tactical and strategic missiles including Lockheed Martin's HELLFIRE® and PAC-3 interceptor, the U.S. National Missile Defense Agency's (MDA) Layered Missile Defense initiatives, multiple hypersonic missiles, as well as Raytheon's TOW missiles. Further, we design, build, and integrate weapons Stores Management Systems (SMS) for light attack aerial reconnaissance, ground, and sea platforms. The SMS plays a critical role in supporting the U.S. Special Operations Command (USSOCOM) Armed Overwatch Program. We provide 24/7 support service for Unmanned Aerial System (UAS) detection, enforcing the Federal Aviation Administration (FAA) restricted airspace for NASA's Kennedy Space Center. We also produce high-power, quiet controls designed and built for many naval vessels including surface ships, Unmanned Undersea Vehicles (UUVs) and submarines such as the U.S. Los Angeles, Seawolf, Virginia, Ohio and Columnia Class. Our torpedo actuation can be found on the MK48 heavyweight torpedo. All our defense solutions are supported by Moog Total Support for defense sustainment services.
Also, we design and manufacture various component products that serve both the space and defense segments by providing mission critical power, data and motion control capabilities. Slip rings allow unimpeded rotation while delivering power and data through a rotating interface. Our motion control products include high-performance motors, position feedback devices and actuators. The military electronics include a range of transceiver and Ethernet-based devices. These capabilities can be vertically integrated to support a broad range of applications which include military vehicles, aircraft, missiles, radar, and satellites.
79
Industrial Systems. We provide customized machine performance components and systems utilizing electrohydraulic, electromechanical and control technologies in applications involving motion control, fluid control and power and data management across a variety of markets.
In the industrial automation market, we design, manufacture and integrate components and systems for applications in injection and blow molding machinery, metal forming presses and heavy industry for steel and aluminum production. Our components and systems allow for precise controls of critical parameters in the industrial manufacturing processes, using both hydraulic and electric technologies. Other industrial automation applications we serve include material handling and paper mills.
In the simulation and test market, we supply electromechanical motion simulation bases for the flight simulation and training applications. We also supply custom test systems and controls for automotive, structural and fatigue testing.
In the energy market, we supply solutions for power generation applications which allow for precise control and greater safety of fuel metering and guide vane positioning on steam and gas turbines. We also design and manufacture high reliability systems and components for applications in oil and gas exploration and production, including downhole drilling, topside and subsea environments. We supply high-reliability components for wind turbine applications.
In the medical market, we supply components and systems for diagnostic imaging CT scan medical equipment, sleep apnea equipment, oxygen concentrators, infusion therapy and enteral clinical nutrition.
Our components product categories include hydraulics, slip rings, rotary unions and fiber optic rotary joints, motors and infusion and enteral pumps and associated sets across similar markets.
Hydraulic components include high-performance servo valves with mechanical or electronic feedback, high-dynamic performance hydraulic servo pumps, energy-efficient electro hydrostatic actuators and complex hydraulic manifold systems.
Slip rings, rotary unions and fiber optic rotary joints come in a range of sizes that allow them to be used in many applications, including diagnostic imaging CT scan medical equipment, construction equipment, remotely operated vehicles and floating platforms for offshore oil exploration, surveillance cameras and wind turbines.
Electric motors are used in an equally broad range of solutions, many of which are the same as for slip rings. We design and manufacture a series of fractional horsepower brushless motors that provide extremely low acoustic noise and reliable long life operation, with the largest programs being sleep apnea equipment and data center cooling. Industrial customers use our motors for material handling and electric pumps.
Infusion therapy products include infusion pumps and associated administration sets. They offer IV, intra-arterial, subcutaneous or epidural flow of fluids and precise medicine delivery and can be applied to many applications, including hydration, nutrition, patient-controlled analgesia, local anesthesia, chemotherapy and antibiotics.
Enteral clinical nutrition products include a complete line of portable and stationary pumps along with disposable sets. They are designed for ease of use and mobility. Medical customers use our enteral feeding products in the delivery of enteral nutrition for patients in their own homes, hospitals and long-term care facilities.
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Disaggregation of net sales by segment are as follows:
| Market Type | 2022 | 2021 | 2020 | |||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Military | $ | 745,376 | $ | 781,921 | $ | 721,024 | ||||||||||||||
| Commercial | 511,085 | 379,317 | 484,726 | |||||||||||||||||
| Aircraft Controls | 1,256,461 | 1,161,238 | 1,205,750 | |||||||||||||||||
| Space | 337,773 | 332,946 | 294,254 | |||||||||||||||||
| Defense | 534,570 | 466,289 | 475,860 | |||||||||||||||||
| Space and Defense Controls | 872,343 | 799,235 | 770,114 | |||||||||||||||||
| Energy | 125,574 | 120,173 | 127,693 | |||||||||||||||||
| Industrial Automation | 435,074 | 427,076 | 405,291 | |||||||||||||||||
| Simulation and Test | 99,815 | 89,459 | 102,600 | |||||||||||||||||
| Medical | 246,516 | 254,812 | 273,106 | |||||||||||||||||
| Industrial Systems | 906,979 | 891,520 | 908,690 | |||||||||||||||||
| Net sales | $ | 3,035,783 | $ | 2,851,993 | $ | 2,884,554 | ||||||||||||||
| Customer Type | 2022 | 2021 | 2020 | |||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Commercial | $ | 511,085 | $ | 379,317 | $ | 484,726 | ||||||||||||||
| U.S. Government (including OEM) | 566,855 | 617,034 | 593,093 | |||||||||||||||||
| Other | 178,521 | 164,887 | 127,931 | |||||||||||||||||
| Aircraft Controls | 1,256,461 | 1,161,238 | 1,205,750 | |||||||||||||||||
| Commercial | 111,569 | 126,751 | 133,715 | |||||||||||||||||
| U.S. Government (including OEM) | 704,675 | 614,984 | 571,045 | |||||||||||||||||
| Other | 56,099 | 57,500 | 65,354 | |||||||||||||||||
| Space and Defense Controls | 872,343 | 799,235 | 770,114 | |||||||||||||||||
| Commercial | 891,238 | 865,269 | 877,148 | |||||||||||||||||
| U.S. Government (including OEM) | 7,565 | 18,510 | 23,184 | |||||||||||||||||
| Other | 8,176 | 7,741 | 8,358 | |||||||||||||||||
| Industrial Systems | 906,979 | 891,520 | 908,690 | |||||||||||||||||
| Commercial | 1,513,892 | 1,371,337 | 1,495,589 | |||||||||||||||||
| U.S. Government (including OEM) | 1,279,095 | 1,250,528 | 1,187,322 | |||||||||||||||||
| Other | 242,796 | 230,128 | 201,643 | |||||||||||||||||
| Net sales | $ | 3,035,783 | $ | 2,851,993 | $ | 2,884,554 | ||||||||||||||
| Revenue Recognition Method | 2022 | 2021 | 2020 | |||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Over-time | $ | 1,003,432 | $ | 939,251 | $ | 1,018,190 | ||||||||||||||
| Point in time | 253,029 | 221,987 | 187,560 | |||||||||||||||||
| Aircraft Controls | 1,256,461 | 1,161,238 | 1,205,750 | |||||||||||||||||
| Over-time | 806,994 | 746,613 | 700,068 | |||||||||||||||||
| Point in time | 65,349 | 52,622 | 70,046 | |||||||||||||||||
| Space and Defense Controls | 872,343 | 799,235 | 770,114 | |||||||||||||||||
| Over-time | 121,405 | 122,066 | 152,366 | |||||||||||||||||
| Point in time | 785,574 | 769,454 | 756,324 | |||||||||||||||||
| Industrial Systems | 906,979 | 891,520 | 908,690 | |||||||||||||||||
| Over-time | 1,931,831 | 1,807,930 | 1,870,624 | |||||||||||||||||
| Point in time | 1,103,952 | 1,044,063 | 1,013,930 | |||||||||||||||||
| Net sales | $ | 3,035,783 | $ | 2,851,993 | $ | 2,884,554 | ||||||||||||||
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Operating profit 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 by segment and reconciliations to consolidated amounts are as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Operating profit: | ||||||||||||||||||||
| Aircraft Controls | $ | 123,620 | $ | 96,678 | $ | 34,670 | ||||||||||||||
| Space and Defense Controls | 86,844 | 88,333 | 101,667 | |||||||||||||||||
| Industrial Systems | 72,384 | 85,948 | 80,025 | |||||||||||||||||
| Total operating profit | 282,848 | 270,959 | 216,362 | |||||||||||||||||
| Deductions from operating profit: | ||||||||||||||||||||
| Interest expense | 36,757 | 33,892 | 38,897 | |||||||||||||||||
| Equity-based compensation expense | 8,882 | 7,461 | 5,661 | |||||||||||||||||
| Pension settlement | — | — | 121,324 | |||||||||||||||||
| 6,072 | (2,194) | 15,231 | ||||||||||||||||||
| Corporate and other expenses, net | 28,158 | 28,026 | 29,832 | |||||||||||||||||
| Earnings before income taxes | $ | 202,979 | $ | 203,774 | $ | 5,417 | ||||||||||||||
| Depreciation and amortization: | ||||||||||||||||||||
| Aircraft Controls | $ | 42,337 | $ | 41,580 | $ | 39,782 | ||||||||||||||
| Space and Defense Controls | 19,399 | 18,655 | 18,039 | |||||||||||||||||
| Industrial Systems | 26,515 | 29,731 | 28,644 | |||||||||||||||||
| Corporate | 138 | 193 | 507 | |||||||||||||||||
| Total depreciation and amortization | $ | 88,389 | $ | 90,159 | $ | 86,972 | ||||||||||||||
| Identifiable assets: | ||||||||||||||||||||
| Aircraft Controls | $ | 1,469,968 | $ | 1,471,338 | $ | 1,322,335 | ||||||||||||||
| Space and Defense Controls | 873,341 | 839,783 | 761,874 | |||||||||||||||||
| Industrial Systems | 1,046,754 | 1,078,025 | 1,102,222 | |||||||||||||||||
| Corporate | 41,778 | 44,023 | 39,400 | |||||||||||||||||
| Total assets | $ | 3,431,841 | $ | 3,433,169 | $ | 3,225,831 | ||||||||||||||
| Capital expenditures: | ||||||||||||||||||||
| Aircraft Controls | $ | 70,526 | $ | 63,514 | $ | 47,954 | ||||||||||||||
| Space and Defense Controls | 44,255 | 39,863 | 22,505 | |||||||||||||||||
| Industrial Systems | 24,620 | 25,338 | 17,700 | |||||||||||||||||
| Corporate | 30 | 19 | 125 | |||||||||||||||||
| Total capital expenditures | $ | 139,431 | $ | 128,734 | $ | 88,284 | ||||||||||||||
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Sales, based on the customer’s location, and property, plant and equipment by geographic area are as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net sales: | ||||||||||||||||||||
| United States | $ | 2,041,952 | $ | 1,935,626 | $ | 1,873,667 | ||||||||||||||
| Germany | 164,388 | 148,739 | 175,598 | |||||||||||||||||
| Japan | 87,435 | 108,813 | 159,025 | |||||||||||||||||
| Other | 742,008 | 658,815 | 676,264 | |||||||||||||||||
| Net sales | $ | 3,035,783 | $ | 2,851,993 | $ | 2,884,554 | ||||||||||||||
| Property, plant and equipment, net: | ||||||||||||||||||||
| United States | $ | 466,427 | $ | 438,851 | $ | 389,454 | ||||||||||||||
| United Kingdom | 61,950 | 62,662 | 58,888 | |||||||||||||||||
| Philippines | 32,905 | 35,851 | 37,270 | |||||||||||||||||
| Other | 107,626 | 108,414 | 114,886 | |||||||||||||||||
| Property, plant and equipment, net | $ | 668,908 | $ | 645,778 | $ | 600,498 | ||||||||||||||
Sales to Boeing were $339,119, $345,907 and $402,960, or 11%, 12% and 14% of sales, in 2022, 2021 and 2020, respectively, including sales to Boeing Commercial Airplanes of $139,615, $118,549 and $206,648 in 2022, 2021 and 2020, respectively. Sales to Lockheed Martin were $260,902, $330,778 and $366,609, or 9%, 12% and 13% in 2022, 2021 and 2020, respectively. Sales arising from U.S. Government prime or sub-contracts, including military sales to Boeing and Lockheed Martin, were $1,279,095, $1,250,528 and $1,187,322 in 2022, 2021 and 2020, respectively. Sales to Boeing, Lockheed Martin and the U.S. Government and its prime- or sub-contractors are made primarily from our Aircraft Controls and Space and Defense Controls segments.
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Note 22 - Related Party Transactions
John Scannell, Moog's Chairman of the Board of Directors and Chief Executive Officer, is a member of the Board of Directors of M&T Bank Corporation and M&T Bank. We currently engage with M&T Bank in the ordinary course of business for various financing activities, all of which were initiated prior to the election of Mr. Scannell to the Board. M&T Bank provides credit extension for routine purchases, which totaled $14,284, $14,176 and $15,533 for 2022, 2021 and 2020, respectively. At October 1, 2022, we held outstanding leases with a total original cost of $16,609. At October 1, 2022, outstanding deposits on our behalf for future equipment leases totaled $2,445. M&T Bank also maintains an interest of approximately 12% in our U.S. revolving credit facility. Further details of the U.S. revolving credit facility can be found in Note 9 - Indebtedness. Wilmington Trust, a subsidiary of M&T Bank, is the trustee of the pension assets for our qualified U.S. defined benefit pension plan. For further details, see Note 14 - Employee Benefit Plans.
Note 23 - Commitments and Contingencies
From time to time, we are involved in legal proceedings. We are not a party to any pending legal proceedings which management believes will result in a material adverse effect on our financial condition, results of operations or cash flows.
We are engaged in administrative proceedings with governmental agencies and legal proceedings with governmental agencies and other third parties in the normal course of our business, including litigation under Superfund laws, regarding environmental matters. We believe that adequate reserves have been established for our share of the estimated cost for all currently pending environmental administrative or legal proceedings and do not expect that these environmental matters will have a material adverse effect on our financial condition, results of operations or cash flows.
In the ordinary course of business we could be subject to ongoing claims or disputes from our customers, the ultimate settlement of which could have a material adverse impact on our consolidated results of operations. While the receivables and any loss provisions recorded to date reflect management's best estimate of the projected costs to complete a given project, there is still significant effort required to complete the ultimate deliverable. Future variability in internal cost and future profitability is dependent upon a number of factors including deliveries, performance and government budgetary pressures. The inability to achieve a satisfactory contractual solution, further unplanned delays, additional developmental cost growth or variations in any of the estimates used in the existing contract analysis could lead to further loss provisions. Additional losses could have a material adverse impact on our financial condition, results of operations or cash flows in the period in which the loss may be recognized.
We are contingently liable for $20,450 of standby letters of credit issued by a bank to third parties on our behalf at October 1, 2022. Purchase commitments outstanding at October 1, 2022 are $1,113,990 including $64,594 for property, plant and equipment.
Note 24 - Subsequent Events
On October 27, 2022, we entered into the Sixth Amended and Restated Loan Agreement (the "Agreement") amending the terms of the Company's Fifth Amended and Restated Loan Agreement. Among other matters, the Agreement extended the maturity of the credit facility from October 15, 2024 to October 27, 2027.
On November 3, 2022, the Board of Directors declared a $0.26 per share quarterly dividend payable on issued and outstanding shares of our Class A and Class B common stock on December 5, 2022 to shareholders of record at the close of business on November 18, 2022.
84
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Moog Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Moog Inc. (the Company) as of October 1, 2022 and October 2, 2021, the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended October 1, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 (2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 1, 2022 and October 2, 2021, and the results of its operations and its cash flows for each of the three years in the period ended October 1, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 1, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 14, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
85
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.
| Estimated contract costs at completion | |||||
| Description of the Matter | As discussed in Note 2 of the consolidated financial statements, revenue for certain of the Company’s contracts with its customers is recognized over time as work progresses toward completion and is measured based on the ratio of cumulative costs incurred to date to the estimated total contract costs at completion. For the year ended October 1, 2022, the Company recognized revenue of $1.9 billion or 64% of total net sales on this basis. Auditing management’s estimated contract costs at completion was complex and highly judgmental due to the significant judgments applied by management including the application of significant assumptions such as estimated direct labor hours, direct material costs, and other direct costs. A significant change in an estimate on one or more contracts could have a material effect on the Company’s statement of earnings. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of estimated contract costs at completion, including the determination of the underlying significant assumptions described above. To test the estimated contract cost at completion, we performed audit procedures that included, among others, inspecting the approved contract and inquiring of program managers regarding the nature of the contract and the scope of work to be performed, testing the actual costs incurred through inspection of source documentation and testing the significant assumptions described above. Our testing of each of these assumptions included a combination of inquiries of finance directors and program managers, inspection of source documentation to support the future estimated costs and analytical procedures comparing profit rates to similar contracts, as applicable. We also assessed the historical accuracy of management’s estimated costs at completion. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Buffalo, NY
November 14, 2022
86
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of October 1, 2022 based upon the framework in Internal Control - Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of October 1, 2022.
We completed one acquisition in 2022, which was excluded from our management’s report on internal control over
financial reporting as of October 1, 2022. On February 21, 2022, we acquired TEAM Accessories Limited. This acquisition is included in our 2022 consolidated financial statements and constituted $19.7 million and $12.3 million of total and net assets, respectively, as of October 1, 2022 and $3.9 million and $.6 million of revenues and net loss, respectively, for the year then ended.
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
| /s/ JOHN R. SCANNELL | ||
| John R. Scannell | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ JENNIFER WALTER | ||
| Jennifer Walter | ||
| Vice President, | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
87
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Moog Inc.
Opinion on Internal Control over Financial Reporting
We have audited Moog Inc.’s internal control over financial reporting as of October 1, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Moog Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 1, 2022, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of TEAM Accessories Limited, which is included in the 2022 consolidated financial statements of the Company and constituted $19.7 million and $12.3 million of total and net assets, respectively, as of October 1, 2022 and $3.9 million and ($0.6) million of net sales and net earnings, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of TEAM Accessories Limited.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 1, 2022 and October 2, 2021, the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended October 1, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 (2) and our report dated November 14, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Buffalo, NY
November 14, 2022
89
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | |||||||
Not applicable.
Item 9A. | Controls and Procedures. | |||||||
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 the end of the period covered by this report, 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.
Management’s Report on Internal Control over Financial Reporting.
See the report appearing under Item 8, Financial Statements and Supplemental Data, of this report.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. | Other Information. | |||||||
On November 14, 2022, the Board of Directors approved the Moog Inc. 2023 Management Short Term Incentive Plan, that is effective beginning with the Company's 2023 fiscal year (the "STI plan"). The bonuses earned under the STI Plan are based on performance against an adjusted earnings before interest, taxes, depreciation and amortization performance metric. The above description does not purport to be complete and is qualified in its entirety by reference to the full text, which is filed as Exhibit 10.26 to this Annual Report on Form 10-K and incorporated by reference herein.
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. | |||||||
Not applicable.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. | |||||||
Information concerning the Company’s directors required by Item 401 of Regulation S-K will appear under the caption “Proposal 1 - Election of Directors” in the 2022 Proxy Statement and is incorporated herein by reference. Information concerning the Company’s executive officers required by Item 401 of Regulation S-K is presented under the caption “Information about our Executive Officers” in Part I of this Annual Report on Form 10-K. Information required by Item 405 of Regulation S-K will be included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2022 Proxy Statement and is incorporated herein by reference. Information required by Items 407(d)(4) and (d)(5) of Regulation S-K will be included under the captions “Audit Committee” and “Audit Committee Report” in the 2022 Proxy Statement and is incorporated herein by reference.
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and Controller. The code of ethics is available upon request without charge by contacting our Chief Financial Officer at 716-652-2000.
Item 11. | Executive Compensation. | |||||||
Information required by Item 402 of Regulation S-K will be included under the captions “Compensation Discussion and Analysis,” “Compensation of Executive Officers,” and “Compensation of Directors” in the 2022 Proxy Statement and is incorporated herein by reference. Information required by Item 407(e)(4) and 407(e)(5) of Regulation S-K will be included under the captions “Executive Compensation Committee Interlocks and Insider Participation” and “The Executive Compensation Committee Report” in the 2022 Proxy Statement and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | |||||||
Information required by Item 201(d) of Regulation S-K will be included under the caption “Equity Compensation Plan Information” in the 2022 Proxy Statement and is incorporated herein by reference. Information required by Item 403 of Regulation S-K will be included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2022 Proxy Statement and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. | |||||||
Information required by Item 404 of Regulation S-K will be included under the caption “Related Party Transactions” in the 2022 Proxy Statement and is incorporated herein by reference. Information required by Item 407(a) of Regulation S-K will be included under the caption “Director Independence” in the 2022 Proxy Statement and is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services. | |||||||
Information required by this Item 14 will be included under the caption “Audit Fees and Pre-Approval Policy” in the 2022 Proxy Statement and is incorporated herein by reference.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules. | |||||||
Documents filed as part of this report:
| 1 | Financial Statements | ||||
Consolidated Statements of Earnings | |||||
Consolidated Statements of Comprehensive Income | |||||
Consolidated Balance Sheets | |||||
Consolidated Statements of Shareholders’ Equity | |||||
Consolidated Statements of Cash Flows | |||||
Notes to Consolidated Financial Statements | |||||
Reports of Independent Registered Public Accounting Firm* | |||||
*Ernst & Young LLP, PCAOB Firm ID No. 00042.
| 2 | Financial Statement Schedules | ||||
II. | Valuation and Qualifying Accounts. | ||||
Schedules other than that listed above are omitted because the conditions requiring their filing do not exist or because the required information is included in the Consolidated Financial Statements, including the Notes thereto.
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| 3 | Exhibits | ||||
| Exhibit No. | Exhibit Description | Form | Filing Date or Filed Herewith | ||||||||
Articles of Incorporation and By-Laws. | |||||||||||
| 3.1 | 10-K | November 12, 2013 | |||||||||
| 3.2 | 10-K | November 15, 2021 | |||||||||
| Instruments defining the rights of security holders, including indentures. | |||||||||||
| 4.1 | 8-K | December 13, 2019 | |||||||||
| 4.2 | 10-K | November 12, 2019 | |||||||||
| Material Contracts | |||||||||||
| Credit and Securitization Agreements | |||||||||||
| 10.1 | 8-K | November 10, 2021 | |||||||||
| 10.2 | 8-K | October 21, 2019 | |||||||||
| 10.3 | X | ||||||||||
| 10.4 | X | ||||||||||
| 10.5 | 8-K | November 1, 2022 | |||||||||
| 10.6 | X | ||||||||||
| 10.7 | X | ||||||||||
| Management Contracts or Compensatory Plan or Arrangement | |||||||||||
| 10.8 | 14A | December 10, 2007 | |||||||||
| 10.9 | 14A | December 13, 2012 | |||||||||
| 10.10 | 8-K | December 26, 2012 | |||||||||
| 10.11 | 10-K | November 25, 2008 | |||||||||
| 10.12 | 14A | December 12, 2014 | |||||||||
| 10.13 | X | ||||||||||
| 10.14 | X | ||||||||||
| 10.15 | X | ||||||||||
| 10.16 | X | ||||||||||
| 10.17 | 10-Q | January 28, 2022 | |||||||||
| 10.18 | 8-K | November 20, 2015 | |||||||||
| 10.19 | 8-K | November 20, 2015 | |||||||||
| 10.20 | 10-K | November 15, 2021 | |||||||||
| 10.21 | 10-K | November 15, 2021 | |||||||||
| 10.22 | 10-K | November 15, 2021 | |||||||||
| 10.23 | 8-K | October 5, 2017 | |||||||||
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| 10.24 | 8-K | July 27, 2018 | |||||||||
| 10.25 | 10-K | November 15, 2021 | |||||||||
| 10.26 | X | ||||||||||
| 10.27 | X | ||||||||||
| 10.28 | 10-Q | January 28, 2022 | |||||||||
| 10.29 | 10-K | September 25, 1999 | |||||||||
| 10.30 | 8-K | November 30, 2004 | |||||||||
| 10.31 | 8-K | August 11, 2017 | |||||||||
| 10.32 | 10-Q | May 2, 2016 | |||||||||
| 10.33 | 10-Q | July 27, 2018 | |||||||||
| 10.34 | X | ||||||||||
| 10.35 | X | ||||||||||
| Other Material Contracts | |||||||||||
| 10.36 | 10-Q | May 4, 2015 | |||||||||
| 10.37 | 10-Q | February 3, 2015 | |||||||||
| 10.38 | 10-Q | July 27, 2018 | |||||||||
| Other Exhibits | |||||||||||
| 21 | X | ||||||||||
| 23 | X | ||||||||||
| Executive Certifications | |||||||||||
| 31.1 | X | ||||||||||
| 31.2 | X | ||||||||||
| 32.1 | X | ||||||||||
| Interactive Data Files | |||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | |||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | X | |||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | X | |||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | X | |||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | X | |||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | X | |||||||||
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101. | X | |||||||||
Item 16. | Form 10-K Summary. | |||||||
None.
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Valuation and Qualifying Accounts
| (dollars in thousands) | Schedule II | |||||||||||||||||||||||||||||||
| Additions | Foreign | |||||||||||||||||||||||||||||||
| Balance at | charged to | exchange | Balance | |||||||||||||||||||||||||||||
| beginning | expenses and | impact | at end | |||||||||||||||||||||||||||||
| Description | of year | other accounts | Deductions* | and other | of year | |||||||||||||||||||||||||||
| Fiscal year ended October 3, 2020 | ||||||||||||||||||||||||||||||||
| Contract reserves | $ | 60,914 | $ | 76,747 | $ | 66,885 | $ | 1,636 | $ | 72,412 | ||||||||||||||||||||||
| Allowance for credit losses | 5,402 | 3,774 | 3,144 | 281 | 6,313 | |||||||||||||||||||||||||||
| Reserve for inventory valuation | 134,185 | 52,956 | 35,747 | 1,917 | 153,311 | |||||||||||||||||||||||||||
| Deferred tax valuation allowance | 13,137 | 2,003 | 860 | 504 | 14,784 | |||||||||||||||||||||||||||
| Fiscal year ended October 2, 2021 | ||||||||||||||||||||||||||||||||
| Contract reserves | $ | 72,412 | $ | 41,572 | $ | 55,377 | $ | 250 | $ | 58,857 | ||||||||||||||||||||||
| Allowance for credit losses | 6,313 | 2,245 | 4,238 | 31 | 4,351 | |||||||||||||||||||||||||||
| Reserve for inventory valuation | 153,311 | 26,513 | 25,151 | 982 | 155,655 | |||||||||||||||||||||||||||
| Deferred tax valuation allowance | 14,784 | 2,513 | 3,729 | 328 | 13,896 | |||||||||||||||||||||||||||
| Fiscal year ended October 1, 2022 | ||||||||||||||||||||||||||||||||
| Contract reserves | $ | 58,857 | $ | 23,607 | $ | 35,099 | $ | (818) | $ | 46,547 | ||||||||||||||||||||||
| Allowance for credit losses | 4,351 | 1,686 | 1,083 | (346) | 4,608 | |||||||||||||||||||||||||||
| Reserve for inventory valuation | 155,655 | 25,252 | 33,876 | (6,426) | 140,605 | |||||||||||||||||||||||||||
| Deferred tax valuation allowance | 13,896 | — | 4,598 | (648) | 8,650 | |||||||||||||||||||||||||||
* Includes the effects of divestitures.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Moog Inc.
(Registrant)
| By | /s/ JOHN R. SCANNELL | ||||||||||
| John R. Scannell | |||||||||||
| Chief Executive Officer | |||||||||||
| Date: | November 14, 2022 | ||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 14, 2022.
| /s/ JOHN R. SCANNELL | /s/ WILLIAM G. GISEL, JR. | |||||||
| John R. Scannell | William G. Gisel, Jr. | |||||||
| Chairman of the Board and Director | Director | |||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| /s/ JENNIFER WALTER | /s/ PETER J. GUNDERMANN | |||||||
| Jennifer Walter | Peter J. Gundermann | |||||||
| Vice President and Chief Financial Officer | Director | |||||||
| (Principal Financial Officer) | ||||||||
| /s/ MICHAEL J. SWOPE | /s/ KRAIG H. KAYSER | |||||||
| Michael J. Swope | Kraig H. Kayser | |||||||
| Controller | Director | |||||||
| (Principal Accounting Officer) | ||||||||
| /s/ JANET M. COLETTI | /s/ BRIAN J. LIPKE | |||||||
| Janet M. Coletti | Brian J. Lipke | |||||||
| Director | Director | |||||||
| /s/ DONALD R. FISHBACK | /s/ MAHESH NARANG | |||||||
| Donald R. Fishback | Mahesh Narang | |||||||
| Director | Director | |||||||
| /s/ BRENDA L. REICHELDERFER | ||||||||
| Brenda L. Reichelderfer | ||||||||
| Director | ||||||||
96