Results of Operations

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 casino gaming industries. Communication systems designs and manufactures military audio and data products for severe battlefield environments, as well as communication control systems to enhance security and aural clarity in military applications. In addition, communication systems designs and manufactures embedded communication intercept receivers for signal intelligence applications.

The Sensors & Systems segment includes power systems, connection technologies, and advanced sensors capabilities. Power systems develops and manufactures electrical power switching and other related systems, principally for aerospace and defense customers. Connection technologies develops and manufactures highly engineered connectors for harsh environments and serves the aerospace, defense & space, power generation, rail and industrial equipment markets. 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 warfare countermeasure devices for military customers. Sales in all segments include domestic, international, defense and commercial customers.

Our 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 July 26, 2011, we acquired the Souriau Group (Souriau). Souriau is a leading global supplier of highly engineered connection technologies for harsh environments. Souriau is included in our Sensors & Systems segment.

On December 30, 2010, we acquired Eclipse Electronic Systems, Inc. (Eclipse). Eclipse is a designer and manufacturer of embedded communication intercept receivers for signal intelligence applications. Eclipse is included in our Avionics & Controls segment.

During the second fiscal quarter of 2012, net income was $45.2 million or $1.44 per diluted share compared to $45.9 million or $1.47 per diluted share in the second fiscal quarter of 2011. For the first six months of fiscal 2012, net income was $68.0 million or $2.18 per diluted share compared to $75.9 million or $2.44 per diluted share during the prior-year period. The second fiscal quarter of 2012 benefited from an $11.9 million gain, or $9.5 million after tax, upon settlement of a contingency related to proceeds from a transaction that preceded our acquisition of CMC.

Sales increased 16% to $504.8 million in the second fiscal quarter of 2012, principally reflecting increased Sensors & Systems segment sales, which benefited from incremental sales from the Souriau acquisition and strong Advanced Materials segment sales. These sales increases were partially offset by lower Avionics & Controls segment sales, which declined 15.8% compared to the prior-year period, principally due to lower sales of avionics systems for military aircraft.

The income tax rate was 19.7% for the second fiscal quarter of 2012 compared to 20.5% for the prior-year period.

Cash flows from operating activities were $85.3 million in the first six months of fiscal 2012 compared to $89.4 million in the prior-year period. We paid down our revolving credit facility and Euro Term Loan by $68.2 million during the first six months of fiscal 2012.

Results of Operations

Three Month Period Ended April 27, 2012, Compared with Three Month Period Ended
April 29, 2011

Sales for the second fiscal quarter increased 16.0% over the prior-year period.
Sales by segment were as follows:

(In thousands)



                           Incr./(Decr.)               Three Months Ended
                            from prior           April 27,             April 29,
                            year period            2012                  2011

   Avionics & Controls        (15.8)%        $         195,025     $         231,532
   Sensors & Systems          116.8%                   184,683                85,181
   Advanced Materials            5.5%                  125,123               118,564

   Total Net Sales                           $         504,831     $         435,277

The 15.8% decrease in sales of Avionics & Controls mainly reflected decreased sales volumes of avionics systems of $30 million, and control systems, communication systems and interface technologies of $7 million. The decrease in avionics systems was principally due to lower cockpit integration sales volumes for the T-6B military trainer and retrofits of military transport aircraft. On May 3, 2012, Hawker Beechcraft, the manufacturer of the T-6B military trainer, filed for bankruptcy under the Chapter 11 of the U.S. Bankruptcy Code. Subsequent to period-end, we agreed to continue shipments of our integrated cockpits to Hawker Beechcraft in exchange for an agreement by Hawker Beechcraft to pay for shipments made 20 days before the filing of bankruptcy and pay for shipments after the filing for bankruptcy within our normal payment terms. Due to the uncertainty associated with the Hawker Beechcraft bankruptcy filing, we expect that our shipments for the T-6B could be at a lower level during the second half of fiscal 2012. Control systems sales decreased modestly compared to the prior-year period. We expect that T-6B shipments will return to normal in the second half of the fiscal year. Its prior-year sales included a $4.4 million retroactive price settlement due to product scope changes. A modest decrease in communication systems sales reflected a $4 million decrease of hearing protection headsets, partially offset by strong sales of embedded communication intercept receivers for signal intelligence applications. Interface technologies principally reflected lower demand for input systems for casino gaming applications.

The 116.8% increase in sales of Sensors & Systems principally reflected incremental sales from the Souriau acquisition of $87 million and increased sales volume of advanced sensors and power systems of $12 million. Souriau's sales exceeded our expectations and reflected strong demand from commercial and industrial customers. Approximately one-third of the increase in advanced sensors and power systems sales was due to higher sales of advanced sensors OEM temperature and pressure sensors and strong aftermarket demand. The increase in power systems reflected higher demand for commercial aviation products.

Overall, gross margin was 36.6% and 37.0% for the second fiscal quarter of 2012 and 2011, respectively. Gross profit was $184.5 million and $160.9 million for the second fiscal quarter of 2012 and 2011, respectively.

Avionics & Controls segment gross margin was 37.8% and 39.6% for the second fiscal quarter of 2012 and 2011, respectively. Segment gross profit was $73.7 million compared to $91.6 million in the prior-year period. About 85% of the net decrease in gross profit was due to decreased sales volumes of cockpit integrations for military aircraft. About 15% of the net decrease in gross profit was principally due to lower gross profit of control systems and interface technologies, which decreased about equally. The decrease in control systems was mainly due to the prior-year $4.4 million retroactive price settlement noted above and lower gross margin in the second fiscal quarter of 2012. The decrease in interface technologies gross profit was due to lower sales volumes and gross profit on input devices for casino gaming applications.

Avionics & Controls segment gross profit in the second fiscal quarter of 2012 was less than our expectations due to lower shipments for the T-6B military trainer resulting in $2 million of decreased gross profit. T-6B shipments were constrained due to the financial difficulties of Hawker Beechcraft.
Communication systems gross profit was $3 million less than our expectations due to reduced demand and delayed orders for hearing protection devices.

Sensors & Systems segment gross margin was 37.3% and 34.7% for the second fiscal quarter of 2012 and 2011, respectively. Segment gross profit was $68.9 million compared to $29.5 million in the prior-year period. The increase in gross profit mainly reflected incremental gross profit from the Souriau acquisition of $33 million. Additionally, the increased segment gross profit reflected strong demand for advanced sensors and power systems.

Advanced Materials segment gross margin was 33.6% compared to 33.5% for the prior-year period. Segment gross profit was $42.0 million compared to $39.8 million in the prior-year period. The increase in segment gross profit was principally due to higher sales volumes of elastomer materials and insulation materials primarily for commercial aviation applications, partially offset by decreased gross profit for defense technologies due to lower demand for combustible ordnance and U.K. manufactured flare countermeasures due to delayed orders.

Selling, general and administrative expenses (which include corporate expenses) totaled $99.0 million, or 19.6% of sales, and $72.4 million, or 16.6% of sales, for the second fiscal quarter of 2012 and 2011, respectively. The increase in selling, general and administrative expense principally reflected incremental selling, general and administrative expenses from the Souriau acquisition.

Research, development and engineering spending was $29.5 million, or 5.9% of sales, for the second fiscal quarter of 2012 compared with $21.3 million, or 4.9% of sales, for the second fiscal quarter of 2011. The increase in research, development and engineering spending principally reflects higher spending on control systems and communication systems of $5 million, and incremental spending as a result of the Souriau acquisition of $3 million. Fiscal 2012 research, development and engineering spending is expected to be approximately 5.5% to 6.0% of sales.

Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the second fiscal quarter of 2012 totaled $69.1 million, or 13.7% of sales, compared with $79.5 million, or 18.3% of sales, for the second fiscal quarter in 2011.

Sensors & Systems segment earnings were $24.7 million, or 13.4% of sales, for the second fiscal quarter of 2012 compared with $11.6 million, or 13.6% of sales, for the second fiscal quarter of 2011, principally reflecting $10 million in incremental earnings from the Souriau acquisition in July 2011. Souriau's earnings exceeded our expectations and reflected strong sales and earnings from commercial aviation and industrial operations.

Advanced Materials segment earnings were $26.1 million, or 20.9% of sales, for the second fiscal quarter of 2012 compared with $23.0 million, or 19.4% of sales, for the second fiscal quarter of 2011, primarily reflecting a $6 million increase in engineered materials, partially offset by a decrease in defense technologies. The increase in engineered materials was due to increased gross profit on higher sales of elastomer and insulation material. The decrease in defense technologies reflected lower gross profit from sales of combustible ordnance and U.K. manufactured countermeasures.

Prior to our March 2007 acquisition of CMC, CMC was involved in a transaction in which CMC shareholders had a limited amount of time in which to tender their shares in exchange for cash. In May 2008, after the prescribed time period had expired, CAD $11.8 million remained unclaimed. As a result, the paying agent returned the unclaimed amount to CMC in accordance with Canadian law. In December 2008, CMC's former parent company instituted a legal action against the paying agent, alleging negligence and breached contract terms by returning the funds to CMC. The plaintiff lost at trial and appealed. In the second quarter of fiscal 2012, CMC received notice that the plaintiff abandoned its appeal. In addition, CMC and the paying agent settled all remaining issues. Management concluded that all contingencies relating to this matter were resolved, and accordingly, the Company recorded a gain of approximately CAD $11.8 million or $11.9 million, or $9.5 million after tax, in the second fiscal quarter of 2012.

Interest expense for the second fiscal quarter of 2012 was $11.5 million compared with $9.0 million for the second fiscal quarter of 2011, reflecting higher borrowings as a result of the Souriau acquisition.

The income tax rate was 19.7% compared with 20.5% for the second fiscal quarter of 2012 and 2011, respectively. In the second fiscal quarter of 2012, we recognized $0.3 million of discrete tax expense associated with the accrual of interest on tax reserves. In the second fiscal quarter of 2011, we recognized $1.9 million of discrete tax benefits principally due to the release of a valuation allowance related to a net operating loss of an acquired subsidiary. The fiscal 2012 income tax rate before discrete items is 19.3% compared to 23.9% for fiscal 2011. The decrease in the income tax rate before discrete items was due to the tax benefits associated with the holding company structure of the Souriau acquisition. The income tax rate differed from the statutory rate in the second fiscal quarter of 2012 and 2011, 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. To the extent that these contracts qualify as hedges under U.S. GAAP, the amount of gain or loss is deferred in Accumulated Other Comprehensive Income (AOCI) until the related sale occurs. Also, we are subject to foreign currency gains or losses from embedded derivatives on backlog denominated in a currency other than the functional currency of our operating companies or its customers. Gains and losses on forward contracts, embedded derivatives, and revaluation of assets and liabilities denominated in a currency other than the functional currency of the Company for the three month periods ended April 27, 2012, and April 29, 2011, are as follows:

(In thousands)                                                 Three Months Ended
                                                        April 27,               April 29,
                                                          2012                    2011

Forward foreign currency contracts - gain           $           1,055       $           2,434
Forward foreign currency contracts -
reclassified from AOCI                                            560                   3,065
Embedded derivatives - gain (loss)                                249                  (1,350 )
Revaluation of monetary assets/liabilities -
(loss)                                                            (70 )                (3,695 )

Total                                               $           1,794       $             454

Sales for the first six months increased 21.0% over the prior-year period. Sales by segment were as follows:

(In thousands)

                             Incr./(Decr.)              Six Months Ended
                              from prior          April 27,           April 29,
                             year period            2012                2011

     Avionics & Controls        (11.7)%        $       374,597     $       423,999
     Sensors & Systems          119.7%                 356,355             162,236
     Advanced Materials          11.3%                 244,761             219,841

     Total Net Sales                           $       975,713     $       806,076

The 11.7% decrease in sales of Avionics & Controls reflected decreased sales volumes of avionics systems of $45 million. The $45 million decrease in avionics systems was principally due to lower cockpit integration sales volumes for the T-6B military trainer and retrofits of military transport aircraft. The decrease in segment sales also reflected an $11.0 million decrease in sales of hearing protection headsets due to reduced demand and order delays, which was substantially offset by strong sales of communication intercept receivers for signal intelligence applications. Additionally, interface technologies sales decreased due to lower demand for input systems for casino gaming applications.

The 119.7% increase in sales of Sensors & Systems principally reflected incremental sales from the Souriau acquisition of $170 million and increased sales volume of advanced sensors and power systems of $24 million. About one third of the increase in advanced sensors and power systems sales reflected higher OEM sales of temperature and pressure sensors and strong aftermarket demand. The increase in power systems reflected higher demand for commercial aviation products. Sales in the first six months of fiscal 2012 reflected a weaker euro relative to the U.S. dollar compared to the prior-year period. The average exchange rate from the euro to the U.S. dollar decreased from 1.37 in the first six months of fiscal 2011 to 1.33 in the first half of fiscal 2012.

The 11.3% increase in sales of Advanced Materials principally reflected increased sales volumes of engineered materials of $33 million, partially offset by decreased sales volumes of defense technologies of $9 million. The $33 million increase in engineered materials primarily reflected strong demand for elastomer and insulation materials for commercial aviation products. The $9 million decrease in defense technologies principally reflected a decrease in sales of non-U.S. countermeasure flares due to reduced demand and order delays.

Overall, gross margin as a percentage of sales was 35.1% and 36.4% for the first six months of fiscal 2012 and 2011, respectively. Gross profit was $342.6 million and $293.1 million for the first six months of fiscal of 2012 and 2011, respectively.

Avionics & Controls segment gross margin was 38.3% and 39.2% for the first six months of fiscal 2012 and 2011, respectively. Segment gross profit was $143.4 million compared to $166.2 million in the prior-year period. The decrease in gross profit was mainly due to lower sales volumes of cockpit integrations for the T-6B military trainer and retrofits of military aircraft. A $2 million increase in communication systems gross profit reflected increased gross profit from strong sales of communication intercept receivers for signal intelligence applications, partially offset by a $6 million decrease in gross profit from sales of hearing protection devices.

Advanced Materials segment gross margin was 33.3% for the first six months of fiscal 2012 compared to 31.8% for the same period one year ago. Segment gross profit was $81.5 million compared to $69.9 million in the prior-year period. The increase in gross profit was principally due to higher sales of elastomer materials and insulation materials primarily for commercial aviation applications. Gross profit on defense technologies decreased $3 million, principally reflecting decreased gross profit and margin on combustible ordnance due to sales mix as well as lower gross profit on non-U.S. flare countermeasures reflecting decreased demand and delayed shipments.

Selling, general and administrative expenses (which include corporate expenses) totaled $193.6 million, or 19.8% of sales, and $138.5 million, or 17.2% of sales, for the first six months of fiscal 2012 and 2011, respectively. The increase in selling, general and administrative expense principally reflected a $42.9 million increase in selling, general and administrative expense at our Sensors & Systems segment. Corporate expense increased nominally due to a loss on a foreign currency hedge on an intercompany loan. The increase in selling, general and administrative expense at our Sensors & Systems segment mainly reflects incremental selling, general and administrative expense from the Souriau acquisition.

Research, development and engineering spending was $55.9 million, or 5.7% of sales, for the first six months of fiscal 2012 compared with $40.9 million, or 5.1% of sales, for the first six months of fiscal 2011. The increase in research, development and engineering spending principally reflects expense on control systems, communication systems, and incremental expense as a result of the Souriau acquisition of $6 million. Fiscal 2012 research, development and engineering spending is expected to be approximately 5.5% to 6.0% of sales.

Total segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first six months of fiscal 2012 totaled $119.1 million, or 12.2% of sales, compared with $136.7 million, or 17.0% of sales, for the first six months in fiscal 2011.

Avionics & Controls segment earnings were $38.3 million, or 10.2% of sales, in the first six months of fiscal 2012 and $75.9 million, or 17.9% of sales, in the first six months of fiscal 2011, mainly reflecting a $24 million decrease in avionics systems and an $8 million decrease in control systems. Avionics systems earnings were impacted by decreased gross profit and the $2.3 million bad debt expense due to the bankruptcy of Hawker Beechcraft. Control systems earnings were impacted by decreased gross profit, $5 million in increased research, development and engineering expense, and $0.5 million in bad debt expense related to the Hawker Beechcraft bankruptcy filing. The prior-year period benefited from a $1.1 million recovery of non-recurring engineering upon settlement with the customer.

Sensors & Systems segment earnings were $31.5 million, or 8.8% of sales, for the first six months of fiscal 2012 compared with $22.6 million, or 13.9% of sales, for the first six months of fiscal 2011, reflecting $4 million in incremental earnings from the Souriau acquisition, a $2 million increase in advanced sensors and a $3 million increase in power systems. Both advanced sensors and power systems benefited from increased gross profit. Power systems earnings were also impacted by higher non-recurring engineering expenses related to the A400M program.

Advanced Materials segment earnings were $49.2 million, or 20.1% of sales, for the first six months of fiscal 2012 compared with $38.2 million, or 17.4% of sales, for the first six months of fiscal 2011, primarily reflecting increased . . .