NOTE 8: Retirement Benefits

Approximately 40% of U.S. employees have a defined benefit earned under the Esterline pension plan.

Under the Esterline defined benefit plan, pension benefits are earned under a cash balance formula with annual pay credits ranging from 2% to 6% effective January 1, 2003. Prior to 2003, pension benefits are based on years of service and five-year average compensation for the highest five consecutive years’ compensation during the last ten years of employment. Participants elected either to continue earning benefits under the prior plan formula or to earn benefits under the cash balance formula. Effective January 1, 2003, all new participants are enrolled in the cash balance formula. Esterline also has an unfunded supplemental retirement plan for key executives providing for periodic payments upon retirement.

CMC sponsors defined benefit pension plans and other retirement benefit plans for its employees in Canada. Pension benefits are based upon years of service and final average salary. Other retirement benefit plans are non-contributory health care and life insurance plans.

The Company sponsors a number of other non-U.S. defined benefit pension plans primarily in Belgium, France and Germany. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings.

The Company accounts for pension expense using the end of the fiscal year as its measurement date. In addition, the Company makes actuarially computed contributions to these plans as necessary to adequately fund benefits. The Company’s funding policy is consistent with the minimum funding requirements of ERISA.

The accumulated benefit obligation and projected benefit obligation for Esterline’s U.S. plans are $309.2 million and $321.2 million, respectively, with plan assets of $294.4 million as of September 29, 2017. The underfunded status for the Esterline plans is $26.8 million at September 29, 2017, of which $22.4 million is for the unfunded supplemental retirement plan for key executives. Contributions to the Esterline non-qualified plans totaled $1.4 million both in fiscal 2017 and 2016. There is no funding requirement for fiscal 2018 for the qualified U.S. pension plans maintained by Esterline.

The accumulated benefit obligation and projected benefit obligation for the CMC plans are $137.5 million and $138.5 million, respectively, with plan assets of $140.2 million as of September 29, 2017. The funded status for these CMC plans is $1.7 million at September 29, 2017. Contributions to the CMC plans totaled $3.5 million and $5.6 million in fiscal 2017 and 2016, respectively. The expected funding requirement for fiscal 2018 for the CMC plans is $3.9 million.

The accumulated benefit obligation and projected benefit obligation for the other non-U.S. plans are $39.3 million and $49.6 million, respectively, with plan assets of $23.0 million as of September 29, 2017. The underfunded status for these other non-U.S. plans is $26.6 million at September 29, 2017. Contributions to the other non-U.S. plans totaled $1.8 million and $5.0 million in fiscal 2017 and 2016, respectively. The expected funding requirement for fiscal 2018 for the other non-U.S. plans is $1.0 million.

Principal assumptions of the Esterline, CMC and other non-U.S. plans are as follows:

	Esterline U.S.				CMC				Other Non-U.S.
	Defined Benefit				Defined Benefit				Defined Benefit
	Pension Plans				Pension Plans				Pension Plans
	2017			2016	2017			2016	2017	2016
Principal assumptions as of year end:
Discount rate		3.75	%	3.60%		3.76	%	3.22%	1.40 - 8.75%	0.90 - 7.75%
Rate of increase in future compensation levels		4.48	%	4.28%		2.75	%	2.75%	2.96 - 10.29%	2.96 - 10.13%
Assumed long-term rate of return on plan assets		7.00	%	7.00%		5.19	%	5.66%	3.25 - 8.25%	3.25 - 8.00%

	Esterline U.S.				CMC
	Post-Retirement				Post-Retirement
	Pension Plans				Pension Plans
	2017			2016	2017			2016
Principal assumptions as of year end:
Discount rate		3.75	%	3.60%		3.51	%	3.16%
Initial weighted average health care trend rate		6.00	%	6.00%		5.80	%	6.00%
Ultimate weighted average health care trend rate		6.00	%	6.00%		4.10	%	4.20%

The Company uses discount rates developed from a yield curve established from high-quality corporate bonds and matched to plan-specific projected benefit payments. Although future changes to the discount rate are unknown, had the discount rate increased or decreased by 25 basis points, pension liabilities in total would have decreased $13.7 million or increased $14.4 million, respectively. If all other assumptions are held constant, the estimated effect on fiscal 2017 pension expense from a hypothetical 25 basis points increase or decrease in both the discount rate and expected long-term rate of return on plan assets would not have a material effect on our pension expense. Management is not aware of any legislative or other initiatives or circumstances that will significantly impact the Company’s pension obligations in fiscal 2018.

The assumed health care trend rate can have a significant impact on the Company’s post-retirement benefit obligations. The Company’s health care trend rate was based on the experience of its plans and expectations for the future. A 100 basis points increase in the health care trend rate would increase the post-retirement benefit obligation by $1.4 million. A 100 basis points decrease in the health care trend rate would decrease the post-retirement benefit obligation by $1.2 million. Assuming all other assumptions are held constant, the estimated effect on fiscal 2016 post-retirement benefit expense from a hypothetical 100 basis points increase or decrease in the health care trend rate would not have a material effect on our post-retirement benefit expense.

Plan assets are invested in a diversified portfolio of equity and debt securities consisting primarily of common stocks, bonds and government securities. The objective of these investments is to maintain sufficient liquidity to fund current benefit payments and achieve targeted risk-adjusted returns. Management periodically reviews allocations of plan assets by investment type and evaluates external sources of information regarding the long-term historical returns and expected future returns for each investment type, and accordingly, the 3.25% to 8.25% assumed long-term rate of return on plan assets is considered to be appropriate. Allocations by investment type are as follows:

		Actual
	Target	2017			2016
Plan assets allocation as of fiscal year end:
Equity securities	35 - 70%		58.4	%		56.4	%
Debt securities	30 - 65%		35.3	%		37.1	%
Cash	0%		6.3	%		6.5	%
Total			100.0	%		100.0	%

The following table presents the fair value of the Company’s Pension Plan assets as of September 29, 2017, by asset category segregated by level within the fair value hierarchy, as described in Note 9.

In Thousands	Fair Value Hierarchy
	Level 1		Level 2		Total
Asset category:
Equity Funds:
Registered Investment Company Funds - U.S. Equity	$	113,997	$	-	$	113,997
U.S. Equity Securities		54,640		-		54,640
Non-U.S. Equity Securities		50,395		-		50,395
Commingled Trust Funds - Non-U.S. Securities		-		48,377		48,377
Fixed Income Securities:
Commingled Trust Funds - Fixed Income		-		83,387		83,387
Non-U.S. Foreign Commercial and Government Bonds		-		77,931		77,931
Cash and Cash Equivalents		28,848		-		28,848
Total	$	247,880	$	209,695	$	457,575

The following table presents the fair value of the Company’s Pension Plan assets as of September 30, 2016, by asset category segregated by level within the fair value hierarchy, as described in Note 9.

In Thousands	Fair Value Hierarchy
	Level 1		Level 2		Total
Asset category:
Equity Funds:
Registered Investment Company Funds - U.S. Equity	$	104,075	$	-	$	104,075
U.S. Equity Securities		55,196		-		55,196
Non-U.S. Equity Securities		28,031		-		28,031
Commingled Trust Funds - Non-U.S. Securities		-		52,973		52,973
Fixed Income Securities:
Commingled Trust Funds - Fixed Income		-		82,627		82,627
Non-U.S. Foreign Commercial and Government Bonds		-		75,414		75,414
Cash and Cash Equivalents		27,465		-		27,465
Total	$	214,767	$	211,014	$	425,781

Valuation Techniques

Level 1 Equity Securities are actively traded on U.S. and non-U.S. exchanges and are either valued using the market approach at quoted market prices on the measurement date or at the net asset value of the shares held by the plan on the measurement date based on quoted market prices.

Level 2 fixed income securities are primarily valued using the market approach at either quoted market prices, pricing models that use observable market data, or bids provided by independent investment brokerage firms.

Level 2 primarily consists of commingled trust funds that are primarily valued at the net asset value provided by the fund manager. Net asset value is based on the fair value of the underlying investments.

Cash and cash equivalents include cash which is used to pay benefits and cash invested in a short-term investment fund that holds securities with values based on quoted market prices, but for which the funds are not valued on quoted market basis.

Net periodic pension cost for the Company’s defined benefit plans at the end of each fiscal year consisted of the following:

In Thousands	Defined Benefit									Post-Retirement
	Pension Plans									Benefit Plans
	2017			2016			2015			2017			2016			2015
Components of Net Periodic Cost
Service cost	$	15,108		$	12,861		$	11,811		$	385		$	342		$	359
Interest cost		15,553			18,095			16,159			335			473			464
Expected return on plan assets		(25,866	)		(24,491	)		(23,872	)		-			-			-
Settlement		21			2			3,522			-			-			-
Amortization of prior service cost		490			487			404			(5	)		(17	)		(63	)
Amortization of actuarial (gain) loss		7,643			6,590			5,165			-			-			-
Net periodic cost (benefit)	$	12,949		$	13,544		$	13,189		$	715		$	798		$	760

The funded status of the defined benefit pension and post-retirement plans at the end of fiscal 2017 and 2016 were as follows:

In Thousands	Defined Benefit						Post-Retirement
	Pension Plans						Benefit Plans
	2017			2016			2017			2016
Benefit Obligations
Beginning balance	$	505,298		$	453,283		$	13,236		$	12,187
Currency translation adjustment		9,340			268			665			26
Service cost		15,108			12,861			385			342
Interest cost		15,553			18,095			335			473
Plan participants contributions		318			376			-			-
Actuarial (gain) loss		(11,420	)		44,136			(529	)		738
Other adjustments		(1,254	)		(859	)		-			-
Benefits paid		(23,687	)		(22,862	)		(550	)		(530	)
Ending balance	$	509,256		$	505,298		$	13,542		$	13,236

Plan Assets - Fair Value
Beginning balance	$	425,781		$	389,461		$	-		$	-
Currency translation adjustment		8,170			341			-			-
Realized and unrealized gain (loss) on plan assets		41,566			45,817			-			-
Plan participants contributions		318			376			-			-
Company contribution		6,681			12,041			550			530
Other adjustments		-			1,466			-			-
Expenses paid		(1,254	)		(859	)		-			-
Benefits paid		(23,687	)		(22,862	)		(550	)		(530	)
Ending balance	$	457,575		$	425,781		$	-		$	-

Funded Status
Fair value of plan assets	$	457,575		$	425,781		$	-		$	-
Benefit obligations		(509,256	)		(505,298	)		(13,542	)		(13,236	)
Net amount recognized	$	(51,681	)	$	(79,517	)	$	(13,542	)	$	(13,236	)

Amount Recognized in the Consolidated Balance Sheet
Non-current asset	$	4,267		$	2,395		$	-		$	-
Current liability		(1,840	)		(1,912	)		(669	)		(716	)
Non-current liability		(54,108	)		(80,000	)		(12,873	)		(12,520	)
Net amount recognized	$	(51,681	)	$	(79,517	)	$	(13,542	)	$	(13,236	)

Amounts Recognized in Accumulated Other Comprehensive Income
Net actuarial loss (gain)	$	78,713		$	112,420		$	476		$	975
Prior service cost		2,593			2,951			-			-
Ending balance	$	81,306		$	115,371		$	476		$	975

The accumulated benefit obligation for all pension plans was $486.0 million at September 29, 2017, and $482.2 million at September 30, 2016.

Estimated future benefit payments expected to be paid from the pension and post-retirement benefit plans or from the Company’s assets are as follows:

In Thousands

Fiscal Year

2018	$	28,083
2019		29,835
2020		31,087
2021		33,212
2022		33,715
2023 - 2027		180,157

Employees may participate in certain defined contribution plans. The Company’s contribution expense under these plans totaled $10.1 million, $10.7 million, and $9.5 million in fiscal 2017, 2016, and 2015, respectively. The Company contributes a matching amount that varies by participating company and employee group based on the first 6% of earnings contributed. The three formulas used are: 25% of the first 6%; or 50% of the first 6%; or 100% of the first 2% and 50% on the next 4%.

In fiscal 2014 the Company offered vested terminated participants in the Esterline plan a one-time opportunity to elect a lump-sum payment from the plan in lieu of a lifetime annuity. In the first fiscal quarter of 2015, the Company paid $16.6 million in lump-sum payments to vested terminated pension plan participants from the plan, which resulted in an actuarial settlement charge of $3.0 million. During the remainder of fiscal 2015, an additional $1.4 million in lump-sum payments was distributed to cash balance participants under the ongoing terms of the plan, which resulted in an additional settlement charge of $0.5 million in fiscal 2015.