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    m 2016 ANNUAL REPORT


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    FINANCIAL PERFORMANCE SALES (Dollars in millions) RECENT FINANCIAL PERFORMANCE $3,000 (Dollars and shares in millions, except per share data) $ 2,648 $ 2,610 $ 2,526 $ 2,470 $ 2,412 $2,500 $ 2,331 $ 2,114 $ 2,000 $ 1,903 $ 1,849 2016 2015 $ 1,558 $ 1,500 $ 1,306 $ 1,000 NET SALES $2,412 $2,526 $ 500 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 NET EARNINGS $127 $132 FISCAL YEAR DILUTED EARNINGS PER SHARE (In dollars) DILUTED EARNINGS $3.47 $3.35 $ 3.75 $ 3.52 PER SHARE $ 3.47 $ 3.50 $ 3.33 $ 3.35 $ 3.25 $ 2.95 $ 3.00 $ 2.75 $ 2.63 EQUITY MARKET $ 2.75 $2,136 $1,997 $ 2.50 $ 2.34 $ 2.36 CAPITALIZATION* $ 2.25 $ 1.97 $ 1.98 $ 2.00 $ 1.75 AVERAGE SHARES $ 1.50 36.5 39.3 $ 1.25 OUTSTANDING $ 1.00 $ 0.75 *Measured as of fiscal year end $ 0.50 $ 0.25 $ 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FISCAL YEAR REVENUE BY SEGMENT REVENUE BY MARKET Aircraft Controls Defense 44% 34% Space and Space Defense Commercial 7% Components 16% Aircraft 19% 24% Industrial Industrial 21% Systems Medical Energy 21% 7% 7% GEOGRAPHIC DISTRIBUTION MARKET DISTRIBUTION United States Industrial and U.S. Military 56% Commercial and Government 63% Funded 30% International 44% Foreign Government 7%


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    O P E R AT I N G S E G M E N T S Commercial Aircraft OEM Defense $ 399.6 M $ 183.6 M Commercial Business Aircraft Jets Aftermarket $ 38.6 M $ 113.1 M Military Military Aircraft Space Aircraft Aftermarket $ 182.5 M OEM $ 199.6 M $ 312.8 M FY 2016 SALES FY 2016 SALES $1,063.7 M $366.1 M AIRCRAFT CONTROLS SPACE AND DEFENSE • State-of-the-art technology in flight controls, engine controls, door drive controls, active • Multi-tier provider capable of components, systems and prime level integration vibration controls and engineered components • Thrust vector control actuation systems, avionics, propulsion controls and structures for • Complete flight control system design and integration capability missiles and launch vehicles • World-class manufacturing facilities and skilled, experienced, team-based workforce • Liquid rocket engines, tanks, chemical and electric propulsion systems, subsystems • Focused, highly-responsive global aftermarket support organization and components for spacecraft and launch vehicles • Satellite integrated avionics, solar array drives, antenna pointing mechanisms and Military Aircraft: vibration isolation systems • F-35, F-15, F/A-18E/F, EA-18G, F-16, KC-46, A400M, Korea T-50, C-27J, C-295, • Fin actuation systems, divert and attitude control components for missiles and CN-235, Eurofighter-Typhoon, JAS 39, India LCA, Japan XC-2, XP-1, Hawk AJT, M346 interceptors Commercial Airplanes: • Weapon Stores Management Systems (SMS) for the deployment of missiles, guns and rockets • Boeing 737, 747, 767, 777, 787 • Motion control systems for turreted weapon systems, ammunition handling and • Airbus A320, A330, A350, A380 expeditionary radar deployment • Embraer E-Jets E2 • EM and EH actuation products for naval ships and submarines • COMAC C919 Business Jets: Space Applications: • Bombardier Challenger 300, 604, 605 and Global Express, Cessna Citation X, • LS-1300, Eurostar, Spacebus, LM A2100, DS-1000/2000, GEOStar, James Webb Gulfstream G280, G350, G400, G450, G500, G550, G600, G650 Space Telescope, GPS III, Galileo, ORBCOMM, NICER, SkySat, OSIRIS-REx • Trident D-5, Minuteman III, Antares®, Atlas V, Delta IV, Ariane 5, Vega, Minotaur, Falcon 9, Military and Commercial Helicopters: NASA’s Space Launch System and Orion, CST-100 Commercial Crew Vehicle • H-60/S-70, H-53, EH-101, S-76, S-92, V-22, V-280, AH-64, A109, A129, AB139, AW159, AW609, Future Lynx, B525 Defense Applications: • HELLFIRE®, TOW, Tomahawk, EKV, MALD Customer Support: • LAV-25, LAV-AT, CV90 family, FLW 100/200 RWS, AC-130 Stinger II, G/ATOR Radar • All current production programs above plus legacy programs including A-7, A-10, A300, A340, AH-64, AMX, B-1B, B-2, B-52, BAE-146, C-5, C-130, C-141, CH-46, • Virginia-class submarines, USS Gerald R. Ford aircraft carrier CH-47, CH-53, DC-8, DC-9, DC-10, E-2C, EA-6B, F-2, F-4, F-100, F/A-18C/D, F/A-22, Segment Competitors: Hawk, KC-10, KC-135, MD-11, MD-80, MD-90, P-3, T-45, Tornado, U-2, VC-10, 757 • Aeroflex, Airbus, ATA Engineering, BAE, Chess Dynamics, Cohu, Curtiss-Wright, ESW, Segment Competitors: Flowserve Limitorque, Honeywell, Marotta, RUAG, Lord Corp., Pelco, SABCA, Sargent Aerospace & Defense, SEAKR, Southwest Research Institute, UTC, Vacco, Valcor, • Curtiss-Wright, Liebherr, Nabtesco, Parker Hannifin, UTC (Goodrich, Hamilton Videotec, ValveTech and Woodward Sundstrand) and Woodward VA-Class Submarine, F-35C Lightning II, USS John Warner (SSN 785) A350-1000 First Flight F/A-18E/F Super Hornets NASA OSIRIS-REx Spacecraft Courtesy of U.S. Navy / Courtesy of Airbus / S. Ramadier Courtesy of U.S. Navy / Lt. Cmdr. Darin Russell Courtesy of Univ. of Arizona / Heather Roper C. Oxley, Huntington Ingalls Ind.


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    Industrial Automation Medical $ 264.3 M $ 181.6 M Industrial Aircraft Simulation $ 110.4 M and Test $ 88.4 M Energy $ 128.6 M $ 122.1 M Energy Space and $ 33.3 M Defense $ 53.5 M FY 2016 SALES FY 2016 SALES $515.0 M $467.1 M INDUSTRIAL SYSTEMS COMPONENTS • World-class motion control products to enable customers to build machines that offer • Innovative solution provider of sensing, control, power and data components and systems outstanding value • Market leader in slip rings and fractional horsepower brushless DC motors, IV infusion and • High performance motion control solutions delivered with deep expertise to customers in enteral medical pumps test, simulation and wind energy markets • Multi-component and system level engineering and applications support • Flexible, comprehensive and timely services, resulting in excellent value Medical: Industrial Automation Applications: • Ambulatory infusion pumps and enteral nutrition feeding pumps • Plastic injection and blow molding machine products – hydraulic and electric designs to • Motors and blowers for sleep disorder devices and portable oxygen therapy improve speed, performance and energy efficiency • Slip rings and fiber optic rotary joints for medical imaging • Steel mill servo control products for improving dimensional accuracy and surface finishes • OEM air detection sensors and surgical handpieces • Metal forming machinery and press products that improve machine performance and productivity Military and Commercial Aircraft: • Multi-component and system level solutions for electro-optics/infrared sensors Energy Applications: • Aircraft servos and utility actuators for UAVs • Wind turbine pitch systems and blade sensing systems for efficient operation, increased safety and turbine life extension • Communication networking Ethernet switches, media converters, optical transceivers • Gas and steam turbine solutions for precise control and greater safety of fuel metering Space and Defense Controls: and guide vane positioning • Slip rings, motors and resolvers for solar array drive assemblies, armored vehicle and • Oil and gas exploration and production solutions for downhole drilling, topside and subsea remote weapon station turrets equipment Industrial: Simulation and Test Applications: • Slip rings and motors for robotics and industrial automation applications • Flight simulation motion systems, control loading systems and control cabinets for realistic • Air moving solutions for thermal management and airflow problems pilot training Energy and Marine: • Automotive turnkey testing systems for component performance testing • Wind turbine slip rings • Aerospace turnkey testing systems for iron bird, structural and components • Remotely Operated Vehicles (ROVSs) slip rings, multiplexers and media converters Segment Competitors: • Subsea imaging acoustic sensors, sonars and video cameras • Allen-Bradley, Bosch Rexroth, Danaher, DEIF, Wind Power, KEB, MTS Systems Corp., • FPS swivels with slip rings, hydraulic swivels and optical rotary joints Parker Hannifin, Siemens and SSB Wind Systems Segment Competitors: • Allied Motion Technologies, Ametek, Cobham, Kollmorgen, Medtronic, Pfizer, Schleifring, Smiths Medical, Stemmann, Whippany Actuation Systems and Woodward Steel Mill Processing Flight Simulator Motion Base Systems Pharmaceutical Processing Automation Courtesy of Shutterstock / Jordache Courtesy of CAE Moog IV and Enteral Medical Pumps Courtesy of Alamy / JG Photography


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    CHAIRMAN’S LETTER To Our Shareholders, Employees and Friends, I’d like to open my annual letter as I do each year by paying tribute to the 10,000+ Moog employees around the world for their dedication and commitment. Their hard work every day makes all the great things we achieve possible. Before I discuss the overall financial performance in 2016, I’d like to reflect on some key activities throughout the year. First, it was another year of great technical achievements for Moog products in many different applications. Examples of our technology at work included: • The successful first flight of the new Embraer E-2 jet using all Moog flight control hardware. • The breathtaking performance of the Short Takeoff and Vertical Landing (STOVL) F-35B at the Farnborough International Airshow. • The entry of NASA’s Juno spacecraft into orbit around Jupiter, after a five-year journey from earth. • The successful beta test of our new wind pitch control products with lead customers. Second, it was a year of heavy R&D spend as we continued to invest in the future of the company. In 2016, we won several new military aircraft development contracts that will position us well for long-term growth in our defense markets. Third, we acquired a controlling interest in an additive manufacturing company. We believe additive manufacturing has the potential to transform many of our markets and we want to be at the forefront of this emerging manufacturing revolution. Finally, we completed the strategic review of our Medical Devices segment. Based on the excellent performance of this business over the last few years, we decided to keep the business and integrate it into our Components segment. Over the years, we’ve enjoyed the benefit of serving multiple markets with our portfolio of products. This market diversification has been the bedrock of consistent sales and earnings growth despite the vagaries of one or other markets. Unfortunately, in 2016, our diversification was not sufficient to deliver on our financial goals, as we experienced challenges in five of our six key markets. On the positive side, commercial aircraft saw continued sales growth in new programs, including the Airbus A350 and the Boeing 787. However, defense continued to be adversely impacted by the Budget Control Act in the U.S. and constrained spending by many of our international allies. Our sales to industrial customers were also down. These customers are largely dependent on capital goods spending and, with tepid GDP growth around the globe, our customers’ business remained soft in 2016. Our energy business continued to struggle as offshore exploration activity slowed further. Sales into two other markets, space and medical, were also lower in 2016, with space going through the low-point of a normal cycle and medical working through a model change with our major customer for sleep apnea equipment. Altogether, sales for the year were down 4%. In the face of these challenges, our operations delivered respectable performance resulting in an increase in earnings per share and strong cash flow. Now a brief review of each of our operating segments. 2016 was a challenging year for our Aircraft segment with full-year sales down 2%. We divide our Aircraft segment into two major markets – military and commercial. In the military market we saw growth in our flagship F-35 program, but softness across the broader military OEM portfolio and the military aftermarket offset this growth. The commercial side witnessed a similar story, as strong growth in the Airbus A350 program was offset by weakness in business jets and in the aftermarket. 2016 represented a milestone in the development of our aircraft business. Back in 2009, military represented two-thirds of the sales in the Aircraft segment. Over the last seven years, the commercial business has grown 150% with the ramp up of the Boeing 787 and the Airbus A350 programs. In 2016, sales on commercial programs exceeded military sales for the first time in our history. In our Space and Defense segment, sales were down 4% from last year. Sales are about evenly split between the space market and the defense market. Space sales were lower in 2016 across most satellite and launch vehicle programs, reflecting a cyclical slowdown at our major customers. On the defense side, the continued slowdown in defense spending around the globe resulted in slightly lower sales. 2016 sales in our Industrial Systems segment were down marginally from last year. We divide our Industrial segment into 3 major markets – energy, simulation and test, and industrial automation. Sales were up in energy on stronger wind sales into China, as well as in simulation and test, reflecting increased activity at our key customers. Sales to industrial automation customers were down as our general industrial automation markets continue to move sideways awaiting a structural recovery in the global capital investment cycle. 2016 was a very tough year for our Components segment, unlike any other we’ve seen since we acquired this business back in 2003. Full-year sales were 13% lower than last year. We divide this segment into 3 major markets – aerospace & defense, industrial and medical – each representing about


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    one third of the segment sales. Sales into the aerospace & defense markets were down across almost all the programs we serve. Industrial sales were down 25% from the previous year. We include offshore oil production in this industrial submarket where sales were down almost 50% this year, following a 26% decline the year before. In the medical market, sales of pumps were up nicely, but sales of motors to our main customer for sleep apnea equipment were down 50% from 2015, as they changed models and added a second source of supply. As we look to 2017, we’re projecting a modest increase in both sales and earnings. Sales should be up in our Aircraft segment driven by the continued ramp up of production on the Airbus A350 program. Sales in the Space & Defense and Components segments should be about flat with 2016, while we anticipate Industrial Systems segment sales will be down about 5%. We continue to look for some positive news on the macro-economic front that might suggest a structural improvement in our industrial businesses beyond 2017. Despite the relatively modest change in the financial outlook for next year, we’re heading into 2017 with optimism that our businesses are starting to show some very positive trends. We’re emerging from a multi-year restructuring program that has refined our portfolio of businesses to focus on the best opportunities for the future. We’re expecting our investment in commercial R&D to come down as our major programs move into production, and at the same time we’re seeing a pickup in funded military R&D which will keep our engineering team engaged in building our long-term future. Our new wind energy products are coming on line at lead customers, and we’re seeing our LEAN and supply chain efforts starting to pay real dividends after several years of learning. Finally, our continued investment in innovation is bringing exciting opportunities for our technology to the fore in areas that include additive manufacturing and autonomous systems – areas which could be the engines for growth in the decades to come. In the face of political changes and the present geopolitical uncertainty, our fundamental strategy remains unchanged. We look to solve our customers’ most difficult technical challenges. We strive to be a great company to work for by fostering an environment where employees can be their very best in an atmosphere of mutual trust and confidence. We make great products – because our customers trust us to perform in applications where performance really matters. Finally, we focus on results for our shareholders through prudent investments of their capital that will generate long-term growth and attractive returns. Our financial goals include top-line sales growth, operating margin improvement and strong cash flow. Our major internal initiatives to achieve our financial goals continue to be a focus on LEAN, innovation and talent development. Respectfully submitted,


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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 1, 2016 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 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.) East Aurora, New York 14052-0018 (Address of Principal Executive Offices) (Zip Code) Registrant’s Telephone Number, Including Area Code: (716) 652-2000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Class A Common Stock, $1.00 Par Value New York Stock Exchange Class B Common Stock, $1.00 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 1 1


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    Table of Contents Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the common stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the common stock on the New York Stock Exchange on April 2, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,462 million. The number of shares of common stock outstanding as of the close of business on November 8, 2016 was: Class A 32,144,998 Class B 3,717,259. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Moog Inc. Proxy Statement for the Annual Meeting of Shareholders to be held on February 15, 2017 (“2016 Proxy”) are incorporated by reference into Part III of this Form 10-K. 2 2


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    Inc. FORM 10-K INDEX PART I Item 1 Business 5 Item 1A Risk Factors 8 Item 1B Unresolved Staff Comments 14 Item 2 Properties 14 Item 3 Legal Proceedings 14 Item 4 Mine Safety Disclosures 14 PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of 15 Equity Securities Item 6 Selected Financial Data 18 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative 19 Item 7A and Qualitative Disclosures About Market Risk 37 Item 8 Financial Statements and Supplementary Data 38 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 80 Item 9A Controls and Procedures 80 Item 9B Other Information 80 PART III Item 10 Directors, Executive Officers and Corporate Governance 81 Item 11 Executive Compensation 81 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 81 Item 13 Certain Relationships and Related Transactions, and Director Independence 81 Item 14 Principal Accountant Fees and Services 81 PART IV Item 15 Exhibits and Financial Statement Schedules 81 3 3


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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. 4 4


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    Table of Contents 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 four operating segments: Aircraft Controls, Space and Defense Controls, Industrial Systems and Components. Additional information describing the business and comparative segment revenues, operating profits and related financial information for 2016, 2015 and 2014 are provided in Note 17 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 four operating segments include: Aircraft Controls: Curtiss-Wright, Liebherr, Nabtesco, Parker Hannifin, UTC (Goodrich, Hamilton Sundstrand) and Woodward. Space and Defense Controls: Aeroflex, Airbus, ATA Engineering, BAE, Chess Dynamics, Cohu, Curtiss- Wright, ESW, Flowserve Limitorque, Honeywell, Marotta, RUAG, Lord Corp., Pelco, SABCA, Sargent Aerospace & Defense, SEAKR, Sierra Nevada Corp., Southwest Research Institute, UTC, Vacco, Valcor, Videotec, ValveTech and Woodward. Industrial Systems: Allen-Bradley, Bosch Rexroth, Danaher, DEIF Wind Power, KEB, MTS Systems Corp., Parker Hannifin, Siemens and SSB Wind Systems. Components: Allied Motion Technologies, Ametek, Cobham, CME Medical, General Dynamics Mission Systems, Kearfott, Kollmorgen, Medtronic, Pfizer, Schleifring, Smiths Medical, Stemmann, Woodward and Whippany Actuation Systems. Government Contracts. All U.S. Government contracts are subject to termination by the U.S. Government. In 2016, sales under U.S. Government contracts represented 30% of total sales and were primarily within our Aircraft Controls, Space and Defense Controls and Components segments. Backlog. Our twelve-month backlog represents confirmed orders we believe will be recognized as revenue within the next twelve months. As noted in Item 6, Selected Financial Data of this report, as of October 1, 2016, our twelve- month backlog was $1.2 billion, a decline of 4% compared to October 3, 2015. 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 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. 5 5


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    Table of Contents 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 $130 million in each of the last three years and represented over 6% of sales in 2016. Employees. On October 1, 2016, we employed 10,497 full-time employees. 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 52% of 2016 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 31% of 2016 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 2016, aftermarket sales accounted for 17% of total sales. Significant customers in our four operating segments include: Aircraft Controls: Boeing, Airbus, Lockheed Martin, Japan Aerospace, United Technologies, Honeywell, Goodrich, Gulfstream, Bombardier, Embraer and the U.S. Government. Space and Defense Controls: Lockheed Martin, Raytheon, Aerojet Rocketdyne, Boeing, Airbus, General Dynamics, Orbital ATK, United Launch Alliance, Northrup Grumman and the U.S. Government. Industrial Systems: CAE, Alstom, FlightSafety, Senvion, Rockwell Automation, Japan Aerospace, Arburg, Schuler, Husky Energy and Doosan. Components: Philips Healthcare, Northrup Grumman, Nestle, Raytheon, Lockheed Martin, Nutricia, Turbo Chef Technologies, MacArtney, Boeing, General Dynamics and the U.S. Government. International Operations. Our operations outside the United States are conducted through wholly-owned foreign subsidiaries and are located predominantly in Europe and the Asia-Pacific region. See Note 17 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 18 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 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. 6 6


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    Table of Contents Executive Officers of the Registrant. 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 August 11, 2015, Maureen M. Athoe was named Vice President and President, Space and Defense Group. Previously, she was a Group Vice President, Group General Manager and Site Manager. On August 11, 2015, R. Eric Burghardt was named Vice President and President, Aircraft Group. Previously, he was a Group Vice President and Financial Director. On August 11, 2015, Mark J. Trabert was named Vice President and President, Aircraft Group. Previously, he was a Group Vice President and Deputy General Manager. On September 1, 2012, Patrick J. Roche was named Vice President. Previously, he was a Group Vice President and General Manager of the Moog Ireland operation. Year First Elected Executive Officers Age Officer John R. Scannell Chairman of the Board; Chief Executive Officer Director 53 2006 Richard A. Aubrecht Vice Chairman of the Board; Vice President - Strategy and Technology; Director 72 1980 Donald R. Fishback Director; Vice President; Chief Financial Officer 60 1985 Lawrence J. Ball Vice President 62 2004 Harald E. Seiffer Vice President 57 2005 Gary A. Szakmary Vice President 65 2011 Patrick J. Roche Vice President 53 2012 Maureen M. Athoe Vice President 58 2015 R. Eric Burghardt Vice President 57 2015 Mark J. Trabert Vice President 57 2015 Jennifer Walter Controller; Principal Accounting Officer 45 2008 Timothy P. Balkin Treasurer; Assistant Secretary 57 2000 In addition to the executive officers noted above, Robert J. Olivieri, 66, was elected Secretary in 2014. Mr. Olivieri's principal occupation is partner in the law firm of Hodgson Russ LLP. 7 7


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    Table of Contents Item 1A. Risk Factors. 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 as well as domestic and foreign 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, driven by fuel price increases, demand for travel and economic conditions. Demand for our industrial products is dependent upon several factors, including capital investment, product innovations, economic growth, the price of oil and natural gas, cost-reduction efforts and technology upgrades. Our sales and operating profit have been affected by the continued low rates of recovery in the economies in which we conduct business. If these economic conditions continue or deteriorate, our operations could be negatively impacted through declines in our sales, profitability and cash flows due to lower orders, payment delays and price pressures for our products. 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. As a result, they may be better able to withstand the effects of periodic economic downturns. 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 methods of more efficiently and effectively providing products and services, or adapt more quickly than we do to new technologies or evolving customer requirements. 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. 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 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. 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 2016, sales under U.S. Government contracts represented 30% of our total sales, primarily within Aircraft Controls, Space and Defense Controls and Components. 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 subject to change. Additionally, the 2011 Budget Control Act reduced the Department of Defense spending (or sequestration) by approximately $500 billion over the next decade. The Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015 provided stability and modest growth in the Department of Defense spending through 2017. However, future budgets beyond 2017 are uncertain with respect to the overall levels of defense spending. As a result of this uncertainty, we expect we will continue to face significant challenges over the next decade. 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. 8 8


  • Page 15

    Table of Contents We make estimates in accounting for long-term contracts, and changes in these estimates may have significant impacts on our earnings. We have long-term contracts with some of our customers. These contracts are predominantly within Aircraft Controls and Space and Defense Controls. Revenue representing 34% of 2016 sales was accounted for using the percentage of completion, cost-to-cost method of accounting. Under this method, we recognize revenue as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. 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. 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. We enter into fixed-price contracts, which could subject us to losses if we have cost overruns. In 2016, fixed- price contracts represented 94% of our sales that were accounted for using the percentage of completion, cost-to-cost method of accounting. 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. Loss reserves are most commonly associated with fixed-price contracts that involve the design and development of new and unique controls or control systems to meet the customer's specifications. We may not realize the full amounts reflected in our backlog as revenue, which could adversely affect our future revenue and growth prospects. As of October 1, 2016, our twelve-month backlog was $1.2 billion, which represents confirmed orders we believe will be recognized as revenue within the next twelve months. There is no assurance that our customers will purchase all the orders represented in our backlog, due in part to the U.S. Government's ability not to exercise contract options or to modify, curtail or terminate major programs. Due to the uncertain nature of our contracts with the U.S. Government, we may never realize revenue from some of the orders that are included in our backlog. A portion of our backlog also relates to commercial aircraft programs. If there are entry into service delays or lower than anticipated deliveries due to production issues, we may never realize the full amounts included in our backlog. If this occurs, our future revenue and growth prospects may be adversely affected. 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 a portion 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 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. A default termination could expose us to liability and substantially impair our ability to compete for future contracts and 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. Contracting on government programs is subject to significant regulation, including rules related to bidding, billing and accounting kickbacks and false claims, and any non-compliance could subject us to fines and penalties or possible debarment. Like all government contractors, we are subject to risks associated with this 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 affect on our operational and financial results. 9 9


  • Page 16

    Table of Contents 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, in total, were 14% of our 2016 sales. Sales to Boeing's commercial airplane group are generally made under a long-term supply agreement through 2021 for the Boeing 787 and through 2019 for other commercial airplanes. The loss of Boeing as a customer or a significant reduction in sales to Boeing could reduce our sales and earnings. Our new product research and development efforts 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. We have incurred, and we expect to continue to incur, expenses associated with research and development activities and the introduction of new products in order to succeed in the future. 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 difficulties 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 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. Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete. In order to maintain a competitive advantage, we rely on internally developed and acquired patents, trademarks and proprietary knowledge and technologies. Our inability to defend against the unauthorized use of these rights and assets could 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 business operations may be adversely affected by information systems interruptions, intrusions or new software implementations. We are dependent on various information technologies throughout our company to administer, store and support multiple business activities. Disruptions, equipment failures or cybersecurity attacks, such as unauthorized access, malicious software and other intrusions, may lead to potential data corruption and exposure of proprietary and confidential information. Any intrusion may cause operational stoppages, diminished competitive advantages through reputational damages and increased operational costs. In addition, we are in the early stages of a multi-year business information system transformation and standardization project. This endeavor will occupy additional resources, diverting attention from other operational activities, and may cause our information systems to perform unexpectedly. While we expect to invest significant resources throughout the planning and project management process, unanticipated delays could occur. 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 for acquisitions, operations, research and development and capital expenditures. Our ability to make interest and scheduled principal payments and meet 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 pursue acquisition opportunities, react to market conditions and meet operational and capital needs, thereby placing us at a competitive disadvantage. 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. Changes in the pension assumptions could adversely affect our earnings, equity and funding requirements. 10 10


  • Page 17

    Table of Contents A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth. Goodwill and other intangible assets are a substantial portion of our assets. At October 1, 2016, goodwill was $740 million and other intangible assets were $114 million of our total assets of $3.0 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 net worth significantly. Among other adverse impacts, this could result in our inability to refinance or renegotiate the terms of our bank indebtedness. In 2016, we took a $5 million goodwill impairment charge for a reporting unit within our Space and Defense Controls Segment. Our sales and earnings may be affected if we cannot identify, acquire or integrate strategic acquisitions, or if we engage in divesting activities. Acquisitions are a key part of our growth strategy. 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, both to expand into new markets and to enhance our position in existing markets throughout the world. 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. We may also continue to engage in divesting activities if we deem the operations as non-strategic or underperforming. 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. 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. In 2016, 44% of our net sales were to customers outside of the United States. 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, changes in tariff and trade barriers and import or export licensing requirements. In addition, any local or global health issue or uncertain political climates, international hostilities, natural disasters, or any other terrorist activities could adversely affect customer demand, our operations and our ability to source and deliver products and services to our customers. 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 reinvested foreign earnings, changes in the valuation of deferred tax assets, alterations to tax regulations or interpretations and outcomes of any audits performed on previous tax returns. 11 11


  • Page 18

    Table of Contents Government regulations could limit our ability to sell our products outside the United States and otherwise adversely affect our business. In 2016, approximately 19% of our sales were subject to compliance with the United States export regulations. 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. 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, foreign corrupt practices 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 had a material adverse impact on 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. Governmental regulations and customer demands related to conflict minerals may adversely impact our operating results. Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, required the Securities and Exchange Commission to establish disclosure requirements for publicly-traded companies whose products contain metals derived from conflict minerals originating from the Democratic Republic of Congo (DRC) and its neighboring countries. The implementation of these requirements could result in additional costs associated with complying with the disclosure requirements. As this regulation will likely impact our suppliers, the availability of raw materials used in our operations could be negatively impacted, including an increase in the price of raw materials. In addition, because our global supply chain is complex, we may face commercial challenges if we are unable to sufficiently verify the origins for all metals used in our products through the due diligence procedures that we have implemented. We have, and will continue to, work with our suppliers and customers to exclude, to the extent feasible, from our product supply chain the use of conflict minerals originating from the DRC or adjoining countries. 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 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, disrupt sales, affect our reputation and that of our products and 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. 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 recorded as liabilities. 12 12


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    Table of Contents 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. In 2016, 24% of our net sales were in the commercial aircraft market. 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 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. 13 13


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    Table of Contents Item 1B. Unresolved Staff Comments. None. Item 2. Properties. On October 1, 2016, we occupied 5,181,000 square feet of space, distributed by segment as follows: Square Feet Owned Leased Total Aircraft Controls 1,431,000 422,000 1,853,000 Space and Defense Controls 486,000 446,000 932,000 Industrial Systems 737,000 535,000 1,272,000 Components 835,000 267,000 1,102,000 Corporate Headquarters 20,000 2,000 22,000 Total 3,509,000 1,672,000 5,181,000 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, Netherlands, Ireland and Germany. Industrial Systems - Germany, Italy, U.S., China, Netherlands, Luxembourg, Philippines, Japan, India, Ireland, Brazil and United Kingdom. Components - U.S., United Kingdom, Costa Rica, Canada 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 2017 through 2036. 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. 14 14


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    Table of Contents 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 following chart sets forth, for the periods indicated, the high and low sales prices of the Class A common stock and Class B common stock on the NYSE. Quarterly Stock Prices Class A Class B Fiscal Year Ended High Low High Low October 1, 2016 1st Quarter $ 67.92 $ 54.93 $ 67.46 $ 55.35 2nd Quarter 59.66 38.11 59.17 38.32 3rd Quarter 55.96 42.61 55.50 42.90 4th Quarter 61.64 50.96 61.24 51.11 October 3, 2015 1st Quarter $ 79.24 $ 65.80 $ 78.51 $ 66.60 2nd Quarter 77.28 68.07 76.77 69.23 3rd Quarter 75.69 65.72 75.26 66.11 4th Quarter 71.55 52.33 70.11 52.74 The number of shareholders of record of Class A common stock and Class B common stock was 769 and 331, respectively, as of November 8, 2016. We did not pay cash dividends on our Class A common stock or Class B common stock in 2015 or 2016 and have no current plans to do so. 15 15


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    Table of Contents The following table summarizes our purchases of our common stock for the quarter ended October 1, 2016. Issuer Purchases of Equity Securities (d) Maximum Number (or Approx. (c) Total number Dollar Value) of of Shares Shares that (a) Total Purchased as May Number of Part of Publicly Yet Be Shares (b) Average Announced Purchased Purchased Price Paid Plans Under Plans or Period (1)(2) Per Share or Programs (3) Programs (3) July 3, 2016 - July 31, 2016 8,113 $ 55.47 — 3,352,009 August 1, 2016 - August 31, 2016 30,469 59.12 — 3,352,009 September 1, 2016 - October 1, 2016 42,119 59.22 — 3,352,009 Total 80,701 $ 58.81 — 3,352,009 (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") as follows: 8,113 shares at $55.47 per share during July; 16,402 shares at $60.11 per share during August; and 10,467 shares at $55.22 per share during September. Excluded above is the SECT purchase of 425,148 shares of Class A common stock from the RSP in exchange for an equivalent value of Class B common stock. (2) In connection with the exercise of equity-based compensation awards, we accept delivery of shares to pay for the exercise price and withhold shares for tax withholding obligations. In August, we accepted delivery of 14,067 shares at $57.97 per share and in September, we accepted delivery of 31,652 shares at $60.55 per share, 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. 16 16


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    Table of Contents 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, 2011, including reinvestment of any dividends. 9/11 9/12 9/13 9/14 9/15 9/16 Moog Inc. - Class A Common Stock $ 100.00 $ 116.09 $ 179.86 $ 209.69 $ 165.76 $ 182.53 NYSE Composite - Total Return Index 100.00 124.79 149.27 170.05 159.55 179.25 S&P Aerospace & Defense Index 100.00 121.88 176.78 208.93 216.77 255.50 17 17


  • Page 24

    Table of Contents Item 6. Selected Financial Data. For a more detailed discussion of 2014 through 2016, 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) 2016(1)(2)(3) 2015(1) 2014(1) 2013(2)(3) 2012(3) RESULTS FROM OPERATIONS Net sales $ 2,411,937 $ 2,525,532 $ 2,648,385 $ 2,610,311 $ 2,469,536 Net earnings (4) 126,745 131,883 158,198 120,497 152,462 Net earnings per share (4) Basic $ 3.49 $ 3.39 $ 3.57 $ 2.66 $ 3.37 Diluted $ 3.47 $ 3.35 $ 3.52 $ 2.63 $ 3.33 Weighted-average shares outstanding Basic 36,277,445 38,945,880 44,362,412 45,335,336 45,246,960 Diluted 36,529,344 39,334,520 44,952,437 45,823,720 45,718,324 FINANCIAL POSITION Cash and cash equivalents $ 325,128 $ 309,853 $ 231,292 $ 157,090 $ 148,841 Working capital 1,030,915 1,021,990 941,260 924,145 885,032 Total assets 3,041,859 3,086,471 3,208,452 3,237,095 3,105,907 Indebtedness - total 1,011,850 1,075,184 874,036 709,157 764,622 Shareholders’ equity 988,411 994,532 1,347,415 1,535,765 1,304,790 Shareholders’ equity per common share outstanding $ 27.56 $ 27.09 $ 32.51 $ 33.86 $ 28.80 SUPPLEMENTAL FINANCIAL DATA Capital expenditures $ 67,208 $ 80,693 $ 78,771 $ 93,174 $ 107,030 Depreciation and amortization 98,732 103,609 109,259 108,073 100,816 Research and development 147,336 132,271 139,462 134,652 116,403 Twelve-month backlog (5) 1,224,878 1,273,495 1,339,959 1,296,371 1,279,307 RATIOS Net return on sales 5.3% 5.2% 6.0% 4.6% 6.2% Return on shareholders’ equity 12.6% 11.3% 10.4% 8.6% 12.1% Current ratio 2.7 2.7 2.3 2.3 2.3 Net debt to capitalization (6) 41.0% 43.5% 32.3% 26.4% 32.1% (1) Includes 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. (2) Includes goodwill impairment charge. See Note 6 of the Consolidated Financial Statements at Item 8, Financial Statements and Supplementary Data of this report. (3) Includes the effects of acquisitions. See Note 2 of the Consolidated Financial Statements at Item 8, Financial Statements and Supplementary Data of this report. In 2013, we acquired two businesses, one in our Space and Defense Controls segment and one in our Components segment. In 2012, we acquired four businesses, two each in our Components and Space and Defense Controls segments. (4) Represents net earnings attributable to common shareholders and net earnings per share attributable to common shareholders. (5) Twelve-month backlog is defined as confirmed orders we believe will be recognized as revenue within the next twelve months. (6) Net debt is total debt less cash and cash equivalents. Capitalization is the sum of net debt and shareholders’ equity. 18 18


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    Table of Contents 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. Commercial 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 - injection molding, metal forming, heavy industry, material and automotive testing and pilot training simulators. Energy market - wind energy, power generation and oil and gas exploration. Medical market - enteral clinical nutrition and infusion therapy pumps, CT scanners and ultrasonic sensors and surgical handpieces. We operate under four segments, Aircraft Controls, Space and Defense Controls, Industrial Systems and Components. Our principal manufacturing facilities are located in the United States, United Kingdom, Philippines, Germany, Italy, Netherlands, China, Costa Rica, Japan, Luxembourg, India, Canada and Ireland. We have long-term contracts with some of our customers. These contracts are predominantly within Aircraft Controls and Space and Defense Controls and represent 34%, 33% and 34% of our sales in 2016, 2015 and 2014, respectively. We recognize revenue on these contracts using the percentage of completion, cost-to-cost method of accounting as work progresses toward completion. The remainder of our sales are recognized when the risks and rewards of ownership and title to the product are transferred to the customer, principally as units are delivered or as service obligations are satisfied. This method of revenue recognition is predominantly used within the Industrial Systems and Components segments, as well as with aftermarket activity. We concentrate on providing our customers with products designed and manufactured to the highest quality standards. Our products are applied in demanding applications, "When Performance Really Matters®." We believe we have achieved a leadership position in the high performance, precision controls market, by capitalizing on our strengths, which include: superior technical competence in delivering mission-critical solutions, an innovative customer-intimacy approach, a diverse base of customers and end markets served by a broad product portfolio, and a well-established international presence serving customers worldwide. These strengths afford us the ability to innovate our current solutions into new, complimentary technologies. They also provide us the opportunity to expand our control product franchise from one market to another, organically growing us from a high-performance components supplier to a high-performance systems supplier. In addition, we will continue to strive to achieve substantial content positions on the platforms on which we currently participate, seeking to be the dominant supplier in the current niche markets we serve. We also look for innovation in all aspects of our business, employing new technologies to improve productivity and to develop innovative business models. 19 19


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    Table of Contents These activities will help us achieve our financial objectives of increasing our revenue base and improving our long term profitability and cash flow from operations. In doing so, we expect to maintain a balanced, diversified portfolio in terms of markets served, product applications, customer base and geographic presence. Our fundamental strategies to achieve our goals center around talent, lean and innovation and include: maintaining our technological excellence by building upon our systems integration capabilities while solving our customers’ most demanding technical problems in applications "When Performance Really Matters®," utilizing our global capabilities and strong engineering heritage to innovate, maximizing customer value by implementing lean enterprise principles, and investing in talent development to strengthen our leadership capability and employee performance. 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. Additionally, we take a balanced approach to capital deployment, which may include strategic acquisitions or further share buyback activity in order to maximize shareholder returns over the long-term. We face numerous challenges to improving shareholder value. These include, but are not limited to, adjusting to dynamic global economic conditions that are influenced by governmental, industrial and commercial factors, pricing pressures from customers, strong competition, foreign currency fluctuations and increases in employee benefit costs. We may also engage in restructuring and divesting activities, including reducing overhead, consolidating facilities and exiting some product lines if we deem the operations as non-strategic or underperforming. Financial Highlights Net sales for fiscal 2016 decreased 4% to $2.4 billion, as sales were lower across all of our segments. Total operating profit decreased 3% to $238 million. Net earnings attributable to common shareholders decreased 4% to $127 million. We repurchased 1 million shares of common stock in 2016, lowering our average outstanding shares 7%. Diluted earnings per share increased 4% to $3.47. Strong cash from operating activities at $216 million, continuing the strong pattern of recent years. Acquisitions and Divestitures 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. In 2016, we acquired a 70% ownership in Linear Mold and Engineering ("Linear"), a Livonia, Michigan-based company specializing in metal additive manufacturing that provides engineering, manufacturing and production consulting services to customers across a wide range of industries, including aerospace, defense, energy and industrial. We acquired our share in Linear Mold and Engineering for $23 million. The acquisition also includes a redeemable noncontrolling interest in the remaining 30%, which is exercisable beginning three years from the date of acquisition. This acquisition is included in our Space and Defense Controls segment. We did not complete any acquisitions in 2014 or in 2015. In 2015, we completed one divestiture in our Components segment. We sold our Rochester, New York and Erie, Pennsylvania life sciences operations for $3 million. On November 3, 2016, we sold our Bradford Engineering B.V. operation located in the Netherlands for approximately $1 million in cash. This operation was included in our Space and Defense Controls segment. This transaction will be recorded in our financial statements in the first quarter of 2017. We are currently evaluating the financial statement impact, which potentially includes an income tax benefit associated with this transaction. 20 20


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    Table of Contents 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 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 Long-Term Contracts Revenue representing 34% of 2016 sales was accounted for using the percentage of completion, cost-to-cost method of accounting. This method of revenue recognition is predominantly used within the Aircraft Controls and Space and Defense Controls segments due to the contractual nature of the business activities, with the exception of their respective aftermarket activities. The contractual arrangements are either firm fixed-price or cost-plus contracts and are with the U.S. Government or its prime subcontractors, foreign governments or commercial aircraft manufacturers, including Boeing and Airbus. The nature of the contractual arrangements includes customers’ requirements for delivery of hardware as well as funded nonrecurring development work in anticipation of follow-on production orders. We recognize revenue on contracts in the current period using the percentage of completion, cost-to-cost method of accounting as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. Estimates are reviewed and updated quarterly for substantially all contracts. A significant change in an estimate on one or more contracts could have a material effect on our results of operations. Occasionally, it is appropriate to combine or segment contracts. Contracts are combined in those limited circumstances when they are negotiated as a package in the same economic environment with an overall profit margin objective and constitute, in essence, an agreement to do a single project. In such cases, we recognize revenue and costs over the performance period of the combined contracts as if they were one. Contracts are segmented in limited circumstances if the customer had the right to accept separate elements of the contract and the total amount of the proposals on the separate components approximated the amount of the proposal on the entire project. For segmented contracts, we recognize revenue and costs as if they were separate contracts over the performance periods of the individual elements or phases. Contract costs include only allocable, allowable and reasonable costs which are included in cost of sales when incurred. For applicable U.S. Government contracts, contract costs are determined in accordance with the Federal Acquisition Regulations and the related Cost Accounting Standards. The nature of these costs includes development engineering costs and product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded as a result of the revenue recognized less costs incurred in any reporting period. Amounts representing performance incentives, penalties, contract claims or change orders are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Revenue recognized on contracts for unresolved claims or unapproved contract change orders was not material in 2016, 2015 or 2014. Contract Loss Reserves At October 1, 2016, we had contract loss reserves of $33 million. For contracts with anticipated losses at completion, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. Loss reserves are more common on firm fixed-price contracts that involve, to varying degrees, the design and development of new and unique controls or control systems to meet the customers’ specifications. Reserves are also recorded for the additional work on completed products in order for them to meet contract specifications. 21 21


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    Table of Contents Reserves for Inventory Valuation At October 1, 2016, we had net inventories of $479 million, or 30% of current assets. Reserves for inventory were $109 million, or 17% of gross inventories. Inventories are stated at the lower-of-cost-or-market 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. Reviews for Impairment of Goodwill At October 1, 2016, we had $740 million of goodwill, or 24% 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. As of the date of our impairment test, our reporting units are the same as our operating segments. 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 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. 22 22


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    Table of Contents For our annual test of goodwill for impairment in 2016, we performed a quantitative assessment for each of our six reporting units. Reporting Units other than Linear We determined the fair value of our reporting units other than Linear using discounted cash flows. We projected sales, operating margins and working capital requirements. We applied a 3% terminal value growth rate, which is supported by our historical growth rate, near-term projections and long-term expected market growth. We then discounted our projected cash flows using weighted-average costs of capital that ranged from 9.5% to 11.0% for our various reporting units. These discount rates reflect management’s assumptions of marketplace participants’ cost of capital. Based on our tests, the fair value of each reporting unit exceeded its carrying amount. Therefore, we concluded that goodwill was not impaired. The fair value of each reporting unit exceeded its carrying amount by at least 30%. While any individual assumption could differ from those that we used, we believe the overall fair values of our reporting units are reasonable as the values are derived from a mix of reasonable assumptions. Had we used discount rates that were 100 basis points higher or a terminal growth rate that was 100 basis points lower than those we assumed, the fair values of each of our reporting units would have continued to exceed their carrying amounts by at least 15%. We evaluate the reasonableness of the resulting fair values of our reporting units by comparing the aggregate fair value to our market capitalization and assessing the reasonableness of any resulting premium. Linear Reporting Unit We tested goodwill of our Linear reporting unit for impairment in our fourth quarter as part of our annual test. In performing this assessment, we estimated fair value using both a discounted cash flow analysis, which we weighted more heavily, and a market-multiple approach. In our discounted cash flow analysis, we projected sales and operating margins based on our current outlook for this business. We assumed a 5% terminal growth rate, which is supported by our near-term projections and long-term market growth potential in additive manufacturing. We then discounted our projected cash flows using a 15.5% weighted-average cost of capital that reflects management’s assumptions of marketplace participants’ costs of capital and business risk. Our test resulted in a fair value of Linear that was less than its carrying amount, requiring us to measure goodwill for impairment. We determined the implied fair value of goodwill and recorded a $5 million impairment charge in our fourth quarter of 2016 for the excess of the carrying amount of goodwill over its implied fair value. We determined the implied fair value of goodwill by taking the difference between the fair value of the reporting unit that we determined using the weighted- average discounted cash flow and market multiple approach and the fair value of the net assets of the reporting unit. During the fourth quarter, we transferred the management of Linear to Space and Defense Controls. Until that time, Linear was its own operating segment. Effective with this transfer, Linear is now part of the Space and Defense Controls operating segment and no longer qualifies as a separate reporting unit. Since we had a change in reporting units, we considered if an interim goodwill impairment test was necessary. However, in this case, two reporting units are simply being combined into a new reporting unit. We had a considerable excess of fair value over carrying value in our Space and Defense Controls reporting unit as of the beginning of the fourth quarter of 2016 and no adverse changes have occurred in that business since the 2016 annual impairment test date. As we had also just written down Linear’s goodwill as a result of the 2016 annual impairment test, we determined that it is not more likely than not that the new Space and Defense Controls reporting unit would yield a fair value less than the carrying value. Pension Assumptions We maintain various defined benefit pension plans covering employees at certain locations. Pension expense for all defined benefit plans for 2016 was $45 million. Pension obligations and the related costs are determined using actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, mortality rates and the long-term expected return on assets. Other assumptions include salary increases and retirement age. 23 23


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    Table of Contents The discount rate is 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 Mercer Pension Above Mean Discount Yield Curve to determine the discount rate for our U.S. defined benefit plans at year end. The discount rate is constructed from bonds included in the Mercer Yield Curve that have a yield higher than the mean yield curve. We believe that the Mercer Pension Above Mean Discount Yield Curve best mirrors the yields of bonds that would be selected by management if actions were taken to settle our obligation. The discount rate used in determining expense for the U.S. Employees’ Retirement Plan, our largest plan, in 2016 was 4.5% compared to 4.4% in 2015, and this increase caused expense to decrease by $1 million this year. We changed the method used to estimate the service and interest cost components of net periodic pension costs as of October 1, 2016, which is expected to lower our 2017 expense by approximately $7 million solely due to the change in method. Previously, these costs were determined using a single-weighted average discount rate. The change does not affect the measurement of our benefit obligations. The new method will provide a more precise measure of service and interest costs by improving the correlation between projected benefit cash flows and the discrete spot yield curve rates and will be accounted for as a change in estimate prospectively beginning in the first quarter of 2017. We will use a 3.96% service cost discount rate and a 3.21% interest cost discount rate to determine our expense in 2017 for this plan. The change in discount rates, after considering a $7 million favorable effect of the refined approach to determine service and interest cost, will cause 2017 expense to increase by $2 million. 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. We began using this table in October of 2015 which increased expense by $6 million in 2016. 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 2016 expense for our largest plan, we used a 7.75% return on assets assumption, compared to 8.0% for 2015. A 25 basis point decrease in the long-term expected return on assets assumption would increase our annual pension expense by $2 million. Deferred Tax Asset Valuation Allowances At October 1, 2016, we had gross deferred tax assets of $317 million and deferred tax asset valuation allowances of $11 million. The deferred tax assets principally relate to benefit accruals, inventory obsolescence, tax benefit carryforwards and contract loss reserves. The deferred tax assets include $17 million related to tax benefit carryforwards associated with net operating losses and tax credits, for which $11 million of deferred tax asset valuation allowances are recorded. 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. 24 24


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    Table of Contents CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK 2016 vs. 2015 2015 vs. 2014 (dollars and shares in millions, except per $ % $ % share data) 2016 2015 2014 Variance Variance Variance Variance Net sales $ 2,412 $ 2,526 $ 2,648 $ (114) (4%) $ (123) (5%) Gross margin 29.5% 29.2% 30.1% Research and development expenses $ 147 $ 132 $ 139 $ 15 11% $ (7) (5%) Selling, general and administrative expenses as a percentage of sales 14.1% 14.7% 15.2% Interest expense $ 35 $ 29 $ 13 $ 6 19% $ 16 131% Restructuring expense $ 15 $ 15 $ 13 $ — —% $ 3 20% Goodwill impairment $ 5 $ — $ — $ 5 n/a $ — n/a Other $ (3) $ 5 $ 10 $ (8) (172%) $ (6) (54%) Effective tax rate 28.5% 28.3% 27.7% Net earnings attributable to common shareholders and noncontrolling interest $ 124 $ 132 $ 158 $ (8) (6%) $ (26) (17%) Diluted average common shares outstanding 37 39 45 (3) (7%) (6) (12%) Diluted earnings per share attributable to common shareholders $ 3.47 $ 3.35 $ 3.52 $ 0.12 4% $ (0.17) (5%) Net sales decreased in each of our segments in 2016 and 2015. Weaker foreign currencies, in particular the British Pound and the Euro relative to the U.S. Dollar, contributed almost 25% of the sales decline in 2016. Weaker foreign currencies, in particular the Euro and the British Pound relative to the U.S. Dollar, contributed 80% of the sales decline in 2015. Gross margin increased in 2016 compared to 2015. The restructuring benefits from actions taken in 2015 contributed $9 million of reduced costs. We also benefited from the absence of last year's $7 million correction of an out-of-period accounting adjustment in our Space and Defense Controls segment. However, the improvements were partly offset by an adverse sales mix in both Components and in Industrial Systems due to lower energy and industrial market sales. Gross margin declined in 2015 compared to 2014 due to an adverse sales mix. We were negatively impacted by lower amounts of military OEM and aftermarket sales and commercial aftermarket sales in Aircraft Controls, as well as lower amounts of energy sales in Industrial Systems and in Components. The decline was partly offset by $14 million of lower amounts of additions to contract loss reserves in Aircraft Controls and $11 million of benefits realized from the 2014 restructuring activities. Research and development expenses in 2016 increased compared to 2015. Within Aircraft Controls, research and development expenses increased $16 million as we had higher activity on our major commercial OEM programs. Research and development expenses decreased in 2015 compared to 2014. Within Aircraft Controls, research and development expenses decreased $7 million as we had lower activity on the Airbus A350 program, but was partly offset by higher amounts of Embraer E-Jets activity. Selling, general and administrative expenses as a percentage of sales decreased in 2016 and in 2015. Most of the declines are due to an on-going focus on expense reduction. Interest expense in 2016 increased $3 million due to higher interest rates associated with our revolving credit facility. Additionally, interest expense increased $3 million due to higher levels of debt attributable to the funding of our share repurchase program. Interest expense increased in 2015 compared to 2014. Higher cost debt following the issuance of our $300 million senior notes in November 2014 increased our interest expense by $8 million. Also, higher levels of debt due to funding our share repurchase program increased our interest expense by $5 million. 25 25


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    Table of Contents In 2014, 2015 and 2016, we incurred restructuring expenses in response to business conditions. In 2014, we incurred $13 million of restructuring expenses primarily in Aircraft Controls and Space and Defense Controls. Through 2015, the total savings were $14 million, or 91% of our projected benefits, and were primarily in cost of sales. In 2015, we incurred $15 million of restructuring expenses, primarily in Space and Defense Controls, Industrial Systems and Aircraft Controls. Through 2016, the total savings were $20 million, or 95% of our original projected benefits and 100% of our revised annual benefits, which reflected amended workforce planning. More than half of these savings are in selling, general and administrative expenses. In 2016, we incurred $15 million of restructuring expenses, primarily in Aircraft Controls and Industrial Systems. Our total projected annual savings are $17 million. Through the last two quarters of 2016, we achieved $5 million of savings, primarily in cost of sales, which is line with our expectations. In 2016, we recorded a $5 million goodwill impairment charge in Space and Defense Controls related to our recent additive manufacturing acquisition. Other expense in 2016 includes $2 million of royalty income. Other expense in 2015 includes a $2 million asset impairment write-down in Industrial Systems, $2 million of foreign exchange currency loss and a $1 million loss on the sales of two small operations in our Components segment. Other expense in 2014 includes payment of a $7 million call premium on the early redemption of our 7.25% senior subordinated notes and a $5 million write-down of a technology investment in Industrial Systems. In comparison to the U.S, statutory tax rate, our effective tax rates in 2016, 2015 and 2014 differ primarily as a result of earnings being taxed in foreign jurisdictions with lower statutory tax rates. Average common shares outstanding decreased over the past three years due to our share buyback program. Since the Board of Directors amended the program in January 2014, we have repurchased 10 million shares. There are 3 million additional shares available under this program as of year end. Other comprehensive loss decreased in 2016 compared to 2015. Foreign currency translation adjustments contributed $44 million of less other comprehensive loss compared to 2015, driven by the positive impacts of the Euro and the Canadian Dollar. These positive impacts were partially offset by a decline in the British Pound against the U.S. Dollar. Other comprehensive loss increased in 2015 compared to 2014. Foreign currency translation adjustments decreased other comprehensive income $51 million compared to 2014. This decline was driven by the negative impacts of the British Pound, the Euro and Canadian Dollar against the U.S. Dollar. 2017 Outlook – We expect sales in 2017 to increase 1% from fiscal 2016 to $2.4 billion, driven primarily by higher OEM sales for the Airbus A350 program in Aircraft Controls. We also expect sales in Components will increase due to higher medical pump sales. Partially offsetting the sales growth is an expected decline in Industrial Systems across our major markets. We expect operating margin will increase to 10.3% in 2017 from 9.9% in 2016. The absence of 2016's restructuring expense and the goodwill impairment charge, as well as the associated restructuring benefits, will help drive margin expansion and offset negative impacts associated with an unfavorable sales mix. We expect net earnings attributable to common shareholders will remain flat with 2016 at $127 million. Average diluted shares outstanding will decrease 1% to 36 million due to shares already repurchased under our current share buyback program. We expect diluted earnings per share will range between $3.30 and $3.70, with a midpoint of $3.50, an increase of 1% compared to 2016. 26 26


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    Table of Contents SEGMENT RESULTS OF OPERATIONS AND OUTLOOK During 2016, we made a change to our segment reporting. Components now includes the Medical Devices product lines, which we previously reported as a separate segment. All amounts have been restated to present Medical Devices within Components. Operating profit, as presented below, is net sales less cost of sales and other operating expenses, excluding interest expense, equity-based compensation 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 17 of Item 8, Financial Statements and Supplementary Data of this report. Aircraft Controls 2016 vs. 2015 2015 vs. 2014 $ % $ % (dollars in millions) 2016 2015 2014 Variance Variance Variance Variance Net sales - military aircraft $ 512 $ 546 $ 572 $ (34) (6%) $ (26) (4%) Net sales - commercial aircraft 551 540 546 11 2% (6) (1%) $ 1,064 $ 1,087 $ 1,118 $ (24) (2%) $ (31) (3%) Operating profit $ 99 $ 100 $ 116 $ (1) (1%) $ (16) (14%) Operating margin 9.3% 9.2% 10.4% Backlog $ 632 $ 678 $ 715 $ (46) (7%) $ (36) (5%) Aircraft Controls' commercial sales increased in 2016 from 2015 after declining in 2015 from 2014. However, decreases in military sales across all three years resulted in lower total Aircraft Controls sales. In 2016, almost half of the total sales decline was due to the weaker British Pound relative to the U.S. dollar. In 2016 compared to 2015, military OEM sales decreased $24 million and military aftermarket sales decreased $10 million. OEM sales on the V-22 program decreased $15 million and sales on the FA-18 program decreased $12 million due to lower sales volumes. These declines were partially offset by $5 million of increased sales for the F-35 program. The decline in military aftermarket sales in 2016 is largely due to work on the C-5 refurbishment program winding down, partially offset by increased activity on the F-35 aftermarket program. In 2016 compared to 2015, commercial OEM sales increased $16 million while commercial aftermarket sales decreased $5 million. Commercial OEM sales to Airbus increased $28 million driven by the A350 program, and sales for the Boeing 787 program increased $9 million. These increases were partially offset by lower sales on various business jet and other commercial programs. The commercial aftermarket sales decline was driven by lower levels of Boeing 787 initial provisioning and business jet aftermarket sales. Military aftermarket sales declined $13 million in 2015 compared to 2014 due to lower spares sales across multiple programs. Also, military OEM sales declined $12 million, due to lower amounts of development work on the KC-46 Tanker program and lower foreign military sales. Sales in commercial aftermarket decreased $12 million due to declining sales for initial provisioning spares for the Boeing 787 program. Slightly offsetting these declines was an increase of $14 million of sales to Airbus due to the ramp up of the new A350 program. Operating margins in 2016, 2015 and 2014 were affected by restructuring activities. In 2014, we incurred $5 million of restructuring expenses, and in 2015, realized $6 million in restructuring benefits. Also in 2015, we incurred $3 million of restructuring expenses, of which we realized $5 million of benefits in 2016. Most recently in 2016, we incurred $7 million of restructuring expenses. Our total expected savings are $7 million, of which we have realized $2 million in the last two quarters of 2016. Operating margin increased marginally in 2016 compared to 2015. In 2016, improvements in the costs on our major commercial OEM programs and operational cost containment activities, contributed to higher margin. However, offsetting the margin expansion was an increase of $16 million in research and development expenses, as we had higher activity across all of our major commercial programs. Additionally, we incurred $4 million of higher restructuring charges. 27 27


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    Table of Contents Operating margin for 2015 declined as compared to 2014, due to an adverse sales mix due to lower amounts of military and commercial aftermarket sales and to lower amounts of military OEM sales. Partly offsetting the margin decline was $14 million of lower additions to contract loss reserves in 2015 compared to 2014. Also, research and development expenses declined $7 million due, in part, to lower activity on the Airbus A350 program. Slightly offsetting the lower Airbus spend was higher research and development expenses associated with the ramp up of the Embraer E-Jets program. The operating profit in 2015 also benefited from restructuring benefits realized from the 2014 restructuring activities. The twelve-month backlog for Aircraft Controls at October 1, 2016 declined compared to October 3, 2015. Almost half of the decline is due to the weaker British Pound relative to the U.S. Dollar. In addition, changes in commercial OEM order patterns, as well as work completed on military programs, reduced the level of twelve-month backlog. The decrease of twelve-month backlog for Aircraft Controls at October 3, 2015 compared to September 27, 2014 is in part due to the timing of commercial orders as well as work completed on military programs. 2017 Outlook for Aircraft Controls – We expect sales in Aircraft Controls to increase 4% from 2016 driven primarily by the continued ramp up of the Airbus A350 program. Partially offsetting the growth is expected lower commercial aftermarket sales on lower initial provisioning for the Boeing 787 program. We expect military sales will increase marginally, as higher F-35 sales are mostly offset by lower sales in other military programs. We expect operating margin will increase to 9.5% in 2017 from 9.3% in 2016. We expect that research and development costs will decrease $10 million, our restructuring expenses will not repeat and we will continue to realize the benefits of cost saving activities. However, partially offsetting the margin improvements is an expected negative sales mix. Sales from our newer military cost plus development jobs are replacing sales from higher-margin foreign military programs. We will also have lower legacy commercial OEM and commercial aftermarket sales. 28 28


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    Table of Contents Space and Defense Controls 2016 vs. 2015 2015 vs. 2014 $ % $ % (dollars in millions) 2016 2015 2014 Variance Variance Variance Variance Net sales $ 366 $ 381 $ 395 $ (15) (4%) $ (13) (3%) Operating profit $ 41 $ 33 $ 26 $ 8 25% $ 7 27% Operating margin 11.3% 8.7% 6.6% Backlog $ 277 $ 250 $ 254 $ 27 11% $ (4) (2%) Space and Defense Controls' net sales decreased in 2016 compared to 2015 as sales declined in both our space and our defense markets. Net sales decreased in 2015 compared to 2014 as sales declines in our space market were partially offset by sales growth in our defense market. Sales in our space market decreased $10 million in 2016 compared to 2015. Sales declined $19 million due primarily to satellite and launch vehicle contracts continuing to wind down. However, this decline was offset by $9 million of additional sales from our recent additive manufacturing acquisition. Sales in our defense market decreased $5 million. Within defense, sales decreased $11 million due to the unfavorable timing of orders on products for European defense vehicles and due to lower sales volumes on missile systems. Partially offsetting these declines was $6 million of higher sales for products on U.S. defense vehicles. Sales in our space market decreased $26 million in 2015 compared to 2014 due to satellite and launch vehicle programs winding down. Partly offsetting the sales decline was $13 million of sales growth in our defense market. Within defense, sales increased $29 million as production rates increased on defense controls, missile systems and naval systems programs. However, these increases within our defense market were offset by $15 million of lower security sales due to lower sales volume. Operating margins in 2015 and 2014 were affected by restructuring activities. In 2014, we incurred $5 million of restructuring expenses, and realized $8 million in cost savings in 2015. In 2015, we incurred $6 million of restructuring expenses, and we realized $6 million of cost savings in 2016. More than half of the total restructuring expense in 2015 relates to the termination of a selling and marketing contractual relationship, and did not carry the same ratio of benefits as our previous restructuring activities. Operating margin increased in 2016 compared to 2015. The absences of last year's $8 million out-of-period adjustment and last year's $6 million restructuring expense contributed to the increase in operating profit. Additionally, improved sales mix, primarily in our satellite business, and cost containment activities contributed incremental operating profit. Partially offsetting the margin improvement is the $5 million goodwill impairment charge related to our recent additive manufacturing acquisition and $2 million more of additions to contract loss reserves in 2016 compared to 2015. Operating margin increased in 2015 compared to 2014. Operating profit increased due to the benefits realized from our 2014 and 2015 restructuring activities. We also benefited from an improved sales mix as well as cost containment activities. Partly offsetting these increases is an $8 million accounting correction recorded in the second quarter of 2015. The higher level of twelve-month backlog for Space and Defense Controls at October 1, 2016 compared to October 3, 2015 is due to higher orders for defense controls and naval programs. The lower level of twelve-month backlog for Space and Defense Controls at October 3, 2015 compared to September 27, 2014 is due to declines in our security and defense controls markets, partly offset by increases in our satellites programs. 2017 Outlook for Space and Defense Controls – We expect sales in Space and Defense Controls to remain flat from fiscal 2016. We expect sales in our space market will remain flat as higher satellite component sales are offset by slightly lower launch vehicle sales. Additionally, we expect sales in our defense market will remain flat as higher sales for products on U.S. defense vehicles are offset by lower missile sales. We expect operating margin will increase to 13.2% in 2017 from 11.3% in 2016, as the goodwill impairment charge does not repeat and we continue to realize savings from cost containment actions. 29 29


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    Table of Contents Industrial Systems 2016 vs. 2015 2015 vs. 2014 $ % $ % (dollars in millions) 2016 2015 2014 Variance Variance Variance Variance Net sales $ 515 $ 522 $ 591 $ (7) (1%) $ (69) (12%) Operating profit $ 49 $ 45 $ 58 $ 4 8% $ (13) (23%) Operating margin 9.4% 8.6% 9.8% Backlog $ 145 $ 178 $ 182 $ (32) (18%) $ (5) (3%) Industrial Systems' net sales decreased in 2016 and 2015 across all of our major markets. Weaker foreign currencies, in particular the Euro and the Brazilian Real relative to the U.S. Dollar, caused sales to decline $11 million, but were partially offset by real sales growth. Weaker foreign currencies, in particular the Euro relative to the U.S. Dollar, contributed $60 million of the sales decline in 2015 compared to 2014. Excluding the currency effects on sales in 2016 compared to 2015, sales increased $9 million in our simulation and test market due to higher sales to flight simulation customers. Also in our energy market, sales increased $6 million due to stronger wind product sales in China. Partially offsetting the increases were declines across our industrial automation products due to the continuing economic weakness in our markets resulting in lower demand for our metal forming, steel production and aftermarket products and services. Sales in our energy market decreased $31 million in 2015 compared to 2014. Unfavorable foreign currency translation contributed approximately half of the decline. Additionally, sales of our non-renewable energy products contributed the other half of the decline due to the unfavorable macro-economic conditions related, in part, to the significant decline in the price of crude oil. Within our industrial automation market, sales decreased $27 million. Unfavorable foreign currency translation contributed $33 million to the decline, but was partly offset by sales increases in our aftermarket services. Sales within our simulation and test market decreased $11 million. Unfavorable foreign currency translation contributed approximately 80% of the decline. Operating margins in 2016 and 2015 were affected by restructuring activities. In 2015, we incurred $5 million of restructuring expenses, and realized $7 million in cost savings in 2016. In 2016, we incurred $5 million of restructuring expenses. Our total expected savings are $6 million, of which we have realized $1 million in the last two quarters of 2016. Operating margin increased in 2016 compared to 2015 due to the realized restructuring benefits from the 2015 restructuring actions, additional cost containment activities and $4 million of lower research and development expenses. Partially offsetting the margin improvement was a negative sales mix due in part to lower industrial automation sales. Operating margin decreased in 2015 compared to 2014. Our operating profit was negatively impacted by the strengthening U.S. Dollar relative to foreign currencies, lower sales volumes and margin pressures in the energy business and additional restructuring expense. Partly offsetting the declines was $6 million of lower write downs in 2015. The lower level of twelve-month backlog in Industrial Systems at October 1, 2016 compared to October 3, 2015 is due to canceled wind energy orders with a key customer who was recently acquired, as well as the completion of simulation orders. The lower level of twelve-month backlog in Industrial Systems at October 3, 2015 compared to September 27, 2014 is primarily due the impact of foreign currency translation, but was partly offset by higher levels of industrial automation orders. 2017 Outlook for Industrial Systems – We expect sales in Industrial Systems to decline 5% from 2016 across all of our major markets. We expect that wind energy sales will decrease as a result of lost sales to a key customer who was acquired. Also, we expect that simulation and test sales will decrease from the high level of sales in 2016. Additionally, we expect lower industrial automation sales as the global economic conditions continue to negatively impact our sales. We expect operating margin will increase to 10.0% in 2017 from 9.4% in 2016, as we will benefit from both our restructuring actions in 2016 and our continued cost containment actions. 30 30


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    Table of Contents Components 2016 vs. 2015 2015 vs. 2014 $ % $ % (dollars in millions) 2016 2015 2014 Variance Variance Variance Variance Net sales $ 467 $ 536 $ 545 $ (69) (13%) $ (9) (2%) Operating profit $ 50 $ 67 $ 76 $ (17) (26%) $ (9) (11%) Operating margin 10.7% 12.5% 13.9% Backlog $ 170 $ 168 $ 188 $ 2 1% $ (21) (11%) Components' net sales decreased in 2016 and in 2015, with most of our markets declining across these years. Within our industrial market, sales decreased $41 million. Approximately two-thirds of the decline is in our energy market where the macro-economic conditions centered around the significant decline in the price of crude oil has continued to result in lower demand for our marine products. The remaining decline in our industrial market is due to unfavorable order timing. Within our aerospace and defense market, sales declined $20 million due primarily to lower demand for aftermarket products. Sales also declined $8 million in our medical market, as lower sales for our sleep apnea products were partially offset by higher sales for medical pump sales. Sales in our industrial market decreased $16 million in 2015 compared to 2014. Our marine energy sales declined $22 million related to the decline in the price of crude oil and the resulting lower demand for our products. Slightly offsetting the decline was a sales increase of $6 million, driven by a strong demand in the U.S. industrial market. Sales in our aerospace and defense market increased $4 million in 2015 compared to 2014 due to higher levels of defense controls and naval product sales. Sales in our medical market increased $2 million, due in part to higher IV pumps and sets sales as we continued to replace competitors' older products in the U.S. home healthcare market. Operating margin decreased in 2016 compared to 2015. The decreases are due, in part, to lower demand for our marine energy products resulting from the significant decline in the price of crude oil, as well as lower sales in our military markets. We also incurred $2 million of higher research and development expenses in 2016. Operating margin declined in 2015 compared to 2014. The decrease is primarily due to lower demand for our marine energy products resulting from the significant decline in the price of crude oil. Additionally, cost overruns on some military programs negatively impacted operating margin. The twelve-month backlog at October 1, 2016 is comparable to the level at October 3, 2015 as higher industrial orders are mostly offset by completed aerospace and defense orders. The twelve-month backlog at October 3, 2015 declined compared to the level at September 27, 2014 due to reduced orders for our marine energy products, as well as timing of defense orders. 2017 Outlook for Components – We expect sales in Components to increase 2% from 2016. We expect that our medical market will contribute all of the growth due to higher sales volumes of enteral pumps and sets. We expect that our aerospace and defense sales and our industrial sales will remain flat. We expect operating margin will decrease to 10.4% in 2017 from 10.7% in 2016, as we continue to be affected by the negative sales mix in our industrial and aerospace and defense markets. 31 31


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    Table of Contents FINANCIAL CONDITION AND LIQUIDITY 2016 vs. 2015 2015 vs. 2014 $ % $ % (dollars in millions) 2016 2015 2014 Variance Variance Variance Variance Net cash provided (used) by: Operating activities $ 216 $ 335 $ 287 $ (119) (35%) $ 47 17% Investing activities (77) (68) (87) (9) 14% 19 (22%) Financing activities (120) (166) (118) 46 (28%) (48) 40% Our available borrowing capacity and our cash flow from operations provide us with the financial resources needed to run our operations, reinvest in our business and make strategic acquisitions. At October 1, 2016, our cash balance was $325 million, which is primarily held outside of the U.S. Cash flow from our U.S. operations, together with borrowings on our credit facility, fund on-going activities, debt service requirements and future growth investments. We reinvest the cash generated from foreign operations locally and such international balances are not available to pay down debt in the U.S. unless we decide to further repatriate such amounts. During 2016, we repatriated $91 million of earnings from various foreign subsidiaries and used the funds to pay down our U.S. revolving credit facility. If we determine further repatriation of foreign funds is necessary, we would then be required to pay U.S. income taxes on those funds. Operating activities Net cash provided by operating activities decreased in 2016 compared to 2015. Unfavorable timing of payments and collections across all of our segments used $89 million more of cash compared to a year ago. Additionally, we contributed an additional $19 million in pension contributions in 2016. Net cash provided by operating activities increased in 2015 compared to 2014. We improved by $37 million due to the favorable timing on collections of receivables, primarily in our Space and Defense Controls, Components and Aircraft Controls segments, and improved by $29 million due to lower pension funding levels. Additionally, we benefited by $24 million due to the favorable timing of customer advances, primarily in Aircraft Controls. The change in the cash provided by operating activities was negatively impacted by $34 million of lower earnings and non-cash charges. Investing activities Net cash used by investing activities in 2016 included $67 million for capital expenditures and $11 million for the 70% ownership for the Linear Mold and Engineering acquisition. Net cash used by investing activities in 2015 included $81 million for capital expenditures. In 2015, investment activities provided $7 million of cash as we liquidated retirement plan investments in order to purchase our stock, and $3 million of proceeds from the sale of two medical operations in our Components segment. Net cash used by investing activities in 2014 included $79 million for capital expenditures and $9 million used to redeem our 7.25% senior subordinated notes that were invested in our supplemental retirement plan. We expect our 2017 capital expenditures to be approximately $80 million, as we support the increased production of commercial aircraft. Financing activities Net cash used by financing activities in 2016 included $39 million to fund our stock repurchase program. We repurchased approximately 850,000 shares, averaging $46 per share, and used our credit facility for funding. Net cash used by financing activities in 2015 included $344 million to fund our stock repurchase program. Additionally, net cash used by financing activities in 2015 included the net proceeds of issuing our $300 million aggregate principal 5.25% senior notes, which were used to pay down our U.S. revolving credit facility borrowings. Net cash used by financing activities in 2014 included $266 million to fund our stock repurchase program and $7 million for the call premium on our 7.25% senior subordinated notes. We also used credit facility borrowings to fund the redemption of our 7.25% senior subordinated notes. 32 32


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    Table of Contents CAPITAL STRUCTURE AND RESOURCES We maintain bank credit facilities to fund our short and long-term capital requirements, including for acquisitions. From time to time, we also sell debt and equity securities to fund acquisitions or take advantage of favorable market conditions. We have $300 million aggregate principal amount of 5.25% senior notes due December 1, 2022 with interest paid semiannually on June 1 and December 1 of each year. The senior notes are unsecured obligations, guaranteed on a senior unsecured basis by certain subsidiaries and contain normal incurrence-based covenants and limitations such as the ability to incur additional indebtedness, pay dividends, make other restricted payments and investments, create liens and certain corporate acts such as mergers and consolidations. On June 28, 2016, we amended our U.S. revolving credit facility. This amendment extended the maturity to June 28, 2021. The U.S. revolving credit facility has a capacity of $1.1 billion and also provides an expansion option, which permits us to request an increase of up to $200 million to the credit facility upon satisfaction of certain conditions. The U.S. revolving credit facility had an outstanding balance of $590 million at October 1, 2016. Interest on the outstanding credit facility borrowings is principally based on LIBOR plus the applicable margin, which was 1.63% at October 1, 2016. The credit facility is secured by substantially all of our U.S. assets. The U.S. revolving credit facility contains various covenants. The covenant for minimum interest coverage ratio, defined as the ratio of EBITDA to interest expense for the most recent four quarters, is 3.0. The covenant for the maximum leverage ratio, defined as the ratio of net debt, including letters of credit, to EBITDA for the most recent four quarters, is 3.5. We are in compliance with all covenants. EBITDA is defined in the loan agreement as (i) the sum of net income, interest expense, income taxes, depreciation expense, amortization expense, other non-cash items reducing consolidated net income and non-cash equity-based compensation expenses minus (ii) other non-cash items increasing consolidated net income. We are generally not required to obtain the consent of lenders of the U.S. revolving credit facility before raising significant additional debt financing; however, certain limitations and conditions may apply that would require consent to be obtained. In recent years, we have demonstrated our ability to secure consents to access debt markets. We have also been successful in accessing equity markets from time to time. We believe that we will be able to obtain additional debt or equity financing as needed. At October 1, 2016, we had $503 million of unused capacity, including $491 million from the U.S. revolving credit facility after considering standby letters of credit. However, our leverage ratio covenant limits our total borrowing capacity to $418 million as of October 1, 2016. We have a trade receivables securitization facility (the "Securitization Program"), which terminates on April 13, 2018. Under the Securitization Program, we sell certain trade receivables and related rights to an affiliate, which in turn sells an undivided variable percentage ownership interest in the trade receivables to a financial institution, while maintaining a subordinated interest in a portion of the pool of trade receivables. The Securitization Program effectively increases our borrowing capacity by up to $120 million and lowers our cost to borrow funds as compared to the U.S. revolving credit facility. We had an outstanding balance of $120 million at October 1, 2016. The Securitization Program has a minimum borrowing requirement, which was $96 million at October 1, 2016. Interest on the secured borrowings under the Securitization Program was 1.41% at October 1, 2016 and is based on 30-day LIBOR plus an applicable margin. Net debt to capitalization was 41% at October 1, 2016 and 44% at October 3, 2015. The decrease in net debt to capitalization is primarily due to our net earnings and positive cash flow. We believe that our cash on hand, cash flows from operations and available borrowings under short and long-term arrangements will continue to be sufficient to meet our operating needs. The Board of Directors authorized a share repurchase program beginning in January 2014 that includes both Class A and Class B common shares, and allows us to buy up to an aggregate 13 million common shares. Under this program, we have purchased approximately 9.6 million shares for $650 million as of October 1, 2016. 33 33


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    Table of Contents Off Balance Sheet Arrangements We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition. Contractual Obligations and Commercial Commitments Our significant contractual obligations and commercial commitments at October 1, 2016 are as follows: (dollars in millions) Payments due by period 2018- 2020- After Contractual Obligations Total 2017 2019 2021 2021 Long-term debt $ 1,010 $ — $ 120 $ 590 $ 300 Interest on long-term debt 80 16 32 31 1 Operating leases 130 22 38 26 45 Purchase obligations 656 507 127 8 14 Total contractual obligations $ 1,876 $ 545 $ 317 $ 655 $ 360 In addition to the obligations in the table above, we have $1 million recorded for unrecognized tax benefits in current liabilities, which includes related accrued interest. We are unable to determine if and when any of those amounts will be settled, nor can we estimate any potential changes to the unrecognized tax benefits. The table above excludes interest on variable-rate debt, primarily our U.S. revolving credit facility, as we are unable to determine the rate and average balance outstanding for the periods presented in the above table. Interest on variable- rate long-term debt, assuming the rate and outstanding balances do not change from those at October 1, 2016, would be approximately $14 million annually. Total contractual obligations exclude pension obligations. In 2017, we have no minimum funding requirements. However, we anticipate making contributions to defined benefit pension plans of $70 million, of which approximately $63 million is to the U.S. plan. We are unable to determine minimum funding requirements beyond 2017. We have made discretionary incremental contributions to our defined benefit plans in excess of minimum funding requirements in 2016 and expect to continue to do the same in 2017. These additional contributions are being made in an effort to migrate toward fully funded status and reduce the volatility to our consolidated financial statements. (dollars in millions) Commitments expiring by period 2018- 2020- After Other Commercial Commitments Total 2017 2019 2021 2021 Standby letters of credit $ 19 $ 14 $ 2 $ 3 $ — 34 34


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    Table of Contents ECONOMIC CONDITIONS AND MARKET TRENDS We operate within the aerospace and defense and industrial markets. Our aerospace and defense markets are affected by market conditions and program funding levels, while our industrial markets are influenced by general capital investment trends and economic conditions. A common factor throughout our markets is the continuing demand for technologically advanced products. Aerospace and Defense Approximately 65% of our 2016 sales were generated in aerospace and defense markets. Within aerospace and defense, we serve three end markets: defense, commercial aircraft and space. The defense market is dependent on military spending for development and production programs. Aircraft production programs are typically long-term in nature, offering predictability as to capacity needs and future revenues. We maintain positions on numerous high priority programs, including the Lockheed Martin F-35 Joint Strike Fighter, FA-18E/F Super Hornet and V-22 Osprey. The large installed base of our products leads to attractive aftermarket sales and service opportunities. The tactical and strategic missile, missile defense and defense controls markets are dependent on many of the same market conditions as military aircraft, including overall military spending and program funding levels. Our security and surveillance product line is dependent on government funding at federal and local levels, as well as private sector demand. Reductions in the U.S. Department of Defense's mandatory and discretionary budgeted spending, which became effective on March 1, 2013, resulting from the Budget Control Act of 2011, has had and will continue to have ongoing ramifications for the domestic aerospace and defense market for the near future. As originally passed, the Budget Control Act provided that, in addition to an initial significant reduction in future domestic defense spending, further automatic cuts to defense spending authorization (which is generally referred to as sequestration) of approximately $500 billion through the Federal Government's 2021 fiscal year would be triggered by the failure of Congress to produce a deficit reduction bill. The sequestration spending cuts were intended to be uniform by category for programs, projects and activities within accounts. The Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015 provided stability and modest growth in the Department of Defense spending through 2017. However, future budgets beyond 2017 are uncertain with respect to the overall levels of defense spending. As a result of this uncertainty, we expect we will continue to face significant challenges over the next decade. We believe that our military sales remain likely to be most affected due to lower defense spending. Currently, we expect approximately $670 million of U.S. defense sales in 2017. The commercial aircraft market is dependent on a number of factors, including global demand for air travel, which generally follows underlying economic growth. As such, the commercial aircraft market has historically exhibited cyclical swings which tend to track the overall economy. In recent years, the development of new, more fuel-efficient commercial air transports has helped drive increased demand in the commercial aircraft market, as airlines replace older, less fuel-efficient aircraft with newer models in an effort to reduce operating costs. The aftermarket is driven by usage of the existing aircraft fleet and the age of the installed fleet, and is impacted by fleet re-sizing programs for passenger and cargo aircraft. Changes in aircraft utilization rates affect the need for maintenance and spare parts and impact aftermarket sales. Boeing and Airbus have historically adjusted production in line with air traffic volume. Demand for our commercial aircraft products is in large part dependent on new aircraft production, which is increasing as Boeing and Airbus work to fulfill large backlogs of unfilled orders. The commercial space market is comprised of large satellite customers, traditionally communications companies. Trends for this market, as well as for commercial launch vehicles, follow demand for increased capacity. This, in turn tends to track with underlying demand for increased consumption of telecommunication services, satellite replacement and global navigation needs. The space market is also partially dependent on the governmental- authorized levels of funding for satellite communications, as well as investment for commercial and exploration activities. 35 35


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    Table of Contents Industrial Approximately 35% of our 2016 sales were generated in industrial markets. Within industrial, we serve three end markets: industrial automation, energy and medical. The industrial automation market we serve is influenced by several factors including capital investment, product innovation, economic growth, cost-reduction efforts and technology upgrades. We experience challenges from the need to react to the demands of our customers, who are in large part sensitive to international and domestic economic conditions. The energy market we serve is affected by changing oil and natural gas prices, global urbanization, the resulting change in supply and demand for global energy and the political climate and corresponding public support for investments in renewable energy generation capacity. Historically, drivers for global growth include investments in power generation infrastructure, including renewable energy, and exploration in search of new oil and gas resources. However, the recent significant decline in the price of crude oil has reduced investment in exploration activities. This reduced investment has directly affected our energy business in Components and in Industrial Systems. Currently, we expect approximately $33 million of oil exploration-related sales in 2017, down from approximately $100 million in 2014. The medical market we serve is influenced by economic conditions, regulatory environments, hospital and outpatient clinic spending on equipment, population demographics, medical advances, patient demands and the need for precision control components and systems. Advances in medical technology and medical treatments have had the effect of extending the average life spans, in turn resulting in greater need for medical services. These same technology and treatment advances also drive increased demand from the general population as a means to improve quality of life. Access to medical insurance, whether through government funded health care plans or private insurance, also affects the demand for medical services. Foreign Currencies We are affected by the movement of foreign currencies compared to the U.S. dollar, particularly in Industrial Systems. About one-quarter of our 2016 sales were denominated in foreign currencies. During 2016, average foreign currency rates generally weakened against the U.S. dollar compared to 2015. The translation of the results of our foreign subsidiaries into U.S. dollars decreased sales by $26 million compared to one year ago. During 2015, average foreign currency rates generally weakened against the U.S. dollar compared to 2014. The translation of the results of our foreign subsidiaries into U.S. dollars decreased 2015 sales by $99 million compared to 2014. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1 of the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates ("ASU"). 36 36


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    Table of Contents Item 7A. Quantitative and Qualitative Disclosures about Market Risk. In the normal course of business, we are exposed to interest rate risk from our long-term debt and foreign exchange rate risk related to our foreign operations and foreign currency transactions. To manage these risks, we may enter into derivative instruments such as interest rate swaps and foreign currency forward contracts. We do not hold or issue financial instruments for trading purposes. In 2016, our derivative instruments consisted of interest rate swaps designated as cash flow hedges and foreign currency forwards. At October 1, 2016, we had $525 million of borrowings subject to variable interest rates. During 2016, our average borrowings subject to variable interest rates were $605 million and, therefore, if interest rates had been one percentage point higher during 2016, our interest expense would have been $6 million higher. At October 1, 2016, we had interest rate swaps with notional amounts totaling $185 million. The interest rate swaps effectively convert this amount of variable-rate debt to fixed-rate debt at 2.5%, including the applicable margin of 1.63% as of October 1, 2016. The interest will revert back to variable rates based on LIBOR plus the applicable margin upon the maturity of the interest rate swaps. These interest rate swaps will mature at various times between December 5, 2016 and July 8, 2019. We also enter into forward contracts to reduce fluctuations in foreign currency cash flows related to third party purchases, intercompany product shipments and to reduce exposure on intercompany balances that are denominated in foreign currencies. We have foreign currency forwards with notional amounts of $201 million outstanding at October 1, 2016 that mature at various times through September 28, 2018. These include notional amounts of $131 million outstanding where the U.S. dollar is one side of the trade. The net fair value of all of our foreign currency contracts was a $4 million net liability at October 1, 2016. A hypothetical 10 percent increase in the value of the U.S. dollar against all currencies would decrease the fair value of our foreign currency contracts at October 1, 2016 by approximately $1 million, while a hypothetical 10 percent decrease in the value of the U.S. dollar against all currencies would increase the fair value of our foreign currency contracts at October 1, 2016 by less than $1 million. It is important to note that gains and losses indicated in the sensitivity analysis would often be offset by gains and losses on the underlying receivables and payables. Although the majority of our sales, expenses and cash flows are transacted in U.S. dollars, we have exposure to changes in foreign currency exchange rates such as the Euro, British pound and Japanese yen. If average annual foreign exchange rates collectively weakened or strengthened against the U.S. dollar by 10%, our net earnings in 2016 would have decreased or increased by $8 million from foreign currency translation. This sensitivity analysis assumed that each exchange rate would change in the same direction relative to the U.S. dollar and excludes the potential effects that changes in foreign currency exchange rates may have on actual transactions. 37 37


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    Table of Contents Item 8. Financial Statements and Supplementary Data. Inc. Consolidated Statements of Earnings Fiscal Years Ended October 1, October 3, September 27, (dollars in thousands, except per share data) 2016 2015 2014 Net sales $ 2,411,937 $ 2,525,532 $ 2,648,385 Cost of sales 1,700,354 1,788,828 1,850,809 Gross profit 711,583 736,704 797,576 Research and development 147,336 132,271 139,462 Selling, general and administrative 339,961 371,498 403,487 Interest 34,605 28,967 12,513 Restructuring 15,393 15,449 12,913 Goodwill impairment 4,800 — — Other (3,372) 4,685 10,278 Earnings before income taxes 172,860 183,834 218,923 Income taxes 49,227 51,951 60,725 Net earnings attributable to common shareholders and noncontrolling $ 123,633 $ 131,883 $ 158,198 interest Net earnings (loss) attributable to noncontrolling interest (3,112) — — Net earnings attributable to common shareholders $ 126,745 $ 131,883 $ 158,198 Net earnings per share attributable to common shareholders Basic $ 3.49 $ 3.39 $ 3.57 Diluted $ 3.47 $ 3.35 $ 3.52 Average common shares outstanding Basic 36,277,445 38,945,880 44,362,412 Diluted 36,529,344 39,334,520 44,952,437 See accompanying Notes to Consolidated Financial Statements. 38 38


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    Table of Contents Inc. Consolidated Statements of Comprehensive Income (Loss) Fiscal Years Ended October 1, October 3, September 27, (dollars in thousands) 2016 2015 2014 Net earnings attributable to common shareholders and noncontrolling $ 123,633 $ 131,883 $ 158,198 interest Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (37,838) (82,042) (31,318) Retirement liability adjustment (54,184) (51,926) (41,289) Change in accumulated income (loss) on derivatives (1,304) (929) (73) Other comprehensive income (loss), net of tax (93,326) (134,897) (72,680) Comprehensive income (loss) $ 30,307 $ (3,014) $ 85,518 Comprehensive income (loss) attributable to noncontrolling interest (3,112) — — Comprehensive income (loss) attributable to common shareholders $ 33,419 $ (3,014) $ 85,518 See accompanying Notes to Consolidated Financial Statements. 39 39


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    Table of Contents Inc. Consolidated Balance Sheets October 1, October 3, (dollars in thousands, except per share data) 2016 2015 ASSETS Current assets Cash and cash equivalents $ 325,128 $ 309,853 Receivables 688,388 698,419 Inventories 479,040 493,360 Deferred income taxes 92,903 91,210 Prepaid expenses and other current assets 34,688 34,653 Total current assets 1,620,147 1,627,495 Property, plant and equipment, net 522,369 536,756 Goodwill 740,162 737,212 Intangible assets, net 113,560 143,723 Other assets 45,621 41,285 Total assets $ 3,041,859 $ 3,086,471 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Short-term borrowings $ 1,379 $ 83 Current installments of long-term debt 167 34 Accounts payable 144,450 165,973 Accrued salaries, wages and commissions 126,319 125,270 Customer advances 167,514 167,423 Contract loss reserves 32,543 30,422 Other accrued liabilities 116,860 116,300 Total current liabilities 589,232 605,505 Long-term debt, excluding current installments 1,010,304 1,075,067 Long-term pension and retirement obligations 401,747 348,239 Deferred income taxes 42,171 60,209 Other long-term liabilities 4,343 2,919 Total liabilities 2,047,797 2,091,939 Commitments and contingencies (Note 18) — — Redeemable noncontrolling interest 5,651 — Shareholders’ equity Common stock - par value $1.00 Class A - Authorized 100,000,000 shares 43,667 43,639 Issued 43,666,801 and outstanding 32,131,566 shares at October 1, 2016 Issued 43,638,618 and outstanding 33,320,187 shares at October 3, 2015 Class B - Authorized 20,000,000 shares. Convertible to Class A on a one-for-one basis 7,613 7,641 Issued 7,612,912 and outstanding 3,734,067 shares at October 1, 2016 Issued 7,641,095 and outstanding 3,388,788 shares at October 3, 2015 Additional paid-in capital 465,762 456,512 Retained earnings 1,706,539 1,579,794 Treasury shares (741,700) (701,771) Stock Employee Compensation Trust (49,463) (44,211) Supplemental Retirement Plan Trust (8,946) (5,337) Accumulated other comprehensive loss (435,061) (341,735) Total shareholders’ equity 988,411 994,532 Total liabilities and shareholders’ equity $ 3,041,859 $ 3,086,471 See accompanying Notes to Consolidated Financial Statements. 40 40


  • Page 47

    Table of Contents Inc. Consolidated Statements of Shareholders’ Equity Fiscal Years Ended October 1, October 3, September 27, (dollars in thousands) 2016 2015 2014 COMMON STOCK Beginning and end of year $ 51,280 $ 51,280 $ 51,280 ADDITIONAL PAID-IN CAPITAL Beginning of year 456,512 463,965 447,478 Issuance of treasury shares (429) (4,529) 256 Equity-based compensation expense 3,271 5,074 7,189 Adjustment to market - SECT, SERP and other 6,408 (7,998) 9,042 End of year 465,762 456,512 463,965 RETAINED EARNINGS Beginning of year 1,579,794 1,447,911 1,289,713 Net earnings attributable to common shareholders 126,745 131,883 158,198 End of year 1,706,539 1,579,794 1,447,911 TREASURY SHARES AT COST Beginning of year (701,771) (360,445) (83,003) Class A shares issued related to equity awards 5,003 15,965 1,991 Class A and B shares purchased (44,932) (357,291) (279,433) End of year (741,700) (701,771) (360,445) STOCK EMPLOYEE COMPENSATION TRUST (SECT) Beginning of year (44,211) (48,458) (35,545) Issuance of shares 28,048 7,395 1,144 Purchase of shares (28,799) (15,151) (7,924) Adjustment to market (4,501) 12,003 (6,133) End of year (49,463) (44,211) (48,458) SUPPLEMENTAL RETIREMENT PLAN (SERP) TRUST Beginning of year (5,337) — — Purchase of shares (2,300) (7,328) — Adjustment to market (1,309) 1,991 — End of year (8,946) (5,337) — ACCUMULATED OTHER COMPREHENSIVE LOSS Beginning of year (341,735) (206,838) (134,158) Other comprehensive income (loss) (93,326) (134,897) (72,680) End of year (435,061) (341,735) (206,838) TOTAL SHAREHOLDERS’ EQUITY $ 988,411 $ 994,532 $ 1,347,415 REDEEMABLE NONCONTROLLING INTEREST Beginning of year $ — $ — $ — Redeemable noncontrolling interest of acquired entity 8,763 — — Net loss attributable to redeemable noncontrolling interest (3,112) — — End of year $ 5,651 $ — $ — (Continued on next page) 41 41


  • Page 48

    Table of Contents Inc. Consolidated Statements of Shareholders’ Equity, Continued Fiscal Years Ended October 1, October 3, September 27, (share data) 2016 2015 2014 TREASURY SHARES - CLASS A COMMON STOCK Beginning of year (10,318,431) (5,806,702) (2,004,262) Class A shares issued related to equity awards 152,099 543,923 283,921 Class A shares purchased (943,755) (5,055,652) (4,086,361) End of year (11,110,087) (10,318,431) (5,806,702) TREASURY SHARES - CLASS B COMMON STOCK Beginning of year (3,323,926) (3,319,038) (3,305,971) Class B shares purchased — (4,888) (13,067) End of year (3,323,926) (3,323,926) (3,319,038) SECT SHARES - CLASS A COMMON STOCK Beginning of year — — — Purchase of shares (425,148) — — End of year (425,148) — — SECT SHARES - CLASS B COMMON STOCK Beginning of year (828,381) (710,841) (610,223) Issuance of shares 487,678 101,000 18,444 Purchase of shares (64,216) (218,540) (119,062) End of year (404,919) (828,381) (710,841) SERP TRUST SHARES - CLASS B COMMON STOCK Beginning of year (100,000) — — Purchase of shares (50,000) (100,000) — End of year (150,000) (100,000) — See accompanying Notes to Consolidated Financial Statements. 42 42


  • Page 49

    Table of Contents Inc. Consolidated Statements of Cash Flows Fiscal Years Ended October 1, October 3, September 27, (dollars in thousands) 2016 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings attributable to common shareholders and $ 123,633 $ 131,883 $ 158,198 noncontrolling interest Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation 77,407 78,610 78,078 Amortization 21,325 24,999 31,181 Deferred income taxes 4,248 12,991 5,021 Equity-based compensation expense 3,271 5,074 7,189 Redemption of senior subordinated notes — — 8,002 Other 13,440 7,826 7,260 Changes in assets and liabilities providing (using) cash: Receivables 1,672 60,616 23,707 Inventories 12,644 3,821 23,666 Accounts payable (21,821) 8,107 (17,783) Customer advances 2,903 24,112 (304) Accrued expenses (727) (6,525) 7,685 Accrued income taxes 4,481 (9,986) 6,273 Net pension and post retirement liabilities (29,708) (15,048) (43,612) Other assets and liabilities 3,086 8,066 (7,459) Net cash provided by operating activities 215,854 334,546 287,102 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of businesses, net of cash acquired (11,016) — — Purchase of property, plant and equipment (67,208) (80,693) (78,771) Other investing transactions 1,256 13,095 (8,124) Net cash used by investing activities (76,968) (67,598) (86,895) CASH FLOWS FROM FINANCING ACTIVITIES Net short-term repayments — (3,570) (977) Proceeds from revolving lines of credit 324,670 428,130 680,875 Payments on revolving lines of credit (409,670) (518,130) (319,740) Proceeds from long-term debt 20,000 — — Payments on long-term debt (10,098) (5,259) (3,256) Proceeds from senior notes, net of issuance costs — 294,430 — Payments on senior subordinated notes — — (191,575) Payment of premium on redemption of senior subordinated notes — — (6,945) Proceeds from sale of treasury stock 4,574 11,436 2,247 Purchase of outstanding shares for treasury (44,933) (363,848) (272,876) Proceeds from sale of stock held by SECT 28,048 7,395 1,144 Purchase of stock held by SECT (28,799) (15,151) (7,924) Purchase of stock held by SERP Trust (2,300) (7,328) — Excess tax benefits from equity-based payment arrangements 598 5,996 2,910 Other financing transactions (1,950) (100) (2,288) Net cash used by financing activities (119,860) (165,999) (118,405) Effect of exchange rate changes on cash (3,751) (22,388) (7,600) Increase in cash and cash equivalents 15,275 78,561 74,202 Cash and cash equivalents at beginning of period 309,853 231,292 157,090 Cash and cash equivalents at end of year $ 325,128 $ 309,853 $ 231,292 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 34,150 $ 23,718 $ 17,300 Income taxes paid, net of refunds 41,517 39,890 41,999 Unsecured notes issued for acquisitions 1,280 — — See accompanying Notes to Consolidated Financial Statements. 43 43


  • Page 50

    Table of Contents ____________________________________________________________________________________________ Notes to Consolidated Financial Statements (dollars in thousands, except per share data) ____________________________________________________________________________________________ Note 1 - Summary of Significant Accounting Policies Consolidation: The consolidated financial statements include the accounts of Moog Inc. and all of our U.S. and foreign subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Fiscal Year: Our fiscal year ends on the Saturday that is closest to September 30. The consolidated financial statements include 52 weeks for the year ended October 1, 2016, 53 weeks for the year ended October 3, 2015 and 52 weeks for the year ended September 27, 2014. Operating Cycle: Consistent with industry practice, aerospace and defense related inventories, unbilled recoverable costs and profits on long-term contract receivables, customer advances and contract loss reserves include amounts relating to contracts having long production and procurement cycles, portions of which are not expected to be realized or settled within one year. Foreign Currency Translation: Assets and liabilities of subsidiaries that prepare financial statements in currencies other than the U.S. dollar are translated using rates of exchange as of the balance sheet date and the statements of earnings are translated at the average rates of exchange for each reporting period. Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Revenue Recognition: We recognize revenue using either the percentage of completion method for contracts or as units are delivered or services are performed. Percentage of completion method for contracts: Revenue representing 34%, 33% and 34% of 2016, 2015 and 2014 sales, respectively, was accounted for using the percentage of completion, cost-to-cost method of accounting. This method of revenue recognition is predominantly used within the Aircraft Controls and Space and Defense Controls segments due to the contractual nature of the business activities, with the exception of their respective aftermarket activities. The contractual arrangements are either firm fixed-price or cost-plus contracts and are primarily with the U.S. Government or its prime subcontractors, foreign governments or commercial aircraft manufacturers, including Boeing and Airbus. The nature of the contractual arrangements includes customers’ requirements for delivery of hardware as well as funded nonrecurring development work in anticipation of follow-on production orders. Revenue on contracts using the percentage of completion, cost-to-cost method of accounting is recognized as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. Estimates are reviewed and updated quarterly for substantially all contracts. A significant change in an estimate on one or more contracts could have a material effect on our results of operations. Occasionally, it is appropriate to combine or segment contracts. Contracts are combined in those limited circumstances when they are negotiated as a package in the same economic environment with an overall profit margin objective and constitute, in essence, an agreement to do a single project. In such cases, revenue and costs are recognized over the performance period of the combined contracts as if they were one. Contracts are segmented in limited circumstances if the customer had the right to accept separate elements of the contract and the total amount of the proposals on the separate components approximated the amount of the proposal on the entire project. For segmented contracts, revenue and costs are recognized as if they were separate contracts over the performance periods of the individual elements or phases. 44 44

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