10-K FY 2022 FINAL MOOG Inc - Flipbook - Page 14
Table of Contents
We may not be able to prevent, or timely detect, issues with our products and our manufacturing processes
which may adversely affect our operations and our earnings. We must continuously improve product
development and manufacturing processes and systems to ensure we deliver high-quality, technically advanced
products. Due to growth in operations, there is a risk our current manufacturing processes and systems are unable to
maintain our high-quality and on-time delivery standards for our customers. If we are unable to maintain these
standards, we could experience late deliveries and penalties, recalls, increased warranty costs, order cancellations
and litigation.
The failure or misuse of our products may damage our reputation, necessitate a product recall or result in
claims against us that exceed our insurance coverage, thereby requiring us to pay significant damages.
Defects in the design and manufacture of our products or our subcontractors' products may necessitate a product
recall. We include complex system designs and components in our products that could contain errors or defects,
particularly when we incorporate new technologies into our products. If any of our products are defective, we could be
required to redesign or recall those products, pay substantial damages or warranty claims and face actions by
regulatory bodies and government authorities. Such an event could result in significant expenses, delay sales, inflate
inventory, cause reputational damage or cause us to withdraw from certain markets. We are also exposed to product
liability claims. Many of our products are used in applications where their failure or misuse could result in significant
property loss and serious personal injury or death. We carry product liability insurance consistent with industry norms.
However, these insurance coverages may not be sufficient to fully cover the payment of any potential claim. A product
recall or a product liability claim not covered by insurance could have a material adverse effect on our business,
financial condition and results of operations.
FINANCIAL RISKS
We make estimates in accounting for over-time contracts, and changes in these estimates may have
significant impacts on our earnings. We have over-time contracts with some of our customers, predominantly in
our aerospace and defense markets. We recognize revenue using an input method that uses costs incurred to date to
measure progress toward completion ("cost-to-cost"). Changes in these required estimates could have a material
adverse effect on sales and profits. Any adjustments are recognized in the period in which the change becomes
known using the cumulative catch-up method of accounting. For contracts with anticipated losses at completion, we
establish a provision for the entire amount of the estimated remaining loss and charge it against income in the period
in which the loss becomes known and can be reasonably estimated. Amounts representing performance incentives,
penalties, contract claims or impacts of scope change negotiations are considered in estimating revenues, costs and
profits when they can be reliably estimated and realization is considered probable. Due to the substantial judgments
involved with this process, our actual results could differ materially or could be settled unfavorably from our estimates.
See Note 2 - Revenue from Contracts with Customers of Item 8, Financial Statements and Supplementary Data, of
this report.
We enter into fixed-price contracts, which could subject us to losses if we have cost overruns. In 2022, fixedprice contracts represented 90% of our sales that were accounted for using the cost-to-cost method. On fixed-price
contracts, we agree to perform the scope of work specified in the contract for a predetermined price. Depending on
the fixed price negotiated, these contracts may provide us with an opportunity to achieve higher profits based on the
relationship between our total contract costs and the contract's fixed price. However, we bear the risk that increased
or unexpected costs may reduce our profit or cause us to incur a loss on the contract, which would reduce our net
earnings. Although we closely monitor all programs and continuously seek opportunities, in coordination with our
customers and suppliers, to mitigate future material impacts on profitability resulting from higher costs for labor or
material, we may be unsuccessful in these efforts and our net earnings may be reduced. Contract loss reserves are
most commonly associated with fixed-price contracts that involve the design and development of innovative control
systems to meet the customer's specifications.
Our indebtedness and restrictive covenants under our credit facilities and indenture governing our senior
notes could limit our operational and financial flexibility. We have incurred significant indebtedness and may
incur additional debt as we invest in operations, research and development, capital expenditures and acquisitions.
Our ability to make scheduled interest and principal payments could be adversely impacted by changes in the
availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These
changes could increase our cost of debt, limiting our ability to meet operational and capital needs, delaying our
reactions to changes in market conditions and pursuing acquisitions, thereby placing us at a competitive
disadvantage. In addition, the restrictive covenants under both our credit facilities and the indenture governing our
senior notes could limit our operational and financial flexibility, which could also impact our ability to operate our
business.
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