Overview

We operate our businesses in three segments: Avionics & Controls, Sensors & Systems and Advanced Materials. Our segments are structured around our technical capabilities.

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 for severe battlefield environments, embedded communication intercept receivers for signal intelligence applications, as well as communication control systems to enhance security and aural clarity in military 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 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 to 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.

Net income was $25.1 million, or $0.80 per diluted share, in the first fiscal quarter of 2013 compared with $22.8 million, or $0.73 per diluted share, in the prior-year period.

Total sales decreased 2.7% over the prior-year period to $458.0 million, principally reflecting lower sales in Avionics & Controls and the Advanced Materials segment. These two segments were impacted by reductions in defense spending mainly due to the continued uncertainty of U.S. congressional budget cuts, or sequestration, on defense spending. Without additional congressional action, further budget cuts as set forth in the Budget Control Act of 2011 will be implemented on March 1, 2013. While we believe we have adequately anticipated the impact on our financial results for fiscal 2013, the impact of sequestration is yet to be fully determined and additional reductions in defense spending over the next decade could occur.

Gross margin increased to 35.0% in the first fiscal quarter of 2013 compared with 33.6% in the prior-year period. The prior-year period included effects of purchase accounting to recognize the fair value of the Souriau Group (Souriau) acquired inventory as expense over the first inventory turn. Research, development and engineering spending decreased $3.3 million over the prior-year period to 5.0% of sales due to decreased spending for Avionics & Controls developments. Selling, general and administrative expenses increased $3.9 million over the prior-year period, reflecting a $3.6 million increase in corporate expense. Selling, general and administrative expense as a percent of sales increased 1.4 percentage points over the prior-year period to 21.5% of sales. The increase in selling, general and administrative expense as a percent of sales mainly reflected lower sales volumes. Net income benefited from a decrease in the income tax rate to 8.5% from 10.1% in the prior-year period, reflecting certain discrete tax benefits.

Results of Operations

Three Month Period Ended January 25, 2013, Compared with Three Month Period
Ended January 27, 2012

Sales for the first fiscal quarter decreased 2.7% when compared with the
prior-year period. Sales by segment were as follows:

(In thousands)

                           Incr./(Decr.)               Three Months Ended
                            from prior          January 25,           January 27,
                            year period            2013                  2012

   Avionics & Controls        (2.8)%         $         174,570     $         179,572
   Sensors & Systems           0.1%                    171,810               171,672
   Advanced Materials         (6.7)%                   111,582               119,638

   Total Net Sales                           $         457,962     $         470,882

The 2.8% decrease in sales of Avionics & Controls reflected decreased sales volumes of avionics systems of $6 million and communication systems of $3 million, partially offset by increased sales volumes of control systems. The decrease in avionics systems was principally due to a relative equal decline in cockpit integration and aviation product sales volumes. The decrease in cockpit integration sales reflected a reduction in retrofits for military transport aircraft and the T-6B. The decrease in avionics products mainly reflected the timing of orders and shipments from our defense customers. The decrease in communication systems principally reflected reduced sales of embedded communication intercept receivers. The increase in control systems mainly reflected strong commercial aviation demand.

The 6.7% decrease in sales of Advanced Materials principally reflected decreased sales volumes of defense technologies of $6 million and decreased sales volumes of engineered materials. The decrease in defense technologies sales volumes mainly reflected lower sales of countermeasure devices due to production inefficiencies resulting in delayed shipments. The decrease in engineered materials mainly reflected lower demand for defense applications.

Overall, gross margin was 35.0% and 33.6% for the first fiscal quarter of 2013 and 2012, respectively. Gross profit was $160.3 million and $158.1 million for the first fiscal quarter of 2013 and 2012, respectively.

Avionics & Controls segment gross margin was 36.6% and 38.8% for the first fiscal quarter of 2013 and 2012, respectively. Segment gross profit was $63.8 million compared to $69.7 million in the prior-year period. The decrease in segment gross profit was principally due to lower gross profit on avionics systems of $6 million mainly due to lower sales volumes for the T-6B military trainer cockpit and avionics products for defense applications. A $3 million increase in gross profit on control systems was offset by a decrease in communication systems due to lower demand for embedded communication intercept receivers.

Sensors & Systems segment gross margin was 36.5% and 28.5% for the first fiscal quarter of 2013 and 2012, respectively. Segment gross profit was $62.7 million compared to $48.8 million in the prior-year period. The increase in gross profit was mainly due to increased gross profit for connection technologies of $14 million. The prior-year period gross profit of connection technologies was impacted by a $12 million charge due to recording Souriau's acquired inventory at its fair value.

Selling, general and administrative expenses (which include corporate expenses) totaled $98.6 million, or 21.5% of sales, and $94.7 million, or 20.1% of sales, for the first fiscal quarter of 2013 and 2012, respectively. The 1.4 percentage point increase in selling, general and administrative expense as a percentage of sales was principally due to lower sales volumes. The $3.9 million increase in selling, general and administrative expenses mainly reflected higher corporate compensation expense and professional fees for regulatory compliance and acquisitions.

Research, development and engineering spending was $23.1 million, or 5.0% of sales, for the first fiscal quarter of 2013 compared with $26.4 million, or 5.6% of sales, for the first fiscal quarter of 2012. The decrease in research, development and engineering spending principally reflects lower spending on avionics systems. Fiscal 2013 research, development and engineering spending is expected to be in the range of approximately 5% to 5.25% of sales.

Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first fiscal quarter of 2013 totaled $55.2 million, or 12.1% of sales, compared with $50.0 million, or 10.6% of sales, for the first fiscal quarter in 2012.

Avionics & Controls segment earnings were $18.6 million, or 10.6% of sales, in the first fiscal quarter of 2013 and $20.1 million, or 11.2% of sales, in the first fiscal quarter of 2012, mainly reflecting a $3 million decrease in avionics systems and a $2 million decrease in communication systems, partially offset by an increase in control systems. Avionics systems earnings were impacted by decreased gross profit, partially offset by lower spending on research, development and engineering. Communication systems earnings were mainly impacted by decreased gross profit on lower sales of embedded communication intercept receivers.

Sensors & Systems segment earnings were $19.0 million, or 11.1% of sales, for the first fiscal quarter of 2013 compared with $6.8 million, or 4.0% of sales, for the first fiscal quarter of 2012, principally reflecting the $12.0 million inventory fair value charge discussed above. Sensors & Systems also benefited by strong earnings from increased sales of power systems, partially offset by weaker earnings from decreased sales of advanced sensors for the aftermarket.

Advanced Materials segment earnings were $17.6 million, or 15.8% of sales, for the first fiscal quarter of 2013 compared with $23.1 million, or 19.3% of sales, for the first fiscal quarter of 2012, primarily reflecting decreased gross profit on lower sales of elastomer materials for defense applications.

Interest expense for the first fiscal quarter of 2013 was $10.4 million compared with $11.5 million for the first fiscal quarter of 2012, reflecting lower borrowings.

The income tax rate was 8.5% compared with 10.1% for the first fiscal quarter of 2013 and 2012, respectively. In the first fiscal quarter of 2013, the Company recognized $3.7 million of discrete tax benefits principally related to the following items. The first item was approximately $1.5 million of tax benefits due to the retroactive extension of the U.S. federal research and experimentation credits. The second item was approximately $2.2 million of tax benefits related to the settlement of U.S. and foreign tax examinations. In the first fiscal quarter of 2012, the Company recognized $2.3 million of discrete tax benefits due to a change in French tax laws associated with the holding company structure and the financing of the Souriau acquisition. The income tax rate differed from the statutory rate in the first fiscal quarter of 2013 and 2012, as both years benefited from various tax credits and certain foreign interest expense deductions.

It is reasonably possible that within the next twelve months approximately $5.1 million of tax benefits associated with research and development tax credits, capital and operating losses that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of a statute of limitations.

We use forward contracts to hedge our foreign currency exchange risk. To the extent that these hedges qualify 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 first fiscal quarter of 2013 and 2012 are as follows:

(In thousands)
                                                            Three Months Ended
                                                   January 25,              January 27,
                                                       2013                    2012
Forward foreign currency contracts - loss       $             (905 )     $          (5,803 )
Forward foreign currency contracts -
reclassified from AOCI                                         (80 )                  (101 )
Embedded derivatives - gain                                    496                     337
Revaluation of monetary assets/liabilities
- gain (loss)                                               (3,113 )                 3,351

Total                                           $           (3,602 )     $          (2,216 )

New orders for the first fiscal quarter of 2013 were $473.6 million compared with $467.8 million for the same period in 2012. Backlog was $1.3 billion at January 25, 2013, compared to $1.2 billion at January 27, 2012, and $1.3 billion at the end of fiscal 2012.

Cash and cash equivalents at January 25, 2013, totaled $202.8 million, an increase of $42.1 million from October 26, 2012. Net working capital increased to $664.7 million at January 25, 2013, from $639.3 million at October 26, 2012. Sources and uses of cash flows from operating activities principally consisted of cash received from the sale of products and cash payments for material, labor and operating expenses. Cash flows provided by operating activities were $86.5 million and $46.6 million in the first fiscal quarter of 2013 and 2012, respectively. The increase principally reflected high cash receipts from the sale of products.

Cash flows used by investing activities were $12.2 million and $12.5 million in the first fiscal quarter of 2013 and 2012, respectively. Cash flows used by investing activities in the first fiscal quarter of 2013 and 2012 mainly reflected cash paid for capital expenditures.

Cash flows used by financing activities were $32.4 million in the first fiscal quarter of 2013 and mainly reflected $36.6 million repayment of long-term debt. Cash flows used by financing activities were $22.1 million in the first fiscal quarter of 2012 and mainly reflected $28.3 million repayment of long-term debt and government assistance payments received of $7.9 million.

Capital expenditures, consisting of machinery, equipment and computers, are anticipated to be approximately $80.0 million during fiscal 2013, compared with $49.4 million expended in fiscal 2012.

Total debt at January 25, 2013, was $814.4 million and consisted of $250.0 million of Senior Notes due in 2020, $175.0 million of Senior Notes due in 2017, $61.2 million (€45.4 million) of the Euro Term Loan, $225.0 million in borrowings under our secured credit facility, $52.0 million government refundable advances, $44.8 million under capital lease obligations, and $6.4 million under our various foreign currency debt agreements and other debt agreements. On February 5, 2013, the $75.0 million interest rate swap agreement to exchange the fixed interest rate on the $175.0 million Senior Notes due in 2017 for a variable interest rate was called and is payable in 30 days.

Subsequent to period end, on February 4, 2013, we acquired the Gamesman Group (Gamesman) for approximately $39.9 million. Gamesman is a global supplier of input devices principally serving the gaming industry. Gamesman will be included in the Avionics & Controls segment.

We believe cash on hand and funds generated from operations are adequate to service operating cash requirements and capital expenditures through the next twelve months.

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases you can identify forward-looking statements by terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "should" or "will" or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risk factors set forth in "Forward-Looking Statements" and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended October 26, 2012, that may cause our or the industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.