Overview

We operate our businesses in three segments: Avionics & Controls, Sensors & Systems and Advanced Materials.

The Avionics & Controls segment includes avionics systems, control systems, interface technologies and communication systems capabilities. Avionics systems designs and develops cockpit systems integration and avionics solutions for commercial and military applications. Control systems designs and manufactures technology interface systems for military and commercial aircraft and land- and sea-based military vehicles. Interface technologies manufactures and develops custom control panels, input systems for medical, industrial, military and gaming industries. Communication systems designs and manufactures military audio and data products designed to operate in severe battle environments. In addition, communication systems designs and manufactures communication control systems with an emphasis on security and aural clarity in military applications.

The Sensors & Systems segment includes power systems and advanced sensors capabilities. Power systems develops and manufactures electrical power switching and other related systems, principally for aerospace and defense customers. Advanced sensors develops and manufactures high precision temperature and pressure sensors for aerospace and defense customers.

The Advanced Materials segment includes engineered materials and defense technologies capabilities. Engineered materials develops and manufactures thermally engineered components and high-performance elastomer products used in a wide range of commercial aerospace and military applications. Defense technologies develops and manufactures combustible ordnance components and electronic warfare countermeasure devices for military customers. Sales in all segments include domestic, international, defense and commercial customers.

Our current business and strategic plan focuses on the continued development of our products principally for aerospace and defense markets. We are concentrating our efforts to expand our capabilities in these markets and anticipate the global needs of our customers and respond to such needs with comprehensive solutions. These efforts focus on continuous research and new product development, acquisitions and strategic realignments of operations to expand our capabilities as a more comprehensive supplier to our customers across our entire product offering.

On November 3, 2008, we sold Muirhead Aerospace (Muirhead) and Traxsys Input Products Limited (Traxsys) for $63.4 million, which resulted in an after tax gain of $15.8 million. Muirhead and Traxsys were included in the Sensors & Systems segment. The results of Muirhead and Traxsys were accounted for as discontinued operations in the consolidated income statement.

On January 26, 2009, we acquired Racal Acoustics Global Ltd. (Racal), which develops and manufactures high technology ruggedized personal communication equipment for the defense and avionics segment. Racal is included in our Avionics & Controls segment.

During the first six months of 2009, our operating results were affected by large fluctuations in foreign currency exchange rates, reductions in our after-market spares sales due to reduced air traffic and our flare countermeasure operations, operating results of which can vary significantly from quarter to quarter as the requirements from our customers change. Additionally, on a comparative basis, the first six months of 2009 contained 26 weeks, while the first six months of 2008 contained 27 weeks. Income from continuing operations was $36.8 million, or $1.23 per diluted share, compared with $53.7 million, or $1.80 per diluted share, in the prior-year period.

Income from continuing operations was also impacted by a foreign currency loss of $7.9 million or $1.7 million after tax, or $0.06 per diluted share, relating to the pound sterling-denominated funding of our acquisition of Racal in January 2009.

Income from continuing operations for the first six months of 2009 includes a $2.0 million, or $0.07 per diluted share, reduction of previously recorded withholding tax liabilities as a result of the enactment of a U.S.-Canadian tax treaty, a $1.6 million, or $0.05 per diluted share, penalty due to a development with regard to certain foreign tax laws and a $0.7 million, or $0.03 per diluted share, expense resulting from the reversal of previously recorded tax benefits associated with CMC's SADI program. Prior-year results include a $2.8 million, or $0.09 per diluted share, reduction of previously estimated income tax liabilities, a $4.1 million, or $0.14 per diluted share, net reduction in deferred income tax liabilities resulting from the enactment of tax laws reducing the Canadian statutory corporate income tax rate, and a $0.7 million, or $0.02 per diluted share, net increase in income tax liabilities at CMC.

Income from discontinued operations was $0.53 per diluted share, compared with $0.08 per diluted share in the prior-year period, reflecting the gain on sale of our U.K.-based Muirhead and Traxsys subsidiaries in November 2008. Net income was $52.7 million, or $1.76 per diluted share, compared with net income of $56.2 million, or $1.88 per diluted share, in the prior-year period.

Results of Operations

Three Month Period Ended May 1, 2009 Compared with Three Month Period Ended
May 2, 2008

Sales for the second fiscal quarter increased 0.4% when compared with the
prior-year period. Sales by segment were as follows:

(In thousands)


                                  Incr./(Decr.)       Three Months Ended
                                   from prior        May 1,        May 2,
                                   year period        2009          2008

           Avionics & Controls        14.9%        $   169,111   $   147,174
           Sensors & Systems         (10.9)%            86,755        97,332
           Advanced Materials        (8.7)%            103,636       113,527

           Total Net Sales                         $   359,502   $   358,033

The 14.9% increase in sales of Avionics & Controls was principally due to incremental sales from the Racal acquisition and increased sales volumes of cockpit controls and avionics systems for military aviation, partially offset by lower sales of cockpit controls for commercial aviation OEM and after-market customers. Stronger sales of interface technologies devices to the gaming industry offset weakness in the medical market. Management expects sales in the second half of the fiscal year to be impacted by continued weakness of commercial aviation, particularly in the business jet segment of the market.

The 10.9% decrease in sales of Sensors & Systems mainly reflected the effect of exchange rates and the strong U.S. dollar. Sales in the second fiscal quarter of 2009 reflected a weaker pound sterling and euro relative to the U.S. dollar. The average exchange rate from the pound sterling to the U.S. dollar decreased from 1.98 in the second fiscal quarter of 2008 to 1.44 in the second fiscal quarter of 2009. The average exchange rate from the euro to the U.S. dollar decreased from 1.54 in the second fiscal quarter of 2008 to 1.30 in the second fiscal quarter of 2009. Additionally, sales were impacted by lower sales of temperature sensors for business jets and certain power systems devices due to the delay of issuance of an Airworthiness Directive by the FAA. Management expects sales in the second half of the year to be impacted by lower sales to advanced sensors after-market customers and power systems to business jet customers.

The 8.7% decrease in sales of Advanced Materials principally reflected the effect of exchange rates on our U.K.-based thermally engineered component operation, lower commercial aircraft build rates, and weakened industrial commercial demand for engineered materials. Additionally, sales at our U.S. flare countermeasure operations decreased over the prior-year period, reflecting reduced demand, which management expects will continue in the second half of fiscal 2009. Sales at our U.K. flare countermeasure operations were weak in the second fiscal quarter of 2009 but are expected to be strong in the second half of the year. Sales at our combustible ordnance operation were even with the prior-year period.

Avionics & Controls segment gross margin was 33.1% and 36.7% for the second fiscal quarter of 2009 and 2008, respectively. The decrease in gross margin reflects a $4.1 million increase in the estimate to complete on certain firm fixed-price long-term contracts for the development and manufacture of certain cockpit avionics systems. Additionally, gross margins were impacted by a $1.6 million charge from mark-to-market accounting for embedded derivatives arising from backlog denominated in other than the functional currency of the cockpit avionics systems unit or its customer. While gross margin declined at our cockpit avionics systems unit, gross margin improved at our control systems operations due to pricing leverage, strong cost control and certain reductions in the work force. Control systems gross margin benefited from a higher mix of military versus commercial aviation sales.

Sensors & Systems segment gross margin was 32.6% and 34.7% for the second fiscal quarter of 2009 and 2008, respectively. The decrease in gross margin principally reflects lower sales of temperature sensors, the impact of starting up a manufacturing facility in Mexico and higher warranty costs. In addition, gross margins were impacted by the delay in shipping certain commercial power system devices as described above.

Advanced Materials segment gross margin was 27.4% compared to 29.5% for the same period one year ago. The decrease in gross margin mainly reflects decreased sales of engineered materials to commercial aviation customers resulting in a lower recovery of fixed costs. Defense systems gross margins were even with the prior-year period reflecting strong gross margins at our combustible ordnance and chaff countermeasure operations and weak gross margins at our flare countermeasure operations.

Selling, general and administrative expenses (which include corporate expenses) totaled $54.6 million, or 15.2% of sales, and $57.7 million, or 16.1% of sales, for the second fiscal quarter of 2009 and 2008, respectively. The decrease in the amount of selling, general and administrative expenses was due principally to reduced incentive compensation expense, lower professional fees, and the effect of foreign exchange rates at our non-U.S. operations.

Research, development and engineering spending was $18.3 million, or 5.1% of sales, for the second fiscal quarter of 2009 compared with $25.0 million, or 7.0% of sales, for the second fiscal quarter of 2008. The decrease in research, development and engineering principally reflected lower spending on the development of the integrated cockpit system for the T-6B military trainer and certain cockpit avionics systems and the A400M development, as well as increased customer funding of certain development costs and the effect of foreign exchange rates. Fiscal 2009 research, development and engineering spending is expected to be about 5.0% of sales.

Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the second fiscal quarter of 2009 were $45.9 million, or 12.8% of sales, compared with $47.8 million, or 13.3% of sales, for the second fiscal quarter of 2008.

Sensors & Systems segment earnings were $9.9 million, or 11.4% of sales, for the second fiscal quarter of 2009 compared with $10.5 million, or 10.8% of sales, for the second fiscal quarter of 2008. Both advanced sensors and power systems operations earnings were slightly below the prior-year period. Advanced sensors results were favorably impacted by strong after-market sales, which are not expected to continue at this level for the balance of the year. Power systems operations benefited from lower research and development expenses and higher customer funding of research and development.

Advanced Materials segment earnings were $14.4 million, or 13.9% of sales, for the second fiscal quarter of 2009 compared with $19.9 million, or 17.6% of sales, for the second fiscal quarter of 2008, principally reflecting lower earnings from our engineered materials and flare countermeasure operations. Engineered materials operations were impacted by lower demand from commercial aviation and industrial commercial customers. Flare countermeasure operations are also being impacted by lower requirements and delayed shipments due to the availability of certified munitions carriers. Our thermally engineered material operations are benefiting from strong sales and earnings from nuclear and petrochemical customers and cost control actions.

Interest expense for the second fiscal quarter of 2009 was $7.6 million compared with $7.3 million for the second fiscal quarter of 2008, reflecting increased borrowings to finance the acquisition of Racal and NMC in the first fiscal quarter of 2009.

The effective income tax rate for the second fiscal quarter of 2009 was 12.2% (before a $0.7 million tax expense) compared with 23.0% (before a $0.7 million tax expense) for the prior-year period. The $0.7 million tax expense in the second fiscal quarter of 2009 was related to the reduction of prior year tax benefits resulting from CMC's implementation of its SADI program. The $0.7 million tax expense in the second fiscal quarter of 2008 was related to certain tax liabilities of CMC. The effective tax rate differed from the statutory rate in the second fiscal quarters of 2009 and 2008, as both years benefited from various tax credits and certain foreign interest expense deductions.

To the extent that sales are transacted in a currency other than the functional currency of the operating unit, we are subject to foreign currency fluctuation risk. We use forward contracts to hedge our foreign currency exchange risk. Also, we are subject to foreign currency gains or

(In thousands)                                                      Three Months Ended
                                                                May 1,             May 2,
                                                                 2009               2008

Forward foreign currency contracts - gain (loss)              $      (128 )      $     1,572
Embedded derivatives - gain (loss)                                 (1,986 )               91
Revaluation of monetary assets/liabilities - gain (loss)            7,968                 (8 )

Total                                                         $     5,854        $     1,655

Sales for the first six months decreased 6.4% when compared with the prior-year period. Sales by segment were as follows:

(In thousands)

                                  Incr./(Decr.)        Six Months Ended
                                   from prior        May 1,        May 2,
                                   year period        2009          2008

           Avionics & Controls        2.6%         $   297,579   $   290,082
           Sensors & Systems         (10.2)%           171,310       190,873
           Advanced Materials        (14.5)%           200,330       234,403

           Total Net Sales                         $   669,219   $   715,358

The 2.6% increase in sales of Avionics & Controls was principally due to the acquisition of Racal and the decrease in the number of weeks contained in the first six months of 2009 compared to the prior-year period, as explained above. Avionics & Controls sales benefited from strong military demand but weak commercial aviation demand impacting OEM and aftermarket spares sales.

The 10.2% decrease in sales of Sensors & Systems mainly reflected the effect of exchange rates at our non-U.S. operations, lower sales of certain power systems devices, and the decrease in the number of weeks contained in the first six month period of 2009 compared to the prior-year period. Sales in the first six months of 2009 reflected a weaker pound sterling and euro relative to the U.S. dollar. The average exchange rate from the pound sterling to the U.S. dollar decreased from 2.00 in the first six months of 2008 to 1.48 in the first six months of 2009. The average exchange rate from the euro to the U.S. dollar decreased from 1.50 in the first six months of 2008 to 1.31 in the first six months of 2009.

The 14.5% decrease in sales of Advanced Materials principally reflected lower sales of flare countermeasure devices at our U.K. operation, decreased sales of thermally engineered components and elastomer components, and the decrease in the number of weeks contained in the first six months of 2009 compared to the prior-year period. The decrease in flare countermeasures sales principally related to timing of receiving orders and scheduling shipments of our international customers. The decrease in sales of thermally engineered components reflected the weakening of the pound sterling as described above. The decrease in sales at our engineered materials operations was principally due to lower demand from commercial aviation customers. These decreases in sales were partially offset by increased sales of combustible ordnance and incremental sales from the acquisition of NMC in December 2008.

Overall, gross margin as a percentage of sales was 32.1% and 33.1% for the first six months of fiscal 2009 and 2008, respectively.

Avionics & Controls segment gross margin was 34.2% and 35.7% for the first six months of 2009 and 2008, respectively. The decrease in gross margin reflected the $4.1 million estimate to complete adjustment for certain long-term contracts, a $1.6 million charge from mark-to-market

Sensors & Systems segment gross margin was 33.9% and 36.1% for the first six months of 2009 and 2008, respectively. The decrease in gross margin was due to lower after-market sales and certain higher margin power distribution devices for commercial aircraft applications, partially offset by a retroactive price adjustment on certain temperature and pressure sensors and the impact of exchange rates, as well as improved gross margin on certain power distribution devices for defense applications.

Advanced Materials segment gross margin was 27.4% compared to 27.3% for the same period one year ago. The increase in Advanced Materials gross margin reflected strong gross margins at our combustible ordnance and thermally engineered components operations, partially offset by lower gross margins at our U.K. flare countermeasure and engineered materials operations, reflecting lower sales volumes and a decreased recovery of fixed overhead expenses.

Selling, general and administrative expenses (which include corporate expenses) totaled $114.3 million, or 17.1% of sales, and $117.1 million, or 16.4% of sales, for the first six months of 2009 and 2008, respectively. The decrease in selling, general and administrative expense principally reflects lower incentive compensation expense and the effect of changes in foreign currency exchange rates, and partially offset by an increase in pension cost.

Research, development and engineering spending was $35.7 million, or 5.3% of sales, for the first six months of 2009 compared with $46.7 million, or 6.5% of sales, for the first six months of 2008. The decrease in research, development and engineering principally reflected increased customer funding and governmental assistance on certain development programs, lower spending on the integrated cockpit system for the T-6B military trainer, the A400M and 787 programs, and the effect of translating our non-U.S. units from their functional currency to the U.S. dollar as the Canadian dollar, euro and pound sterling weakened against the U.S. dollar.

Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first six months of 2009 totaled $80.6 million, or 12.1% of sales, compared with $91.3 million, or 12.8% of sales, for the first six months in 2008.

Avionics & Controls segment earnings were $36.2 million, or 12.2% of sales, in the first six months of 2009 and $32.9 million, or 11.3% of sales, in the first six months of 2008, principally reflecting the incremental earnings from the Racal acquisition. Control systems earnings declined against the prior-year period, reflecting decreased sales of after-market spares sales. Our avionics systems unit incurred operating losses in both the first six months of fiscal 2009 and 2008. Operating losses of our avionics systems unit in the first six months of fiscal 2009 mainly reflected lower than expected gross margins on certain long-term contracts, partially offset by lower research, development and engineering costs principally related to the development of the cockpit integration system for the T-6B military trainer. During the first six months of fiscal 2008, the

Sensors & Systems segment earnings were $20.2 million, or 11.8% of sales, for the first six months of 2009 compared with $22.8 million, or 12.0% of sales, for the first six months of 2008. The decrease in segment earnings as a percent of sales principally reflects lower gross margins at our temperature and pressure sensor operations and start-up costs incurred to set up a manufacturing operation in Mexico. Lower gross margins at our power distribution operations were substantially offset by decreased research, engineering and development due to increased governmental assistance and customer development funding and decreased A400M program development expenses.

Advanced Materials segment earnings were $24.3 million, or 12.1% of sales, for the first six months of 2009 compared with $35.6 million, or 15.2% of sales, for the first six months of 2008, principally reflecting lower earnings from our engineered materials, U.K. countermeasure flare, and metal finishing operations. As explained above, our U.K. flare countermeasure unit had significant international sales and gross profit in the prior-year period, which did not occur in the first six months of 2009. We expect our international flare countermeasure sales orders to ship later this year. The decrease in earnings at our advanced materials operation principally reflected lower sales volumes and gross margin due to sales mix. The decrease in earnings at our metal finishing unit resulted from decreased sales and gross profit principally due to the effects of the strike at Boeing.

On January 26, 2009, we acquired Racal for £119.3 million or $166.7 million. Racal develops and manufactures high technology ruggedized personal communication equipment for the defense and avionics market segment. The acquisition was funded with cash proceeds from the sale of U.K.-based Muirhead and Traxsys and our line of credit. To facilitate the acquisition of Racal, we executed a $159.7 million U.S. dollar-denominated intercompany loan with a wholly owned subsidiary, for which its functional currency is the pound sterling. Due to our holding of pounds sterling to fund the acquisition during a period of foreign exchange volatility, we incurred a $7.9 million foreign currency transaction loss in January 2009, which was recorded in other expense. We were subject to foreign currency exchange risk on this intercompany loan until bank lender approval was secured to convert the intercompany loan to an investment in subsidiary. On February 24, 2009, lender approval was obtained.

Interest expense for the first six months of 2009 was $14.3 million compared with $15.2 million for the first six months of 2008, reflecting lower borrowings during most of the first six months of 2009.

During the first six months of 2008, we repaid £31.0 million under our pound sterling term loan and terminated our interest rate swap, which resulted in a $1.9 million gain.

The effective income tax rate for the first six months of 2009 was 14.2% (before a $0.3 million tax benefit) compared with 22.6% (before a $6.2 million tax benefit) for the prior-year period.