Moog Inc.
10-K on 11/17/2020   Download
SEC Document
SEC Filing
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Table of Contents


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 3, 2020

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 Rd
East Aurora,
New York
14052-0018
 
(Address of Principal Executive Offices)
(Zip Code)
 
(716) 652-2000
Registrant's telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

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 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   


1

Table of Contents

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   

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 March 27, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,634 million.
The number of shares outstanding of each class of common stock as of November 10, 2020 was:
Class A common stock, 29,356,566 shares
Class B common stock, 2,662,621 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Moog Inc. Proxy Statement for the Annual Meeting of Shareholders to be held on February 9, 2021 ("2020 Proxy") are incorporated by reference into Part III of this Form 10-K.





















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moogimagea21.jpg
FORM 10-K INDEX
 
 
PART I
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 

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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.
 


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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 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 2020, 2019 and 2018 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 Technology and Woodward.
Space and Defense Controls: Aerojet Rocketdyne, Airbus, ATA Engineering, Bradford Engineering, Chess Dynamics, Cobham, Curtiss-Wright, Electro-Miniatures, EBAD, Elbit, EOS, Fulcrum Concepts LLC, Glenair, Honeywell, IHI-Aerospace, JASC, Kearfott, Kollmorgan, Kongsberg, Marotta, Parker-Hannifin, RUAG, Rafael, Raytheon Technologies, PVP Advanced, Sargent Aerospace & Defense, Schleifring, SEAKR, Silent Sentinel, SL Montevideo, SwRI, Vacco, Valcor, ValveTech and Vincorian.
Industrial Systems: Allied Motion, Baumüller, Atos, Bosch Rexroth, Cardinal Health, Eaton, MTS Systems, Parker-Hannifin, Schleifring, Shinano Kenshi, Smiths Medical, Stemman, Woodward.
Government Contracts. All U.S. Government contracts are subject to termination by the U.S. Government. In 2020, sales under U.S. Government contracts represented 41% 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 3, 2020, our twelve-month backlog was $1.7 billion, an increase of 10% compared to September 28, 2019. 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, surveillance/security, 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 2020.
Human Capital Resources. Moog’s culture and values, along with its approximately 13,000 employees in almost 30 countries, are the most valuable assets of the Company. These values, which are the foundation of our Company culture, are:
Trust Is A Must
Competence Is King
We Try Harder
We’re All In This Together
It’s My Job
We Look For Solutions, Not Someone To Blame
Communication Is Crucial
Formality Doesn’t Help
We Have To Be Adaptable And Ready To Change
Performance and Commitment Should Be Rewarded
Work Should Be An Enjoyable Experience
Your Personal Life Is Important

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 works diligently to attract the best talent from a diverse range of sources 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. 

Moog has a strong employee value proposition that leverages our unique culture, collaborative working environment, shared sense of purpose, desire to do the right thing and ground-breaking work to attract talent to our Company. Although we are a successful global business, our people feel like they are amongst friends and can be themselves. We empower them to find new and better ways of doing things and the scale of our business means that careers can develop in exciting and unexpected directions.

In 2020, we hired 1,692 new employees at our Company. When we hire talent, they tend to stay at Moog. The average employee has 11 years of service. On October 3, 2020, we employed 12,623 full-time employees. 

Diversity, equity and inclusion

Moog aspires to be a diverse, equitable, and inclusive Company where employees are empowered to bring their whole, authentic selves to work every day. At Moog, we believe in the people who work for us. As part of our investment in our people, we make diversity, equity, and inclusion a priority. Our goal is to create a culture where we value, respect, and provide fair treatment and equal opportunities for all employees. By recognizing and celebrating our differences, we cultivate an environment that’s the right fit for every person inside of it.

Moog demonstrates diversity, equity, and inclusion at the highest levels of our Company. 33% of the executive team and 29% of our independent directors are female.

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Compensation programs and employee benefits

The main objective of Moog’s compensation program is to provide a compensation package that will attract, retain, motivate and reward superior employees who must operate in a highly competitive and technologically challenging environment. We seek to do this by linking annual changes in compensation to overall Company performance, as well as each individual’s contribution to the results achieved. The emphasis on overall Company performance is intended to align the employee’s financial interests with the interests of shareholders. Moog also seeks fairness in total compensation with reference to external comparisons, internal comparisons and the relationship between management and non-management remuneration.

In addition to competitive base salaries, Moog accomplishes this compensation objective through its profit share plan for employees, short-term incentive plan for its senior managers (approximately 400), and long-term incentive plan for its executives (approximately 40). The profit share plan gives a fixed percentage of Moog’s net earnings back to its employees on an annual basis. The short-term incentive plan provides a bonus to senior managers based on annual increases to earnings per share and free cash flow conversion. The long-term incentive plan benefits executives and is based on achieving revenue and operating margin targets and stock price appreciation. Moog also recently introduced enhancements to its retirement savings plan that gives employees an industry leading employer match and other employer contributions.

Moog is committed to providing comprehensive benefit options and it is our intention to offer benefits that will allow our employees and their families to live healthier and more secure lives. Some examples of Moog’s wide ranging benefits offered are: Medical insurance, prescription drug benefits, dental insurance, vision insurance, hospital indemnity insurance, accident insurance, critical illness insurance, life insurance, disability insurance, health savings accounts, flexible spending accounts, legal insurance, auto/home insurance, identity theft insurance and pet insurance.

Employee well-being

In addition to traditional employee benefits, Moog has a number of innovative initiatives to support the well-being of its employee base. These include: Onsite wellness clinics at our significant 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.

Employee engagement and retention

In 2019, Moog conducted a global employee engagement survey using a leading outside firm that specializes in employee engagement. There were many questions, but the overarching goal of the survey was to determine overall employee engagement through understanding how happy our employees are working at Moog and if our employees would recommend Moog as a great place to work. The results of that survey were an overall engagement score of 74 out of 100, which was two points above the survey providers industry benchmark. While we are happy with this level of employee engagement, we are continuing to try to do better. Our leadership has collected all the feedback, both positive and constructive, and is focusing on making employee-suggested changes to become an even better place to work.

We see our positive employee engagement coming through in high levels of employee retention. For the last five years the average of voluntary attrition has been just above 5% of our workforce. That is a competitive attrition figure and a testament to Moog being a great place to work.


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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 experiences our Company provides and deliberate learning experiences. 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. This program accelerates the growth and development of our high potential employees and prepares them for future senior-level roles within the organization. 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. Finally, our leading and coaching people program, which is open to people managers at Moog, is a two-day course and 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 training resources available for employees in order to ensure our people have everything they need to succeed both personally and professionally. Moog facilitates these training opportunities and programs through state-of-the-art learning 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 corporate social and environmental responsibility. Beyond creating exciting technologies that solve our customers' difficult technical challenges, we believe that to be truly successful, it's crucial that we do our part to improve the world for current and future generations. For us, that means 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; and engaging in ethical practices. We're all in this together - when our local and global communities succeed, we succeed. Moog and its employees live this mantra with countless initiatives focused on supporting our communities both financially and with employee time.

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.  The Company regularly re-enforces 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. The Company also maintains 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. 

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Customers. Our principal customers are Original Equipment Manufacturers, or OEMs, and end users for whom we provide aftermarket support. Aerospace and defense OEM customers collectively represented 56% of 2020 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 32% of 2020 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 2020, 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, BAE Systems Aerospace, Bombardier and the U.S. Government.
Space and Defense Controls: Lockheed Martin, Northrup Grumman, Raytheon, Boeing, General Dynamics, Aerojet Rocketdyne, United Launch Alliance, Raytheon Technologies, L3Harris Technologies and the U.S. Government.
Industrial Systems: McKesson, Phillips Healthcare, CAE, Nutricia, Integrated Medical Systems, Flight Safety, Mitsubishi Hitachi Power Systems TurboChef Technologies, MacArtney and Nestle.
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. 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 Securities and Exchange Commission. We have posted our corporate governance guidelines, Board committee charters and code of ethics to the investor relations portion of our website. This information is available in print to any shareholder upon request. All requests for these documents should be made to Moog’s Manager of Investor Relations by calling 716-687-4225.




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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 January 2, 2020, Donald R. Fishback, retired from his position as Chief Financial Officer of the Company.
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 HR Officer. Previously, he was a Group Vice President and Global HR Director, Aircraft Group.
On August 11, 2015, R. Eric Burghardt was named Vice President and President, Aircraft Group. Previously, he was a Group Vice President and Finance Director. Effective May 3, 2019 he stepped down as President, Aircraft Group.
Executive Officers
 
Age
 
Year First Elected Officer
 
 
 
 
 
John R. Scannell
 
 
 
 
Director; Chairman of the Board; Chief Executive Officer
 
57
 
2006
Jennifer Walter
 
 
 
 
Vice President; Chief Financial Officer
 
49
 
2008
Donald R. Fishback
 
 
 
 
Director; Vice President
 
64
 
1985
Maureen M. Athoe
 
 
 
 
Vice President
 
62
 
2015
R. Eric Burghardt
 
 
 
 
Vice President
 
61
 
2015
Patrick J. Roche
 
 
 
 
Vice President
 
57
 
2012
Mark J. Trabert
 
 
 
 
Vice President
 
61
 
2015
Paul Wilkinson
 
 
 
 
Vice President
 
40
 
2017
In addition to the executive officers noted above, Robert J. Olivieri, 70, was elected Secretary in 2014. Mr. Olivieri's principal occupation is partner in the law firm of Hodgson Russ LLP.

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Item 1A. 
  
Risk Factors.
COVID-19 PANDEMIC RISKS
We face various risks related to health pandemics such as the global COVID-19 pandemic, which may have material adverse consequences on our operations, financial position, cash flows, and those of our customers and suppliers. We face adverse effects related to the global COVID-19 pandemic, including disruption and volatility in the global capital markets, disruption in our global supply chain and a net reduction in our overall manufacturing activities. We would expect the COVID-19 pandemic to adversely affect our operations and financial position if significant portions of our workforce are unable to work effectively due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 pandemic. To-date, substantially all of our operations and production activities in the U.S. and globally have remained operational during the COVID-19 pandemic. Many of our facilities are considered essential activities (including manufacturing for U.S. military contracts and meeting the demand of medical devices and sub-assemblies) and are exempt from closure directives. However, our manufacturing sites are subject to various local and national directives curtailing operations, requiring work from home and social distancing which otherwise could impact the efficiency of our operations. Such directives could change at any time. We continue to monitor the situation, assessing possible implications on our operations, supply chain, liquidity, cash flow and customer orders, and will continue taking actions in an effort to mitigate adverse consequences. Recognizing the unprecedented nature, scale and uncertainty associated with this global health crisis, the duration and extent of the on-going impacts cannot be reasonably estimated at this time.
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 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 current global pandemic, and their program wins could reduce the total number of viable suppliers and increase their market share. 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 new products and technology research and development efforts are substantial and may not be successful which could reduce our sales and earnings. Technologies related to our products 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 activities during the introduction of new products. Our technology has been developed through customer-funded and internally-funded research and development, 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 enhancements. Also, the research and development expenses we incur may exceed our cost estimates and the new products we develop may not generate sales sufficient to offset our costs. Additionally, our competitors may develop technologies and products that have more competitive advantages than ours and render our technology uncompetitive or obsolete.


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Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete. Protecting our intellectual property is critical in order to maintain a competitive advantage. We therefore rely on internally developed and acquired patents, trademarks, proprietary knowledge and technologies. Our inability to defend against the unauthorized use of these rights and assets could lead to reputational harm and have an adverse effect on our competitive position and on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. This litigation could result in significant costs and divert management's focus away from operations.
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 resume 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 continue 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 match the current customer demand. Divestitures could adversely affect our profitability and, under certain circumstances, require us to record impairment charges or a loss 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.
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. For example, our defense programs are largely contingent on U.S. Department of Defense funding. In addition, our space programs rely on the same governmental funding as well as investment for commercial and exploration activities. Our aerospace programs are dependent on the highly cyclical commercial airline industry, which is driven by changes in fuel prices, fluctuating demand for travel and changing economic conditions. Demand for our industrial products is dependent 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 global pandemic and related economic uncertainties continue to 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 2020, sales under U.S. Government contracts represented 41% of our total sales, primarily within Aircraft Controls and Space and Defense Controls. Sales to foreign governments represented 7% of our total sales. Funding for government programs can be structured into a series of individual contracts and depend on annual congressional appropriations, which are cyclical. 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 beyond 2020 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 as a customer or a significant reduction in sales to The Boeing Company could adversely impact our operating results. We provide The Boeing Company, or Boeing, with controls for both military and commercial applications, which totaled 14% of our 2020 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. We have seen lower commercial aircraft orders from Boeing, as they match their commercial production rates to the reduced global air traffic volume due to the COVID-19 pandemic. A further reduction in sales or the loss of Boeing as a customer could reduce our sales and earnings.

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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 3, 2020, our total backlog was $2.6 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, due in part to governments' abilities to modify, curtail or terminate major programs. Due to the uncertain nature of our contracts with the U.S. Government and other foreign governments, we may not realize revenue from some of the orders that are included in our backlog. A portion of our backlog also relates to commercial aircraft programs as well as industrial programs. The COVID-19 pandemic has drastically reduced air traffic as travel restrictions and social distancing measures were implemented to help control the spread of the virus. The reduced air traffic has applied financial pressures on airlines, which have in turn dramatically reduced flight hours and delayed the purchases of new aircraft in order to preserve cash and liquidity. As Boeing and Airbus match their production rates with the reduced air traffic volume, we may never realize the full amounts included in our commercial backlog. If this occurs, our future revenue and growth prospects may be adversely affected.
OPERATIONAL RISKS
Our business operations may be adversely affected by information systems interruptions, intrusions or new software implementations. We rely extensively on various information technologies throughout our company supporting almost every business activity. In doing so, we store sensitive data including proprietary business information, intellectual property and confidential employee data on servers and databases, some of which are managed and administrated by third parties. Furthermore, we may have access to sensitive, confidential or personal information that may be subject to privacy and security laws and controls. Although we continue to review and enhance our computer systems and cybersecurity controls, information system disruptions, equipment failures or evolving cybersecurity attacks, such as unauthorized access, malicious software and other intrusions, could still occur and may lead to potential data corruption and exposure of proprietary and confidential information. Also as a result of the COVID-19 pandemic, our enablement of employees to work productively from home may increase our risk exposure to cyberattacks. Any information systems intrusion may cause operational stoppages, increased operational costs, fines, penalties and diminished competitive advantages through reputational damages. Additionally, we have and may continue to incur additional costs to comply with our customers' increased cybersecurity protections and standards, including those of the U.S. Government. Prior cyberattacks directed at us have not had a material impact on our financial results. In addition, we have embarked on multi-year business information system transformation and standardization projects. These endeavors will occupy additional resources, may divert attention from other operational activities, may cause our information systems to perform unexpectedly and may increase our risk exposure to cyberattacks. While we are investing significant resources throughout the planning and project management process, unanticipated delays could occur and could adversely affect our financial results.
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.
If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted. We rely on subcontracts with other companies to perform portions of the service we provide to our customers on many of our contracts. There is a risk that we may have disputes with our subcontractors including disputes 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 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. In addition, a delay or failure in our ability to obtain components and equipment parts from our suppliers may adversely affect our ability to perform our obligations to our customers.

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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" in Part II of this form 10-K.
We enter into fixed-price contracts, which could subject us to losses if we have cost overruns. In 2020, fixed-price contracts represented 89% 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. 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 could limit our operational and financial flexibility. We have incurred significant indebtedness, and may incur additional debt as we opportunistically resume investments for operations, research and development, capital expenditures and acquisitions in a measured and balanced way. Our ability to make interest and scheduled principal payments and operate within the restrictive covenants 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 business, limiting our ability to meet operational and capital needs, react to changes in market conditions and to pursue acquisition opportunities, thereby placing us at a competitive disadvantage.
The phase out of LIBOR may negatively impact our debt agreements and financial position, results of operations and liquidity. In July 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established or whether different benchmark rates used to price indebtedness will develop. If LIBOR ceases to exist, we may need to renegotiate our revolving credit facility and our securitization facility, both of which extend beyond 2021 and utilize LIBOR as a factor in determining the interest rate. In doing so, we may be negatively impacted by the renegotiated terms and costs of indebtedness. In addition, the overall financial markets may be disrupted as a result of the phase out or replacement of LIBOR, which could have an adverse effect on our cost of capital and our financial position. We continue to monitor the LIBOR transition and will work to minimize any impact.

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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 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 3, 2020, goodwill was $822 million and other intangible assets were $85 million of our total assets of $3.2 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 tax regulations or interpretations could have significant impacts on our effective tax rates 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. It could also result in our progress payments being withheld or our 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 political and currency risks and adverse changes in local legal and regulatory environments. 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. We expect international operations and export sales to contribute to our earnings for the foreseeable future. Both the sales from international operations and export sales are subject in varying degrees to risks inherent in doing business outside of the United States. Such risks include the possibility of unfavorable circumstances arising from host country laws or regulations including privacy laws protecting personal data, changes in tariff and trade barriers and import or export licensing requirements. See "Note 21 - Segments" in Part II of this form 10-K.

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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 with respect to a significant quantity of our products, 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 may 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. See "Note 21 - Segments" in Part II of this form 10-K.
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 where 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.
GENERAL RISKS
The United Kingdom's decision to exit the European Union may result in short-term and long-term adverse impacts on our results of operations. In January 2020, the United Kingdom officially left the European Union and is in a transition period until December 2020. The resulting outcome of the United Kingdom's decision could adversely affect our business and our results of operations. In 2020, our United Kingdom operations represented approximately 7% of our consolidated net sales across all three segments. In the short-term, the results of the negotiated terms could create volatility in the currency exchange rate of the British Pound, which would negatively impact our financial results. In the longer term, any impact from Brexit on our United Kingdom operations will depend on the outcome of yet-to-be negotiated tariff, trade, regulatory and other matters. While we have established cross-segment teams and adopted measures to mitigate the potential risks within the current uncertain environment, such measures may negatively impact our operations and our financial results.

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Escalating tariffs, restrictions on imports or other trade barriers between the United States and various countries may impact our results of operations. Uncertainty remains with respect to trade policies, treaties, government regulations and tariffs between the United States and other countries, both where we source products and where we have large customers. The current U.S. administration has called for substantial changes to U.S. foreign trade policy including imposing greater restrictions on international trade with significant increases in tariffs on goods imported into the U.S. In the near-term, we expect these tariffs will negatively impact our costs to in-source materials, primarily from China, which could negatively impact our operating results. In the longer-term, these tariffs may negatively impact customer order volume if the resulting higher prices for aircraft restrict future orders. The potential loss of orders would negatively impact our financial results including lower sales, operating profits and cash flow.
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 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 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 employees, 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 3, 2020, we occupied 5,549,000 square feet of space, distributed by segment as follows:
  
 
Square Feet
  
 
                 Owned
 
                  Leased
 
                     Total
Aircraft Controls
 
1,475,000

 
359,000

 
1,834,000

Space and Defense Controls
 
912,000

 
424,000

 
1,336,000

Industrial Systems
 
1,709,000

 
650,000

 
2,359,000

Corporate Headquarters
 
20,000

 

 
20,000

Total
 
4,116,000

 
1,433,000

 
5,549,000

We have principal manufacturing facilities in the United States and countries throughout the world in the following locations:
Aircraft Controls - U.S., Philippines and United Kingdom.
Space and Defense Controls - U.S., United Kingdom and Ireland.
Industrial Systems - U.S., Germany, Czech Republic, Italy, Costa Rica, China, United Kingdom, Netherlands, Luxembourg, Philippines, Japan, Canada, India and Lithuania.
Our corporate headquarters is located in East Aurora, New York.
We believe that our properties have been adequately maintained and are generally in good condition. Operating leases for our properties expire at various times from 2021 through 2057. 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 shareholders of record of Class A common stock and Class B common stock was 603 and 720, respectively, as of November 10, 2020.
The following table summarizes our purchases of our common stock for the quarter ended October 3, 2020.
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)
June 28, 2020 - August 1, 2020
83,866

 
$
52.92

 

 
765,320

August 2, 2020 - August 29, 2020
225,524

 
60.66

 
224,456

 
540,864

August 30, 2020 - October 3, 2020
380,305

 
61.93

 
374,673

 
166,191

Total
689,695

 
$
60.42

 
599,129

 
166,191


(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: 7,610 shares at $53.16 per share during July; 984 shares at $57.57 per share during August and 1,113 shares at $64.02 per share during September. In connection with the issuance of shares to the Employee Stock Purchase Plan ('ESPP"), we purchased 76,256 Class B shares at $52.90 per share from the SECT during July.

(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. We accepted delivery of 84 shares at $58.73 per share in August and 4,519 shares at $64.55 per share in September in connection with the exercise of equity-based awards.

(3)
The Board of Directors has authorized a share repurchase program. This program has been amended from time to time to authorize additional repurchases up to an aggregate 13 million common shares. The program permits the purchase of 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 224,456 Class A shares at an average price of $60.68. In September, we purchased 374,673 Class A shares at an average price of $61.90. The purchases identified with notes (1) and (2) in column (a) are not included in this program.












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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, 2015, including reinvestment of any dividends.

 
chart-0c22b5093b255cb19a5.jpg
 
 
9/15
 
9/16
 
9/17
 
9/18
 
9/19
 
9/20
Moog Inc. - Class A Common Stock
 
$
100.00

 
$
110.12

 
$
154.30

 
$
159.99

 
$
152.78

 
$
120.79

NYSE Composite - Total Return Index
 
100.00

 
112.35

 
131.16

 
144.02

 
146.94

 
147.15

S&P Aerospace & Defense Index
 
100.00

 
117.87

 
169.18

 
209.29

 
222.91

 
159.87

 

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Item 6.
 
    Selected Financial Data.
For a more detailed discussion of 2018 through 2020, 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)
2020
2019
2018
2017
2016
RESULTS FROM OPERATIONS
 
 
 


Net sales
$
2,884,554

$
2,904,663

$
2,709,468

$
2,497,524

$
2,411,937

Net earnings
9,205

174,548

95,240

143,157

126,745

Net earnings per share
 
 
 


Basic
$
0.28

$
5.01

$
2.67

$
3.99

$
3.49

Diluted
$
0.28

$
4.96

$
2.64

$
3.95

$
3.47

Dividends declared per share
$
0.75

$
1.00

$
0.50

$

$

Weighted-average shares outstanding
 
 
 


Basic
33,257,684

34,854,614

35,661,638

35,852,448

36,277,445

Diluted
33,437,801

35,178,968

36,052,307

36,230,043

36,529,344

FINANCIAL POSITION

 



Cash and cash equivalents
$
84,583

$
89,702

$
125,584

$
368,073

$
325,128

Working capital
902,933

901,315

797,919

997,005

938,295

Total assets
3,225,831

3,114,237

2,964,048

3,090,592

3,004,974

Indebtedness - total
930,332

833,233

862,824

957,037

1,006,393

Shareholders’ equity
1,243,083

1,322,481

1,224,986

1,214,304

988,411

Shareholders’ equity per common share outstanding
$
38.65

$
38.12

$
35.20

$
33.94

$
27.56

SUPPLEMENTAL FINANCIAL DATA
 



Capital expenditures
$
88,284

$
118,422

$
94,517

$
75,798

$
67,208

Depreciation and amortization
86,972

85,260

88,572

90,167

98,732

Research and development
110,865

126,453

129,838

144,157

147,336

Total backlog
2,555,129

2,232,605

n/a
n/a
n/a
Twelve-month backlog
1,658,344

1,502,028

1,481,230

1,211,797

1,224,878

RATIOS

 



Net return on sales
0.3
%
6.0
%
3.5
%
5.7
%
5.3
%
Return on shareholders’ equity
0.7
%
13.4
%
7.7
%
13.4
%
12.6
%
Current ratio
2.3

2.2

2.2

2.6

2.6

Net debt to capitalization
40
%
36
%
38
%
33
%
41
%
Notes and definitions for the above table:

All periods include the effects of our share repurchase program. See the Consolidated Statements of Shareholders' Equity and Consolidated Statements of Cash Flow at Item 8, Financial Statements and Supplementary Data of this report.
All periods include the effects of acquisitions and divestitures. See Note 3, Acquisitions and Divestitures, at Item 8, Financial Statements and Supplementary Data of this report.
2020 includes long-lived asset impairment charges and 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, at Item 8, Financial Statements and Supplementary Data of this report.
2017 to 2020 includes the retrospective application of a change in accounting method for the determination of the market-related value of assets for a class of assets within our U.S. defined benefit pension plan. See Note 1, Summary of Significant Accounting Policies, at 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.
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, 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 for space launch vehicles.
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, Czech Republic, Italy, Costa Rica, China, Netherlands, Luxembourg, Japan, Canada, India and Lithuania.
Under ASC 606, 65% of revenue was recognized over time for the year ended October 3, 2020, 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 3, 2020, 35% 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.
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 dominant 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.





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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 activities 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 base and geographic presence.
We focus on improving shareholder value through strategic revenue growth, both acquired and organic, 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. Our activities have included strategic acquisitions, share buybacks and dividend payments. In the current COVID-19 environment, we have shifted our capital deployment strategies from a long-term perspective that balances growth and capital returns with one that focuses on liquidity and leverage in the near-term. Our immediate financial focus will continue to revolve around cash preservation and cost management, while opportunistically resuming investments in a measured and balanced way. We are committed to ensuring that we have adequate liquidity during this crisis, protecting the long-term health of the Company and emerging financially strong and ready to capitalize on opportunities once this environment stabilizes.
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.
On November 28, 2019, we acquired Gesellschaft für Antriebstechnik mbH and GAT Inc. (GAT), headquartered in Geisenheim, Germany for a purchase price of $54 million, net of acquired cash. GAT designs and manufactures high-end fluid rotating unions and slip rings. This operation is included in our Industrial Systems segment.
In the first quarter of 2020, we sold a non-core business of our Industrial Systems segment for $2 million in net consideration and recorded a minimal gain in other income.
In 2019, we sold a non-core business of our Industrial Systems segment for $4 million in cash and recorded a gain in other income of $3 million.





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CRITICAL ACCOUNTING POLICIES
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 3, 2020 was 65% 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 additional discussion on revenue recognition, see Note 2, Revenue from Contracts with Customers, of Item 8, Financial Statements and Supplementary Data, of this report.
Contract Reserves
At October 3, 2020, we had contract reserves of $72 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.
Reserves for Inventory Valuation
At October 3, 2020, we had net inventories of $623 million, or 39% of current assets. Reserves for inventory were $153 million, or 20% 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 3, 2020, we had $822 million of goodwill, or 25% 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 estimates. 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 2020, we performed a qualitative 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 qualitative assessment indicated that is more likely than not that the fair value of each of the reporting units exceed its carrying value; and therefore, a quantitative two-step impairment test was not necessary.


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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.
During 2020, we recorded $38 million of impairment charges for property, plant and equipment, right-of-use assets and intangible assets.
Pension Assumptions
We maintain various defined benefit pension plans covering employees at certain locations. In 2020, pension expense for all defined benefit plans was $46 million, exclusive of the $121 million pension settlement resulting from the transfer of future benefits obligations and annuity administration for certain retirees and beneficiaries in our qualified U.S defined benefit pension plan. 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 2020 were 3.5% for service cost and 2.9% for interest cost, compared to 4.4% and 4.1%, respectively, in 2019. A 50 basis point decrease in the discount rates would increase 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 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 (SOA), 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 2020 expense for our largest plan, we used a 4.50% return on assets assumption, compared to 5.25% for 2019. A 25 basis point decrease in the long-term expected return on assets assumption would increase our annual pension expense by $2 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 2020. 
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 3, 2020, we had gross deferred tax assets of $171 million and deferred tax asset valuation allowances of $15 million. The deferred tax assets principally relate to benefit accruals, inventory obsolescence, tax benefit carryforwards and contract reserves. The deferred tax assets include $14 million related to tax benefit carryforwards associated with net operating losses and tax credits, for which $12 million of deferred tax asset valuation allowances are recorded.


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COVID-19 IMPACTS ON OUR BUSINESS
The spread of the COVID-19 outbreak has disrupted businesses on a global scale. On March 11, 2020, the World Health Organization classified the outbreak as a pandemic. As we entered this crisis, the Company established two clear priorities: first and foremost the health and safety of our employees and their families, and second, continuing to meet the needs of our customers and secure the financial well-being of the Company. Substantially all of our operations and production activities have, to-date, remained operational. Many are considered essential and are exempt from closure directives. However, such directives could change at any time. We have implemented changes in our work practices maintaining a safe working environment for production employees at our facilities, while enabling other employees to productively work from home.
Early in our fiscal third quarter of 2020 in response to this pandemic, we implemented short term actions to maintain the financial health and liquidity of the Company. We now have more clarity around customer demand. We have resized the business in end markets in which we are facing significant and sustained reductions in demand. We will continue to monitor the situation, assessing further possible implications on our operations, supply chain, liquidity, cash flow and customer orders, and will take action in an effort to mitigate any adverse consequences. We will continue to focus on cash preservation and cost management, while opportunistically resuming investments in a measured and balanced way.
Recognizing the unprecedented nature, scope and continued uncertainty associated with this global health crisis, the duration and extent of the ongoing impact cannot be reasonably estimated at this time. Our businesses are facing varying levels of pressure depending on the markets they serve.
As such, we have suspended our practice of providing detailed guidance for fiscal 2021. However, we expect that COVID-19 will be with us for all of fiscal 2021, and as such, our factories will continue operating with the current work practices and that the majority of our office staff will continue to work remotely. We believe our defense, space and medical markets will remain strong; however, our medical market could soften as the initial surge of demand during the beginning of COVID-19 does not repeat. We do not expect any recovery in our industrial markets from the level in the second half of fiscal 2020. Also, we are working to the production schedules of our major commercial OEM customers, while recognizing that there remains considerable uncertainty in their outlooks. Additionally, we believe we may see a modest growth in commercial aftermarket demand in the second half of 2021.
We believe that our existing financial arrangements, along with our actions to mitigate the business pressures we are facing, will be sufficient to meet our operating needs over the short-term. We have available borrowings under short and long-term arrangements that could provide relief should the situation become more stressed.

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CONSOLIDATED RESULTS OF OPERATIONS
The following is a discussion of our results of operations in fiscal 2020 compared to fiscal 2019. A discussion of our fiscal 2019 results of operations compared to fiscal 2018 results can be found within Part II, Item 7. Management's Discussion and Analysis within our fiscal 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 12, 2019.
  
 
 
  
 
 
2020 vs. 2019
2019 vs. 2018
(dollars and shares in millions, except per share data)
2020
 
2019
 
2018
$ Variance
% Variance
$ Variance
% Variance
Net sales
$
2,885

 
$
2,905

 
$
2,709

 
$
(20
)
 
(1
%)
 
$
195

 
7
%
Gross margin
25.8
 %
 
28.1
%
 
28.6
%
 

 


 

 

Research and development expenses
$
111

 
$
126

 
$
130

 
$
(16
)
 
(12
%)
 
$
(3
)
 
(3
%)
Selling, general and administrative expenses as a percentage of sales
13.8
 %
 
13.9
%
 
14.3
%
 

 


 

 


Interest expense
$
39

 
$
39

 
$
36

 
$

 
(1
%)
 
$
3

 
8
%
Restructuring expense
$
11

 
$

 
$
29

 
$
11

 
100
%
 
$
(29
)
 
(100
%)
Long-lived asset impairment
$
38

 
$

 
$

 
$
38

 
100
%
 
$

 
n/a

Pension settlement
$
121

 
$

 
$

 
$
121

 
100
%
 
$

 
n/a

Other
$
21

 
$
19

 
$
9

 
$
2

 
12
%
 
$
10

 
115
%
Effective tax rate
(69.9
)%
 
23.1
%
 
47.7
%
 

 


 

 


Net earnings attributable to Moog and noncontrolling interest
$
9

 
$
175

 
$
95

 
$
(165
)
 
(95
%)
 
$
79

 
83
%
Diluted average common shares outstanding
33

 
35

 
36

 
(2
)
 
(5
%)
 
(1
)
 
(2
%)
Diluted earnings per share
$
0.28

 
$
4.96

 
$
2.64

 
$
(4.68
)
 
(94
%)
 
$
2.32

 
88
%
Total backlog
$
2,555

 
$
2,233

 
n/a

 
$
323

 
14
%
 
n/a

 
n/a

Twelve-month backlog
$
1,658

 
$
1,502

 
$
1,212

 
$
156

 
10
%
 
$
290

 
19
%
Net sales decreased in 2020 compared to 2019 as the impacts of the global COVID-19 pandemic adversely affected our commercial aircraft programs and our industrial automation products. These declines were partially offset by higher demand for our military aircraft programs, space and defense programs and our medical products.
Gross margin decreased in 2020 compared to 2019. Gross profit in 2020 includes $23 million of inventory write-downs related to the impact of the COVID-19 pandemic on our business. Also, as a result of the macro-economic conditions from the COVID-19 pandemic, facilities in our Aircraft Controls and Industrial Systems segments were under-utilized due to significantly lower sales volumes, which negatively impacted gross margin. Additionally, negative adjustments on development programs further reduced gross margin in 2020.
Research and development expenses declined in 2020 compared to 2019. In Aircraft Controls, we had $10 million of lower research and development expense as we shifted work towards funded development programs and as work on major commercial OEM programs wound down. Also lower activity in Industrial Systems reduced research and development expenses $4 million.
Selling, general and administrative expenses as a percentage of sales decreased in 2020 compared to 2019. The implementation of cost containment actions in response to the COVID-19 pandemic helped to reduce expenses, primarily in Space and Defense Controls and in Industrial Systems.
In 2020, we incurred impairment and restructuring expenses related to the impact that the COVID-19 pandemic had on our business. Throughout the year we incurred $38 million of long-lived asset impairments, $23 million of inventory write-downs and $11 million of restructuring expense. Of the total expense, the charges consist of $29 million of non-cash charges for the impairment of property, plant and equipment, $23 million of non-cash inventory reserves, $10 million for severance and $9 million of non-cash charges for the impairment of intangible assets.
In the fourth quarter of 2020, we purchased a single premium non-participating group annuity contract for our retirees who are receiving benefits of our U.S. defined benefit plan, which were then transferred to an insurance company. As a result of this transaction, we incurred a $121 million non-cash pension settlement charge as we accelerated unrecognized losses held in equity into our earnings.

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Other expense in 2020 includes a $4 million call premium as we redeemed our $300 million aggregate principal 5.25% senior notes.
Our effective tax rate in 2020 differs from what would be expected by applying the U.S. federal statutory tax rate due to tax benefits recorded from increased foreign tax credit utilization and due to a lower earnings before income tax base resulting from the significant charges of the pension settlement and impairments on long-lived assets.
Other comprehensive income in 2020 was impacted by a $26 million foreign currency translation gain, as compared to a $30 million foreign currency translation loss in 2019. The change in foreign currency translation in 2020 compared to 2019 was primarily attributable to the appreciation of the Euro and the British Pound relative to the U.S. Dollar.
The change in twelve-month backlog at October 3, 2020 compared with September 28, 2019 was driven by increases in our military aircraft programs and by increases for our medical products. Backlog increased due to the timing of orders for the F-35 program, additional military development program orders, as well as higher military aftermarket orders. Within our medical programs, backlog increased due to higher medical equipment demand in response to COVID-19 requirements. These increases were partially offset by the timing of orders across our space and defense 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
 
  
 
  
 
  
 
2020 vs. 2019
 
2019 vs. 2018
(dollars in millions)
2020
 
2019
 
2018
 
$  Variance
 
%  Variance  
 
$  Variance
 
%  Variance  
Net sales - military aircraft
$
721

 
$
622

 
$
522

 
$
99

 
16
%
 
$
100

 
19
%
Net sales - commercial aircraft
485

 
681

 
603

 
(196
)
 
(29
%)
 
78

 
13
%

$
1,206

 
$
1,303

 
$
1,194

 
$
(97
)
 
(7
%)
 
$
109

 
9
%
Operating profit
$
35

 
$
123

 
$
130

 
$
(88
)
 
(72
%)
 
$
(7
)
 
(5
%)
Operating margin
2.9
%
 
9.4
%
 
10.9
%
 


 

 

 

Net sales decreased in 2020 compared to 2019 as the impacts of the global COVID-19 pandemic adversely affected our commercial OEM and aftermarket programs, but were partially offset by higher demand for our military OEM and aftermarket programs.
Across our commercial aircraft programs, the COVID-19 pandemic greatly reduced airline traffic and orders for new aircraft while, concurrently, our airframe customers reduced their inventory levels. These factors, which started in the second half of our fiscal 2020, lead to full year declines of $169 million across our commercial OEM programs and $27 million across our commercial aftermarket programs. Partially offsetting these declines in 2020 was a $55 million military OEM sales increase and a $44 million military aftermarket sales increase. Higher F-35 activity as the active fleet grew increased OEM sales $39 million and increased aftermarket sales $10 million. Additionally, work on funded development programs increased sales $21 million, higher orders for the KC-46 program increased sales $9 million, and sales for all of our remaining aftermarket programs increased when compared to 2019.
Operating margin decreased in 2020 compared to 2019 due mostly to the dramatic decline in sales in our commercial aircraft markets. In 2020, we incurred COVID-19 pandemic related impairments and restructuring totaling $57 million. Excluding these charges, adjusted operating margin in 2020 was 7.6%. In addition to these charges, negative adjustments to development contracts and higher operating costs further reduced operating margins, offsetting $10 million of lower research and development expenses.

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Space and Defense Controls
  
 
 
  
 
  
 
2020 vs. 2019
2019 vs. 2018
(dollars in millions)