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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Exact Name of Registrant as Specified in its Charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:         None

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        X            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. _________

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   X       No              

The aggregate market value of the Common Stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the Common Stock on the New York Stock Exchange on March 31, 2003, the last business day of the registrant’s most recently completed second quarter, was approximately $374 million.

The number of shares of Common Stock outstanding as of the close of business on November 28, 2003 was:
Class A 15,114,066; Class B 2,134,596.

The documents listed below have been incorporated by reference into this Annual Report on Form 10-K:

Cautionary Statement
Information included herein or incorporated by reference 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,” “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. These important factors, risks and uncertainties include (i) uncertainty relating to the allocation of the purchase price among the assets of the Poly-Scientific division of Northrop Grumman, which was acquired in fiscal 2004, amortization of intangible assets resulting from that allocation and the impact of fair value purchase accounting adjustments, (ii) fluctuations in general business cycles for commercial aircraft, military aircraft, space products and industrial capital goods, (iii) the Company’s dependence on government contracts that may not be fully funded or may be terminated, (iv) the Company’s dependence on certain major customers, such as The Boeing Company and Lockheed Martin, for a significant percentage of its sales, (v) the possibility that advances in technology could reduce the demand for certain of the Company’s products, specifically hydraulic-based motion controls, (vi) intense competition in the Company’s business which may require the Company to lower prices or offer more favorable terms of sale, (vii) the Company’s significant indebtedness which could limit its operational and financial flexibility, (viii) the significant amount of the Company’s debt which is at variable interest rates that may increase, (ix) higher pension costs and increased cash funding requirements which could occur in future years if future actual plan results differ from assumptions used for the Company’s defined benefit pension plans, including returns on plan assets and interest rates, (x) a write-off of all or part of the Company’s goodwill which could adversely affect the Company’s operating results and net worth and cause it to violate covenants in its bank agreements, (xi) the potential for substantial fines and penalties or suspension or debarment from future contracts in the event the Company does not comply with regulations relating to defense industry contracting, (xii) the potential for cost overruns on development jobs and fixed price contracts and the risk that actual results may differ from estimates used in long-term contract accounting, (xiii) the Company’s ability to successfully identify and consummate acquisitions and integrate the acquired businesses, including the Poly-Scientific division, and the risk that known liabilities will be assumed by the Company in connection with acquisitions, including liabilities for which indemnification from the seller may be limited or unavailable, (xiv) the possibility of a catastrophic loss of one or more of the Company’s manufacturing facilities, (xv) the impact of product liability claims related to the Company’s products used in applications where failure can result in significant property damage, injury or death, (xvi) the possibility that litigation may result unfavorably to the Company, (xvii) foreign currency fluctuations in those countries in which the Company does business and other risks associated with international operations and (xviii) the cost of compliance with environmental laws. The factors identified above are not exhaustive. 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. The Company disclaims any obligation to update the forward-looking statements made in this report.

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PART I

    The Registrant, Moog Inc., a New York corporation formed in 1951, is referred to in this Annual Report on Form 10-K as “Moog,” “the Company” or in the nominative “we” or the possessive “our.”

Item 1. Business.

    Certain information required herein is incorporated by reference to the 2003 Annual Report.

    Description of the Company’s Business. See pages 2 through 24 of the 2003 Annual Report.

    Distribution. Moog’s 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 Moog’s engineering staff. Moog’s 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 markets.

    Industry and Competitive Conditions. Moog is a leading worldwide designer and manufacturer of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and industrial markets. The Company experiences considerable competition in both of these markets.

    Many of our competitors have greater financial and other resources. In Aircraft Controls, the Company’s principal competitors include Parker Hannifin Corporation, Curtiss-Wright Corporation, Liebherr-Holding GmbH, Goodrich Actuation Systems and Teijin Seiki Co., Ltd. In Space Controls, the Company’s principal competitors include Vacco Industries, Inc., Parker Hannifin, Goodrich, MPC and Textron. In Industrial Controls, competitors include Bosch Rexroth AG, Parker Hannifin, Eaton Vickers and Danaher.

    Competition in each market served is based upon design capability, product performance and life, service, price and delivery time. The Company believes it competes effectively on all of these bases.

    Backlog. Substantially all backlog will be realized as sales in the next twelve months. Also see the discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 31 of this report.

    Raw Materials. Materials, supplies and components are purchased from numerous suppliers. The Company believes the loss of any one supplier, although potentially disruptive in the short term, would not materially affect the Company’s operations in the long term.

    Working Capital. See the discussion on operating cycle in Note 1 of Item 8, Financial Statements and Supplementary Data, on page 43 of this report.

    Seasonality. Moog’s business is generally not seasonal.

    Patents. Moog has numerous patents and has filed applications for others. While the protection afforded by these is of value, the Company does not consider the successful conduct of any material part of its business to be dependent upon such protection. The Company’s patents and patent applications, including U.S. and international patents, relate to electrohydraulic, electropneumatic and electromechanical actuation mechanisms and control valves, electronic control component systems and interface devices. The Company has trademark and trade name protection in major markets throughout the world.

    Research Activities. Research and product development activity has been and continues to be significant to the Company. See Item 6, Selected Financial Data, on page 30 of this report.

    Employees. On September 27, 2003, the Company employed 4,744 full-time employees, compared to 4,817 full-time employees on September 28, 2002.

    Segment Financial Information. See the discussion in Note 15 of Item 8, Financial Statements and Supplementary Data, on pages 52 and 53 of this report.

    Customers. The information required herein is incorporated by reference to pages 2 through 24 of the 2003 Annual Report. Also see pages 31 and 52 of this report. The Company’s customers fall into three groups, Original Equipment Manufacturer (OEM) customers of its aircraft and space businesses, OEM customers of its industrial business, and aftermarket customers in all three businesses. Aircraft and space OEM customers collectively represented 46% of fiscal 2003 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 the Company’s relationships with aircraft and space OEM customers are based on long-term agreements. The Company’s sales of industrial controls are to a diversity of customers around the world and are normally based on lead times of 90 days or less. The Company also provides spare and replacement parts and repair and overhaul services, or aftermarket, for most of its product applications. The Company’s major aftermarket customers include the U.S. Government and the commercial airlines.

    The Boeing Company represented approximately 15% of consolidated sales in 2003, including sales to the Boeing Commercial Airplane Group which represented 5% of fiscal 2003 sales. Sales to Lockheed Martin were approximately 10% of sales. Sales arising from U.S. Government prime or subcontracts, including military sales to Boeing, were approximately 38% of sales. Sales to these customers are made primarily through Aircraft Controls and Space Controls.

    International Operations. Operations outside the United States are conducted through wholly-owned foreign subsidiaries. The Company’s international operations are located predominantly in Europe and the Asian-Pacific region. See pages 53, 57 and 58 of this report. The Company’s international operations are subject to the usual risks inherent in international trade, including currency fluctuations, 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 such operations are conducted.

    Environmental Matters. See the discussion in Note 16 of Item 8, Financial Statements and Supplementary Data, on page 53 of this report.

    Website Access to Information. The Company’s internet address is www.moog.com. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and, if applicable, amendments to those reports available on the investor information portion of its website. The reports are free of charge and are available as soon as reasonably practicable after

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they are filed with the Securities and Exchange Commission. The Company will post to the investor information portion of its web-site its corporate governance guidelines, board committee charters and code of ethics. This information will be available in print to any shareholder upon request. All requests for these documents should be made to Susan Johnson, the Company’s manager of investor relations, by calling (716) 652-4225.

    Executive Officers of the Registrant. Other than John B. Drenning, the principal occupations of the following officers for the past five years have been their employment with the Company. John B. Drenning’s principal occupation is partner in the law firm of Hodgson Russ LLP.

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    On October 1, 1999, Robert H. Maskrey was named Executive Vice President and Chief Operating Officer. Previously he was a Vice President of the Company.

    On February 25, 2000, Martin J. Berardi was named Vice President and continues as a General Manager in the Industrial Controls segment.

    On February 25, 2000, Warren C. Johnson was named Vice President and continues as General Manager of the Aircraft Group, a position he assumed in October 1999. Previously he was Chief Engineer of the Aircraft Group.

    On June 1, 2000, Timothy P. Balkin was named Treasurer. Previously he was Director of Financial Planning and Analysis.

    On February 7, 2002, Jay K. Hennig was named Vice President and continues as the Space Systems Group’s General Manager, a position he assumed in January 2001. Previously he was General Manager of Moog’s Chatsworth Operations in California.

Item 2. Properties.

    On September 27, 2003, the Company occupied approximately 2,425,000 square feet of space in the United States and countries throughout the world, distributed by segment as follows:

    Aircraft Controls has principal manufacturing facilities located in New York, California, Utah, England and the Philippines. Space Controls has primary manufacturing facilities located in New York and California. Industrial Controls has principal manufacturing facilities located in New York, Germany, Italy, Japan, Ireland and Luxembourg. The Company’s headquarters are located in East Aurora, New York.

    On September 30, 2003, the Company acquired the assets of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. This business occupies an additional 352,000 square feet of space, located primarily in Virginia, North Carolina and Pennsylvania.

    The Company believes that its properties have been adequately maintained and are generally in good condition. Operating leases for properties expire at various times from 2003 through 2017. Upon the expiration of its current leases, the Company believes that it 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, the Company is named as a defendant in legal actions. The Company is not a party to any pending legal proceedings which management believes will result in a material adverse effect on the Company’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

    None.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.

    Moog’s 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.

    The number of shareholders of record of Class A Common Stock and Class B Common Stock was 1,259 and 593, respectively, as of November 28, 2003.

    Dividend restrictions are included in Note 8 of Item 8, Financial Statements and Supplementary Data, on page 46 of this report. The Company does not pay dividends on its Class A Common Stock or Class B Common Stock.

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Item 6. Selected Financial Data.

For a more detailed discussion of 2001 through 2003, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, on pages 31 through 38 of this report and Item 8, Financial Statements and Supplementary Data, on pages 39 through 55 of this report.

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    All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years.

Overview

    Moog is a leading worldwide designer and manufacturer of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and industrial markets. In 2003, approximately 47% of the Company’s sales were related to global military defense or government funded programs. The Company has three operating segments.

    Aircraft Controls designs and manufactures technologically advanced flight and engine controls for manufacturers of military and commercial aircraft. Moog supplies flight controls for major, in-production military aircraft, including the U.S. Navy’s F/A-18E/F Super Hornet fighter aircraft, the V-22 Osprey tiltrotor aircraft and the F-15 Eagle. The Company is the contract lead for developing flight controls for the System Development and Demonstration phase of the F-35 Joint Strike Fighter program, teaming with Parker Hannifin, Hamilton Sundstrand and Curtiss-Wright. Lockheed Martin is the prime contractor on the F-35, the next generation fighter aircraft to be used by the U.S. Air Force, Navy and Marine Corps and the U.K. Royal Navy and Royal Air Force. The Company is a supplier to both commercial large body aircraft manufacturers, The Boeing Company and EADS, and business aircraft manufacturers including Raytheon Company and Bombardier Inc. Aftermarket sales, including repairs and spare parts, represented 35% of Aircraft Controls sales in 2003.

    Space Controls designs and manufactures controls and systems that control the flight, positioning or thrust of tactical and strategic missiles, launch vehicles, satellites and NASA’s Space Shuttle. Customers include Lockheed Martin Corporation, Boeing, Alliant Techsystems Inc., Astrium Ltd. and Raytheon. Moog participates on tactical missile programs such as Maverick, VT-1, Hellfire and TOW, missile defense programs such as the Ground-Based Midcourse Defense program, or GMD, Minuteman, and the Atlas and Delta Evolved Expendable Launch Vehicles.

    Industrial Controls designs and manufactures hydraulic and electric controls used in a variety of industrial applications. Product applications include plastic injection and blow molding machines, steam and gas turbines, steel rolling mills, fatigue testing machines, motion simulators, metal forming and gun and turret positioning and ammunition-loading systems on combat vehicles.

    On September 16, 2003, the Company completed the offering and sale of 2,012,500 shares of Class A Common Stock at $38 per share. The Company used the net proceeds of $72 million to pay a portion of the $158 million purchase price of the Company’s September 30, 2003 acquisition of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. Poly-Scientific is a manufacturer of motion control and data transmission devices, and its principal products are electrical and fiber optic slip rings, brushless D.C. motors and electromechanical actuators. Poly-Scientific had sales of approximately $132 million for its year ended December 31, 2002.

Critical Accounting Policies - Estimates or Judgments

    The Company’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management’s application of accounting policies, which are discussed in Note 1 to the Consolidated Financial Statements in Item 8 of this report. The critical accounting policies were reviewed with the Audit Committee of the Company’s Board of Directors.

    Revenue Recognition on Long-Term Contracts. In 2003, 41% of the Company’s sales were accounted for using the percentage of completion (cost-to-cost) method of accounting for long-term contracts which recognizes sales and costs as work is performed in advance of the delivery of the product. The remaining 2003 sales were recognized when the risks and rewards of ownership and title to the product transferred to the customer, principally as units were shipped.

    The percentage of completion (cost-to-cost) method of accounting is used primarily on the Company’s aircraft and space contracts, which typically have longer performance cycles, resulting in the matching of sales with costs as they are incurred throughout the duration of the contract.

    Percentage of completion (cost-to-cost) accounting for long-term contracts requires a disciplined cost estimating system in which all relevant functions of the business are involved. The Company believes it has adequate systems and procedures that result in reasonably dependable estimates of extent of progress toward completion, contract revenues and contract costs by contract. The cost estimates rely on engineering and manufacturing assessments of progress achieved against technical or performance milestones, and are validated using applicable product or project cost history.

    Contract prices, or contract values, are generally based on the terms and conditions specified in the contract or in the related customer purchase orders. However, the effort required under a contract can change during the performance period. These changes are typically in the form of a directed scope change from the customer, or a claim by the Company for an adjustment to the contract value based upon requirements that are different from the contract’s baseline requirements. The Company includes an estimate of scope changes or claims in the contract value for purposes of revenue recognition only when that amount can be reliably estimated and when realization is considered probable. At September 27, 2003, the amount of unnegotiated scope changes or claims included in contract values on firm fixed price contracts which are used in the determination of 2003 sales and operating profit was not material.

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    The Company reviews contract cost estimates and contract values, including unnegotiated claims and scope changes, on a quarterly basis. As a result of these reviews, sales and costs of sales are recorded in the statement of earnings to reflect the most current assessment of each contract’s percentage of completion.

    Contract Loss Reserves. For contracts for which the estimated costs at completion, exclusive of allocated general and administrative period costs, exceed the estimated contract value, a loss reserve for the entire remaining loss is recorded when the loss becomes known. 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 customers’ specifications. The determination of contract loss reserves is made on a specific contract basis and, therefore, no general reserves are maintained.

    Once established, the amount of the loss reserve is reviewed at least quarterly and adjusted, if necessary, based on progress made and on updated cost estimates including a current assessment of any remaining risks.

    Provisions for losses on contracts are reflected in the statement of earnings as additional cost of sales. As costs are incurred, the previously established contract loss reserve included in current liabilities is reduced. At September 27, 2003, contract loss reserves were $16.1 million.

    Reserves for Inventory Valuation. At September 27, 2003, inventories represented approximately 17% of total assets and 31% of current assets. Inventories are stated at lower-of-cost-or-market with cost determined primarily on the first-in, first-out method of valuation.

    The Company records valuation reserves to provide for slow-moving or obsolete inventory by using both a formula-based method that increases the valuation reserve as the inventory ages and, supplementally, a specific identification method. Determining the appropriate reserve for inventory valuation requires significant knowledge of the business. Management considers overall inventory levels in relation to firm customer backlog as well as forecasted demand including consideration of aftermarket sales. Inventory obsolescence reserves also consider issues such as low demand or technological obsolescence. The Company’s inventory valuation reserve represents a reduction in inventory cost which creates a new cost basis of accounting. The reserve amount is maintained in a general ledger account separate from the gross inventory cost. Once a reserve is established for an inventory item, it is removed upon the subsequent use or disposition of the item. At September 27, 2003, the reserve for inventory valuation was $34.6 million, or 16.9% of gross inventories.

    Reviews for Impairment of Goodwill. The Company reviews goodwill for impairment at least annually at the reporting unit level. At September 27, 2003, the Company had $195 million of goodwill.

    In testing for impairment of goodwill, companies are required to allocate goodwill among reporting units, estimate fair values of those reporting units and determine their carrying values. The Company’s reporting units are the operating segments used for segment reporting: Aircraft Controls, Space Controls and Industrial Controls. This determination was made based on the similarities of the components of these groups as well as the components not qualifying as businesses themselves.

    The process of evaluating the Company’s goodwill for potential impairment is subjective and requires significant estimates. These estimates include judgments about future cash flows of the reporting units and allocations of commonly shared assets to the reporting units, as well as the estimates of the cost of capital used to discount future cash flows.

    Based on the discounted present values of the projected cash flows, the fair value of each reporting unit exceeded the respective carrying value resulting in no impairment of the Company’s goodwill.

    Pension Assumptions. The Company maintains defined benefit plans in six countries covering substantially all employees. The U.S. plans represent 81% of the consolidated projected benefit obligation at September 27, 2003. The accounting for these plans is based in part on certain assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used.

    The assumption for return on assets reflects the average rate of earnings expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumed return on assets of 8.5% used in 2003 for the U.S. plans was determined with reference to the fund’s investment mix at September 28, 2002 of 70% equities and 30% fixed income securities, along with forecasted rates of return on these types of securities. The assumption took the market’s poor performance in 2001 and 2002 into consideration. Had the Company selected a return on assets that was one percentage point lower, pension expense for U.S. plans for 2003 would have been $2 million higher than the amount recorded.

    In addition to the return on assets assumption, assumptions for the rate of compensation increase and discount rate were made. The rate of compensation increase used in determining the 2003 pension cost was 3.8% for the U.S. plans and was determined using a long-term projection for inflation in addition to real wage increase assumptions. The discount rate used in determining the 2003 pension cost was 6.9% for U.S. plans. Consistent with prior years, the Company used the AA corporate bond rate as the discount rate for U.S. plans. At September 27, 2003, the discount rate used to value the projected benefit obligation was 6.5%.

    Deferred Tax Asset Valuation Allowances. At September 27, 2003, the Company had total gross deferred tax assets of $66.0 million. These assets relate principally to domestic liabilities or asset valuation reserves including pension and vacation accruals, inventory obsolescence, bad debt reserves and contract loss reserves. Based on recent historical earnings performance and current projections, management believes that a valuation allowance is not required against the domestic portion of these deferred tax assets, which totaled $53.6 million at September 27, 2003.

    Deferred tax assets recorded at September 27, 2003 by the Company’s foreign subsidiaries totaled $12.4 million, of which $4.8 million relates to net operating losses in Luxembourg. The Company had a $3.7 million valuation allowance recorded against this asset at September 27, 2003 representing 78% of the gross

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asset related to net operating losses. Management believes this reserve is adequate after considering recent operating performance, future financial projections, tax planning strategies and the allowable tax carryforward period. Other than the deferred tax assets related to net operating losses in Luxembourg and based on recent historical earnings performance and current projections, management believes that a valuation allowance is not required against the other $7.6 million of the foreign portion of deferred tax assets.

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Results of Operations

2003 Compared to 2002

    Consolidated. Net sales for 2003 increased 5% to $755 million from $719 million in 2002. Sales increased by $45 million in Aircraft Controls and $14 million in Industrial Controls, while sales decreased by $23 million in Space Controls.

    Cost of sales as a percentage of net sales increased to 68.9% in 2003 from 67.9% in 2002. The increase in cost of sales as a percentage of net sales is primarily attributable to lower sales levels and an unfavorable product mix in Space Controls and higher sales on the F-35 Joint Strike Fighter aircraft program which is a cost-plus contract with modest margins, offset partially by benefits from cost savings initiatives within Industrial Controls.

    Estimated costs to complete are reviewed quarterly for contracts accounted for under the percentage of completion (cost-to-cost) method of accounting. For those contracts with anticipated losses at completion, a contract loss reserve is recorded when the loss becomes known. Additions to contract loss reserves are reflected in the statement of earnings in cost of sales. Additions to contract loss reserves were $17 million in 2003 compared to $11 million in 2002. Half of the additions in 2003 relates to increased cost estimates on business jet development contracts. The balance of the additions primarily relates to other aircraft development contracts. During 2003, $15 million of contract loss reserves, primarily on business jet development contracts, were utilized as costs were incurred and were reflected as reductions to the previously established contract loss reserves, compared to $13 million in 2002.

    Reserves for inventory valuation are recorded for obsolete or slow-moving inventory. Additions to reserves were $8 million in 2003 compared to $9 million in 2002. Reductions to reserves resulting from inventory being disposed were $2 million in 2003 and in 2002. Most of the inventory disposed had been previously reserved.

    Research and development expenses decreased to $30 million in 2003 from $33 million in 2002. The lower level of research and development primarily relates to completion of a pump and motor design for military aircraft applications and controls for unmanned combat aircraft, both which peaked in 2002.

    As a percentage of net sales, selling, general and administrative expenses increased to 17.0% in 2003 from 16.3% in 2002. The increase primarily relates to commissions, personnel related costs, travel costs, the June 2003 Paris Air Show, professional services and bid and proposal costs related primarily to the Boeing 7E7.

    Interest expense decreased to $17 million in 2003 from $26 million in 2002. The decrease in interest expense is primarily due to lower interest rates including the effects of the Company’s use of its available credit facility to redeem its $120 million 10% senior subordinated notes on May 1, 2003.

    Other expense of $1 million in 2003 includes $1.2 million for the write off of deferred debt issuance costs related to the $120 million 10% senior subordinated notes that were redeemed at par on May 1, 2003. Other expense is net of a third quarter $0.7 million gain on a sale of land.

    The Company’s effective tax rate was 26.7% in 2003 compared to 29.0% in 2002. The decrease in the effective tax rate resulted from state investment tax credits realized in 2003, benefits related to the 2002 reorganization of the Company’s European operations and to a higher level of additional export tax benefits that the Company claimed on amended U.S. tax returns. These benefits were partially offset by a $1 million valuation allowance adjustment related to deferred tax assets associated with net operating losses in Luxembourg.

    In 2003, net earnings increased 14% to $43 million from $38 million in 2002. Diluted earnings per share, or EPS, increased 10% to $2.76 in 2003 from $2.50 in 2002. Diluted weighted average shares outstanding were higher in 2003 compared to 2002 due to the exercise of options, the sale of Class A Common Stock on September 16, 2003 and a higher dilutive effect of outstanding stock options related to the higher price of Class A Common Stock.

    Aircraft Controls. Net sales in Aircraft Controls increased 12% to $404 million in 2003 from $359 million in 2002. Military aircraft sales increased $64 million to $266 million, while commercial aircraft sales decreased $19 million to $138 million. The increase in military aircraft sales is primarily due to a $43 million increase in sales for primary flight controls and the leading edge flap actuation system on the F-35 Joint Strike Fighter development program and a $16 million increase on the V-22 Tilt Rotor Osprey related to the replacement of swashplate actuators to the customer’s latest specifications. The net increase on other military aircraft programs was $5 million, and included increases in sales of controls for military engines and subassemblies for the F-15 in Japan. The decrease in commercial aircraft sales is primarily due to a $22 million decrease in Boeing OEM sales due to lower production rates.

    Operating margins for Aircraft Controls decreased to 17.4% in 2003 from 18.2% in 2002. The decrease in operating margins is primarily attributable to higher sales on the F-35 Joint Strike Fighter program which is a cost-plus contract with modest margins.

    Twelve-month backlog for Aircraft Controls was $242 million at September 27, 2003 compared to $239 million at September 28, 2002. The increase is due to increases in backlog on military programs including the F-35 Joint Strike Fighter, partially offset by decreases on commercial aircraft programs.

    Space Controls. Net sales in Space Controls decreased 21% to $84 million in 2003 from $107 million in 2002. The lower level of sales primarily relates to decreases of $11 million in controls for satellites reflecting the soft commercial satellite market and last year’s completion of the Gravity Probe B program, $10 million on tactical missile programs including the AGM-142 Popeye, Hellfire and VT1, and $6 million on the Crew Return Vehicle. These decreases were partially offset by an increase of $4 million on the Ground-based Midcourse Defense program.

    Operating margins for Space Controls decreased to 0.6% in 2003 from 11.5% in 2002. The decrease in margins primarily relates to the decrease in sales, most significantly in sales of controls for satellites. To a lesser extent, the decrease in margins is attributable to cost overruns on commercial satellite programs and a less favorable product mix. Operating margins were a 4.0% loss in the fourth quarter of 2003 compared to a 5.6% profit in the fourth quarter of 2002.

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The decrease in fourth quarter operating margins primarily resulted from a 13% decrease in fourth quarter sales.

    Twelve-month backlog for Space Controls was $59 million at September 27, 2003 and at September 28, 2002.

    Industrial Controls. Net sales in Industrial Controls increased 6% to $267 million in 2003 from $253 million in 2002. The increase occurred despite a $17 million decrease in sales of controls for turbines primarily in the U.S., with other markets, primarily in Europe and the Pacific region, generating a net increase of $31 million, including a $23 million beneficial impact related to stronger foreign currencies relative to the U.S. dollar. Including the currency effect, the sales growth primarily consists of increases of $12 million in sales of controls for plastics machinery, $6 million through distributors, $5 million in combat controls for military vehicles, $5 million in controls for presses and metal forming equipment and $3 million in aftermarket.

    Operating margins for Industrial Controls increased to 6.3% in 2003 from 5.5% in 2002. The improvement in margins is primarily a result of benefits realized from cost reduction initiatives and a more favorable product mix.

    Twelve-month backlog for Industrial Controls was $67 million at September 27, 2003 and at September 28, 2002. Excluding the impact of foreign currencies, backlog decreased $7 million from a year ago primarily related to the timing of combat controls orders for U.S. programs.

2002 Compared to 2001

    References to cost of sales as a percentage of net sales, net earnings, diluted EPS and operating margins in the following discussion of results of operations for 2002 compared to 2001 reflect the exclusion of goodwill amortization for 2001. Goodwill amortization expense was $7 million in 2001.

    Consolidated. Net sales for 2002 increased 2% to $719 million from $704 million in 2001. Sales increased by $19 million in Aircraft Controls and $4 million in Space Controls, while sales decreased by $8 million in Industrial Controls. Net sales for 2002 included incremental sales of $14 million from industrial and space-related acquisitions.

    Cost of sales as a percentage of net sales decreased to 67.9% in 2002 from 69.1% in 2001. The decrease in cost of sales as a percentage of net sales is primarily due to a favorable change in product mix towards more profitable military aircraft sales, in particular aftermarket sales. In 2002, sales of controls for military aircraft represented 28% of net sales compared to 22% of net sales in 2001. In addition, operating losses narrowed on business jets, in part due to a favorable $2 million adjustment in the third quarter of 2002 related to progress made on certain scope change negotiations. These improvements were partially offset by weak margins for industrial products due primarily to lower sales.

    Additions to contract loss reserves were $11 million in 2002, mostly related to unforeseen expanded work requirements on certain firm fixed price commercial business jet development contracts. The Company also recorded $1 million of contract loss reserves related to acquisitions as part of purchase accounting.

    During 2002, $13 million of contract loss reserves, primarily related to business jet development contracts, were utilized as costs were incurred and were reflected as reductions to the previously established contract loss reserve included in current liabilities. Contract loss reserves were also reduced by $2 million related to progress made on certain scope change negotiations for business jet development contracts. The net decrease in contract loss reserves was $3 million in 2002, compared to a net decrease of $4 million in 2001.

    The net increase in reserves for inventory valuation was $7 million in 2002, compared to a net increase of $2 million in 2001. Additions to the reserve in 2002 were $2 million higher compared to 2001. The increase is primarily within the Aircraft Controls segment, and to a lesser extent, the Industrial Controls segment where product specifications or projected future demand have changed during the year resulting in inventory levels that, in management’s estimation, are in excess of amounts needed to fulfill existing and future sales requirements. Reductions to the reserve resulting from inventory being disposed were $2 million less in 2002 as compared to 2001, primarily in the Space Controls segment. Most of this inventory had been previously reserved and the reserve balance was relieved when the inventory was disposed.

    Research and development expenses increased to $33 million in 2002 from $26 million in 2001. The higher levels of research and development related primarily to a variety of Aircraft Controls initiatives, including a new flap actuation system for the business jet market, a new pump and motor design for military aircraft applications, controls for unmanned combat aircraft and active vibration controls for helicopters.

    As a percentage of net sales, selling, general and administrative expenses increased to 16.3% in 2002 from 15.7% in 2001. The increase is primarily attributable to higher personnel-related costs, including costs related to a stock-based deferred compensation plan for certain officers and directors, and higher professional fees.

    Interest expense decreased to $26 million in 2002 from $32 million in 2001. The decrease in interest expense is due to lower interest rates and reduced debt levels, each contributing approximately equally to the decrease. The reduced debt levels are primarily related to $39 million of net proceeds from the November 2001 equity offering in addition to $30 million of reduced net debt levels related to cash flow from operations.

    Other expense was $1 million in 2002 compared to zero in 2001. The increase is primarily due to higher foreign currency exchange losses in 2002.

    The Company’s effective tax rate was 29.0% in 2002 compared to 33.5% in 2001. The decrease in the effective tax rate relates to additional export tax benefits that the Company claimed in 2002 on amended 1997, 1998 and 2000 U.S. tax returns and a reorganization of the Company’s European operations. This decrease was partially offset by a first quarter charge related to decreasing a deferred tax asset in Europe for a change in a statutory tax rate enacted in 2002. During the fourth quarter, additional tax benefits related to the distribution of foreign earnings were offset by a valuation allowance adjustment related to deferred tax assets associated with net operating losses in Luxembourg.

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    In 2002, net earnings increased 16% to $38 million from $32 million in 2001. Diluted EPS increased 2% to $2.50 in 2002 from $2.45 in 2001. Diluted weighted average shares outstanding were higher in 2002 compared to 2001 primarily due to the sale of Class A Common Stock on November 20, 2001.

    Aircraft Controls. Net sales in Aircraft Controls increased 6% to $359 million in 2002 from $340 million in 2001. The increase is primarily due to a $20 million increase in sales on fighter aircraft programs, an $18 million increase in military aftermarket sales, related primarily to the F-18 fighter aircraft and the Black Hawk helicopter, and a $4 million increase in sales to OEMs for the Black Hawk and Sea Hawk helicopter programs. The $20 million increase in sales on fighter aircraft programs consists primarily of $10 million on the F-35 Joint Strike Fighter, $5 million on the F-15 and $3 million on the F/A-18E/F programs. These increases were partially offset by decreases of $12 million in Boeing OEM sales resulting from lower build rates, $7 million, or 12%, in commercial aftermarket sales related to the reduced number of commercial airplane flights, $2 million in flight controls for Airbus and $2 million related to business jets.

    Operating margins for Aircraft Controls increased to 18.2% in 2002 from 15.6% in 2001. The increase is primarily a result of the higher levels of military aftermarket sales, narrowed operating losses on business jets, including a favorable $2 million adjustment in the third quarter of 2002 related to progress on certain scope change negotiations, and better margins on certain fighter aircraft as production rates increase.

    Twelve-month backlog for Aircraft Controls was $239 million at September 28, 2002 compared to $223 million at September 29, 2001. The increase is due to an increase on the F-35 Joint Strike Fighter, partially offset by a decrease for commercial aircraft.

    Space Controls. Net sales in Space Controls increased 4% to $107 million in 2002 from $103 million in 2001. An $8 million increase during the first nine months of 2002 was partially offset by a decrease of $4 million in the fourth quarter of 2002 resulting from lower sales of controls for tactical missiles and, to a lesser extent, satellites. The increase in sales for the year is primarily due to increases of $5 million for satellite controls, all related to acquisitions, $3 million on the Space Shuttle refurbishment effort and $3 million on the Hellfire tactical missile program. These increases were partially offset by a $7 million decrease in sales of controls for launch vehicles related to the wind down on the Titan IV program and lower development activity on Evolved Expendable Launch Vehicle programs.

    Operating margins for Space Controls decreased to 11.5% in 2002 from 12.9% in 2001. The decrease in margins is primarily related to poor operating performance on contracts associated with the PerkinElmer acquisition in 2001 and lower sales in the fourth quarter of 2002 that resulted in fourth quarter operating margins of 5.6%. These decreases were partially offset by increases due to higher volume and better cost experience on the Space Shuttle refurbishment effort and favorable cost performance on the Crew Return Vehicle, which was nearing completion, and tactical missile programs such as Hellfire, TOW and AGM-142 Popeye.

    Twelve-month backlog for Space Controls was $59 million at September 28, 2002 compared to $72 million at September 29, 2001. The decrease primarily relates to programs that were near completion such as the Crew Return Vehicle and reduced orders for satellites and tactical missiles such as the AGM-142 Popeye, which was completed, and the Hellfire missile program that had entered a production break.

    Industrial Controls. Net sales in Industrial Controls decreased 3% to $253 million in 2002 from $261 million in 2001. The decrease in sales associated with the global industrial economic slowdown included a $9 million decrease for controls for motion simulators, a $6 million decrease for controls for plastic injection molding machinery, a $5 million decrease for electric drives and a $5 million decrease for turbine controls. These decreases were partially offset by an $11 million increase in sales for combat controls and $9 million of incremental sales from acquisitions.

    Operating margins for Industrial Controls decreased to 5.5% in 2002 from 9.1% in 2001. The decrease in margins resulted from low volume in industrial markets and an unfavorable product mix weighted more towards lower margin standard products.

    Twelve-month backlog for Industrial Controls was $67 million at September 28, 2002 compared to $69 million at September 29, 2001. Excluding the impact of the acquisition of TSS and foreign currency exchange, backlog decreased by $5 million primarily due to generally soft industrial markets.

Financial Condition and Liquidity

    On March 3, 2003, the Company increased its revolving and term loan credit facility to $390 million. The term loan portion of the credit facility, which had a balance of $41 million at December 31, 2002, was increased to $75 million with the difference reducing the outstanding balance on the revolving portion of the facility to $90 million. Interest on outstanding credit facility borrowings is based on LIBOR plus the applicable margin, which increased 25 basis points and is currently 175 basis points. The credit facility expires on March 31, 2008 and requires quarterly principal payments on the term loan of $3.75 million. The credit facility is secured by substantially all of the Company’s U.S. assets. At September 27, 2003, the term loan had a balance of $67.5 million and the revolver had a balance of $175 million.

    The credit facility contains various covenants. The covenant for minimum consolidated net worth, defined as the sum of capital stock and additional paid-in capital plus retained earnings, adjusts over the term of the facility and was $250 million as of September 27, 2003. The covenant for minimum interest coverage ratio, defined as the ratio of adjusted EBITDA to total interest expense for the most recent four quarters, is 3.0. The covenant for minimum fixed charge coverage ratio, defined as the ratio of (i) adjusted EBITDA minus capital expenditures to (ii) the sum of interest expense, income tax expense and regularly scheduled principal payments on debt, all of the most recent four quarters, is 1.2. The covenant for the maximum leverage ratio, defined as the ratio of total debt (including letters of credit) less cash to adjusted EBITDA for the most recent four quarters, is 3.5. The covenant for maximum capital expenditures is $30 million in any one fiscal year.

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Adjusted EBITDA is defined as (i) the sum of net income, interest expense, income tax expense, depreciation expense, amortization expense and other non-cash items reducing net income minus (ii) other non-cash items increasing net income. At September 27, 2003, the Company was in compliance with all covenants.

    On May 1, 2003, the Company completed the early redemption of the $120 million 10% senior subordinated notes at par. The redemption was financed by using the unused portion of the credit facility with interest at LIBOR plus 175 basis points.

    On September 16, 2003, the Company completed the offering and sale of 2,012,500 shares of Class A Common Stock at a price of $38 per share. The Company used the net proceeds of approximately $72 million to pay a portion of the purchase price of the Company’s September 30, 2003 acquisition of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. After completion of the offering and sale of Class A Common Stock on September 16, 2003, the Company’s shelf registration statement filed on August 1, 2003 allows the Company to register an additional $43.5 million of Class A Common Stock or debt securities.

    At September 27, 2003, the Company had $242 million of unused borrowing capacity, including $138 million from the credit facility and $80 million from a bridge loan that allows for a one-time draw to finance the Poly-Scientific acquisition. The Company’s $77 million of cash at September 27, 2003 was unusually large as most of the $72 million of proceeds from the sale of Class A Common Stock on September 16, 2003 remained in cash until the acquisition of Poly-Scientific on September 30, 2003. The $158 million purchase price of Poly-Scientific was paid on September 30, 2003 by increasing borrowings on the credit facility by $80 million, using cash of $57 million and by borrowing $21 million on the bridge loan. After the acquisition, the Company’s unused borrowing capacity was reduced to $82 million.

    Total debt, net of cash, was $179 million at September 27, 2003, or $337 million after considering the September 30, 2003 acquisition, compared to $301 million at September 28, 2002. The reduction in net debt from September 28, 2002 to September 27, 2003 primarily relates to $72 million of net proceeds from the sale of Class A Common Stock and $49 million of cash generated by operations net of capital expenditures.

    Long-term debt to capitalization was 35% at September 27, 2003 and 42% after the acquisition on September 30, 2003, compared to 49% at September 28, 2002.

    Cash provided by operating activities was $77 million in 2003 compared to $59 million in 2002. The increase in cash from operations was primarily due to the increase in earnings adjusted for non-cash charges, increased customer advances and a tax refund primarily related to significant deductions for pension contributions and accelerated depreciation, offset by other changes in working capital.

    Net property, plant and equipment was $208 million at September 27, 2003 compared to $203 million at September 28, 2002. Capital expenditures in 2003 were $28 million compared with depreciation and amortization of $30 million. Capital expenditures in 2002 were $27 million compared with depreciation and amortization of $26 million in 2002. Capital expenditures in 2004 are not expected to exceed $30 million.

    The Company believes its cash on hand, cash flows from operations and available borrowings under short and long-term lines of credit will continue to be sufficient to meet its operating needs.

Off Balance Sheet Arrangements

    Under current accounting pronouncements, the Company does not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on its results of operations or financial condition.

Contractual Obligations and Commercial Commitments

    The following table summarizes significant contractual obligations and commercial commitments of the Company at September 27, 2003:

Recent Accounting Standards

     Effective October 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Company adopted the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities," effective for exit or disposal activities initiated after December 31, 2002. Effective in the first quarter of 2003, the Company adopted and is applying the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation –Transition and Disclosure, an amendment of FASB Statement No. 123." As permitted by SFAS No. 148, the Company has not elected to adopt its recognition provisions. Effective January 1, 2003, the Company adopted the provisions of FASB Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Company adopted the provisions of SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," generally effective for contracts entered into or

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modified after June 30, 2003. The Company adopted the provisions of SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," generally effective for financial instruments entered into or modified after May 31, 2003. The adoption of these standards did not have a material impact on the Company’s results of operations or financial condition.

    In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which addresses consolidation of variable interest entities (VIEs). VIEs are entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks and rewards. Companies must apply the provisions of FIN 46 prospectively for all VIEs created after January 31, 2003 and must apply the provisions of FIN 46 in reporting periods ending after December 15, 2003 for all VIEs created before February 1, 2003. The Company is in the process of evaluating the effect that this standard will have on its results of operations and financial condition.

Outlook

    During its November 7, 2003 conference call for its year end earnings release, the Company provided the following outlook for fiscal 2004. Net sales in 2004 are forecasted to grow to between $920 million and $940 million, a 22% to 25% increase over 2003. Sales are expected to grow as a result of the Poly-Scientific acquisition in addition to experiencing growth in each segment. Moog’s Components segment (previously referred to as Poly-Scientific) is forecasted to contribute $140 million in sales during 2004. Aircraft Controls sales are expected to increase 1% to $408 million, reflecting an increase in military aftermarket sales resulting from the release of funding for programs on which the Company participates. The increase is expected to be partially offset by decreases on the V-22 Osprey and F-15 fighter aircraft programs, both of which provided strong sales in 2003. Space Controls sales are expected to increase 5% to $89 million related to increases on the Space Shuttle as the program prepares to resume launches, strategic missiles related to Minuteman III refurbishments, and tactical missiles for which the Company has a new order for Maverick missile hardware. Decreases in missile defense and launch vehicles are expected to partially offset increases in sales within Space Controls. Industrial Controls sales are expected to increase between 6% and 14%, or to between $283 million and $303 million, with the range partially reflecting potential volatility of major currencies such as the euro and yen.

    Operating margins for 2004 are expected to be between 11.3% and 11.5%. Aircraft Controls operating margins are expected to decrease from 2003 to 16.2%, reflecting a slightly less favorable mix. Space Controls operating margins are expected to remain around break even. Industrial Controls operating margins are expected to increase over 2003 to between 8% and 9% based on product mix. Operating margins for Moog's Components segment are expected to be 10.5% after considering amortization of intangible assets and the short term effect of the opening balance sheet write up of inventory.

    Net earnings for 2004 are expected to be between $54 million and $58 million. Diluted earnings per share for 2004 are expected to be between $3.10 and $3.30, representing an increase between 12% and 20% over 2003. Due to the sale of 2,012,500 shares of Class A Common Stock on September 16, 2003, weighted average shares outstanding will be higher in 2004 than in 2003. Net earnings and diluted earnings per share are expected to increase between 10% and 12% in each of the first two quarters of 2004 compared to the respective quarters of 2003 and between 14% and 26% in the third and fourth quarters of 2004 compared to the third and fourth quarters of 2003.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

    The Company, in the normal course of business, has exposures to interest rate risks from its long-term debt obligations and foreign exchange rate risk with respect to its foreign operations and from foreign currency transactions. To minimize these risks, the Company may enter into derivative instruments such as interest rate swaps and forward contracts. The Company does not hold or issue financial instruments for trading purposes. For the year ended September 27, 2003, the Company’s exposure to derivatives was primarily limited to interest rate swaps that were designated and qualified as cash flow hedges.

    The Company’s borrowings under variable interest rate facilities were $251 million at September 27, 2003. In order to provide for interest rate protection, the Company has interest rate swap agreements. Of the $180 million notional amount of interest rate swaps outstanding at September 27, 2003, $90 million matures in the second quarter of 2005, $55 million matures in the second quarter of 2006 and $35 million matures in the first quarter of 2007. Based on the current applicable margin, the interest rate swaps effectively convert these amounts of variable-rate debt to fixed-rate debt at 3.8%, 4.3% and 4.1%, respectively, through their maturities, at which times the interest will revert back to a variable rate based on LIBOR plus the applicable margin. If interest rates had changed by one percentage point, the impact on consolidated interest expense from the Company’s variable-rate debt would have been approximately $1 million in 2003.

    Although the majority of the Company’s sales, expenses and cash flows are transacted in U.S. dollars, the Company does have some market risk exposure with respect to changes in foreign currency exchange rates primarily as it relates to the value of the U.S. dollar versus the euro, the Japanese yen and the British pound. If average annual foreign exchange rates were to collectively weaken or strengthen against the U.S. dollar by 10%, net earnings would be reduced or increased, respectively, by approximately $2 million related to currency exchange rate translation exposures and $1 million related to pressures on operating margins for products sourced in non-U.S. countries.

    The Company uses on a limited basis forward contracts to reduce fluctuations in foreign currency cash flows related to third party raw material purchases, intercompany product shipments and intercompany loans and to reduce fluctuations in the value of foreign currency investments in, and long-term advances to, subsidiaries. At September 27, 2003, there were no significant contracts outstanding.

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See accompanying Notes to Consolidated Financial Statements.

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Note 1 - Summary of Significant Accounting Policies

    Consolidation: The consolidated financial statements include the accounts of Moog Inc. and all of its U.S. and foreign subsidiaries (the Company). All intercompany balances and transactions have been eliminated in consolidation.

    Fiscal Year: The Company’s fiscal year ends on the last Saturday in September. The consolidated financial statements include 52 weeks for each of the years ended September 27, 2003, September 28, 2002 and September 29, 2001.

    Revenue Recognition: Revenue under long-term contracts, representing 41% of fiscal 2003 sales, are accounted for by the percentage of completion (cost-to-cost) method of accounting. Under this method, revenue is recognized as the work progresses toward completion as determined by the ratio of costs incurred to date compared to estimated costs at completion, multiplied by the total estimated contract revenue. For contracts with anticipated losses at completion, a provision is recorded when the loss becomes known. 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. Amounts representing contract claims or change orders are included in the estimate of contract values only when they can be reliably estimated and realization is considered probable.

    The remainder of the Company’s revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the customer, principally as units are shipped. These sales are primarily associated with the Company’s industrial and after-market products or services.

    Operating Cycle: Consistent with industry practice, aerospace 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.

    Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

    Cash and Cash Equivalents: All highly liquid investments with an original maturity of three months or less are considered cash equivalents.

    Inventories: Inventories are stated at the lower-of-cost-or-market with cost determined primarily on the first-in, first-out (FIFO) method of valuation.

    Property, Plant and Equipment: Property, plant and equipment are stated at cost. Plant and equipment are depreciated principally using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings, 15 years for building improvements, 12 years for furniture and fixtures, 10 years for machinery and equipment, 8 years for tooling and test equipment and 5 years for computer hardware. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the asset, whichever is shorter.

    Goodwill and Acquired Intangible Assets: On October 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 141, “Business Combinations.” The Company ceased amortizing goodwill on that date. No reclassification of identifiable intangible assets apart from goodwill was necessary as of a result of the adoption of these standards. Prior to the adoption of SFAS No. 142, the Company amortized goodwill on a straight-line basis over periods up to 40 years. The Company tests goodwill for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment test consists of comparing the fair value of a reporting unit with its carrying amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss would be recognized for the carrying amount of goodwill in excess of its implied fair value.

    Acquired identifiable intangible assets primarily consist of customer-related intangible assets, including non-compete agreements, and technology-related intangible assets. Acquired identifiable intangible assets are recorded at cost and are amortized over their estimated useful lives. There are no identifiable intangible assets with indefinite lives at September 27, 2003.

    Impairment of Long-Lived Assets: Long-lived assets, including acquired identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss using discounted cash flows.

    Product Warranties: In the ordinary course of business, the Company warrants its products against defect in design, materials and workmanship over various time periods. Changes in the warranty accrual are as follows:

    Foreign Currency Translation: Foreign subsidiaries’ assets and liabilities 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 the year.

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    Financial Instruments: The Company’s financial instruments consist primarily of cash and cash equivalents, notes payable, long-term debt and interest rate swaps. The carrying values for the Company’s financial instruments approximate fair value. The Company does not hold or issue financial instruments for trading purposes.

    The Company carries derivative instruments on the balance sheet at fair value, determined by reference to quoted market prices. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. The Company’s use of derivative instruments is generally limited to cash flow hedges of certain interest rate risks.

    Earnings Per Share: Basic and diluted weighted-average shares outstanding are as follows:

    Preferred stock dividends are deducted from net earnings to calculate income available to common stockholders for basic earnings per share.

    On September 16, 2003, the Company completed the sale of 2,012,500 shares of Class A Common Stock. On November 20, 2001, the Company completed the sale of 1,980,000 shares of Class A Common Stock.

    On September 21, 2001, the Company distributed Class A and Class B Common Stock in a three-for-two stock split, effected in the form of a 50% stock distribution, to shareholders of record as of September 7, 2001. Share and per share amounts have been restated accordingly.

    Stock-Based Compensation: The Company accounts for stock options under the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25. The exercise price equals the market price of the underlying common shares on the date of grant and, therefore, no compensation expense is recognized. The following table illustrates the effect on net earnings and earnings per share as if the fair value method had been applied to all outstanding awards in each period.

    The weighted-average fair value of options granted during 2003, 2002 and 2001 was $13.09, $10.34 and $8.46 per option, respectively. Fair value was estimated at the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions: risk-free interest rates of 3.9%, 4.3% and 5.8% for 2003, 2002 and 2001, respectively, expected volatility of 36% for 2003 and 2002 and 33% for 2001, expected life of 7.1 years, 5.8 years and 7.5 years for 2003, 2002 and 2001, respectively, and expected dividend yield of 0%.

    Accounting Standards Not Yet Adopted: In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which addresses consolidation of variable interest entities (VIEs). VIEs are entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks and rewards. Companies must apply the provisions of FIN 46 prospectively for all VIEs created after January 31, 2003 and must apply the provisions of FIN 46 in reporting periods ending after December 15, 2003 for all VIEs created before February 1, 2003. The Company is evaluating the effect that this standard will have on its results of operations and financial condition.

Note 2 - Acquisitions

    All of the Company’s 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.

    On March 29, 2002, the Company acquired 81% of the stock of Tokyo Precision Instruments Co. Ltd. (TSS) from the Mitsubishi Electric Corporation and other shareholders for approximately $600 in cash. TSS’s balance sheet, which is consolidated in the Company’s financial statements, included approximately $4,100 of net funded debt and $1,600 of cash, as of March 29, 2002. As of September 28, 2002 and September 27, 2003, the Company had acquired 98.8% of TSS for approximately $800 in cash. TSS is a manufacturer of high-performance industrial servo-valves, hydraulic systems and pneumatic components with annual sales of approximately $6,000. Goodwill resulting from this acquisition was approximately $2,400 and other intangible assets were approximately $1,000.

    On October 25, 2001, the Company purchased the net assets of the satellite and space product lines of the Electro Systems Division of Tecstar, Inc. for approximately $7,900 in cash. The acquired business of Tecstar’s Electro Systems Division is a manufacturer of electromechanical equipment for spacecraft with annual sales of approximately $6,000. Goodwill resulting from this acquisition was approximately $5,700 and other intangible assets were approximately $1,400.

    On June 8, 2001, the Company purchased the net assets of the space valve business of PerkinElmer Fluid Sciences, a division of PerkinElmer, Inc., for $6,000 in cash. This business is a designer and manufacturer of solenoid and pressure-operated valves for satellites, launch vehicles and manned space flight applications with annual sales of approximately $3,000. Goodwill resulting from this acquisition was approximately $5,200 and other intangible assets were approximately $600.

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    On February 1, 2001, the Company acquired the net assets of the radial piston pump business of Robert Bosch GmbH, including $1,500 of unfunded pension liabilities, for approximately $5,600 in cash. This business is a designer and manufacturer of hydraulic pumps used for a variety of industrial applications, in particular, injection molding machinery, with annual sales of approximately $20,000. Goodwill resulting from this acquisition was approximately $1,900.

    On January 19, 2001, the Company acquired the stock of Whitton Technology Limited in the U.K. and the industrial gas turbine assets of Whitton Technology Inc. in the U.S. for approximately $6,100 in cash and $900 in notes payable. Whitton is a designer and manufacturer of pumps and specialty products for producers of industrial power generating equipment with annual sales of approximately $7,000. Goodwill resulting from this acquisition was approximately $4,000 and other intangible assets were approximately $600.

    On November 15, 2000, the Company purchased the remaining 25% minority interest of Hydrolux Sarl, a Luxembourg manufacturer and designer of hydraulic power control systems for industrial machinery, and Moog-Hydrolux Hydraulic Systems, Inc. (Moog-Hydrolux) with combined annual sales of approximately $14,000 for approximately $1,400 in cash. On October 30, 1998, the Company acquired a 75% shareholding in Hydrolux Sarl and Moog-Hydrolux for $8,200 in cash, plus the assumption of $6,400 in debt. Goodwill resulting from this acquisition was approximately $3,300.

    On October 31, 2000, the Company purchased the net assets of the Vickers Electrics Division, an Italian manufacturer of high-performance electric drives with annual sales of approximately $17,000 from Aeroquip-Vickers S.p.A., an Eaton Corporation subsidiary, for approximately $10,300 cash. Goodwill resulting from this acquisition was approximately $1,500 and other intangible assets were approximately $200.

    On September 30, 2003, the beginning of the Company’s fiscal year 2004, the Company acquired the assets of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation, for approximately $158,000 in cash. Poly-Scientific is a manufacturer of motion control and data transmission devices and its principal products are electrical and fiber optic slip rings, brushless D.C. motors and electromechanical actuators with annual sales of approximately $132,000.

    Long-term contract receivables are primarily associated with the U.S. Government and its prime- and sub-contractors and major commercial aircraft and satellite manufacturers. Unbilled recoverable costs and profits on long-term contracts include $22,178 related to a business jet program and are expected to be collected as milestones are achieved and production deliveries are made and accepted, which will likely extend into 2006. Substantially all other unbilled amounts are expected to be collected within one year. In situations where billings exceed revenues recognized, the excess is included in customer advances.

    Concentrations of credit risk on receivables are limited to those from significant customers that are believed to be financially sound. Receivables from Boeing were $49,860 at September 27, 2003 and $48,912 at September 28, 2002. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.

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Note 6 - Goodwill and Intangible Assets

    The Company adopted the provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” on October 1, 2001. The following table presents consolidated net earnings adjusted as though the adoption of SFAS No. 142 occurred on October 1, 2000.

    The weighted-average amortization period is nine years for non-compete agreements as well as for other acquired intangible assets. Other acquired intangible assets consist primarily of technology-based and customer-related intangible assets. Amortization of acquired intangible assets was $953 in 2003 and $885 in 2002. Based on acquired intangible assets recorded at September 27, 2003, amortization is estimated to be $927 in 2004, $900 in 2005, $733 in 2006, $446 in 2007 and $393 in 2008. The components of acquired intangible assets are as follows:

Note 7 - Severance and Restructuring Costs

    In connection with the March 2002 acquisition of TSS, the Company initially established a $1,412 reserve on the opening balance sheet for severance costs associated with expected involuntary termination of employees. During 2002, payments were made, reducing the balance to $1,212 at September 28, 2002. During the first quarter of 2003, the entire remaining balance was paid.

    During the second quarter of 2003, the Company initiated a reduction in force of 61 employees in the U.S. and established a reserve for one-time termination benefits of $648. The charge was primarily to cost of sales in Space Controls. Substantially all of the balance was paid during 2003.