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(INTRODUCTION FOR CONFERENCE CALL)

Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of July 30, 2021 our most recent Form 8K filed on July 30, 2021 and in certain of our other public filings with the SEC.

We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our investor relations webcast page at .

Intro

Good morning.Ìý Thanks for joining us.Ìý This morning we’ll report on the third quarter of fiscal ’21 and affirm our guidance for the full year.Ìý Overall, it was a relatively quiet quarter with the business performing pretty much to plan.Ìý I’ll follow my usual format today, starting with the headlines under the 3 headings of macro-economic factors, market trends and Áõ«hÊ״δóÕ½ºÚÈËspecific items.ÌýÌý

Headlines

The macro-economic factors affecting our business have not changed markedly over the last quarter, although the state of play has evolved.Ìý Vaccines have become widely available in the developed world facilitating a partial return to pre-COVID behaviors.Ìý As a result, economic activity is picking up across most major markets.Ìý However, the emergence of the Delta variant, combined with vaccine hesitancy in large portions of the population, give reason to remain vigilant and are a reminder that the dangers of COVID are far from over.Ìý In the U.S., federal spending on COVID relief, infrastructure and green initiatives will set the budget tone for several years to come.Ìý Higher taxes and potentially more constrained Defense budgets seem inevitable.Ìý Supply chains continue to tighten for a range of commodities with electronics topping the list.Ìý Finally, inflation is reported to be transitory, although the experience at both the business and personal level would suggest it could be longer-lasting than the Federal Reserve is projecting.

Turning to our major markets, all 5 markets continue to perform pretty much in line with expectations.Ìý Government spending on Defense remains strong.Ìý Commercial air traffic has recovered nicely over the last 90 days with domestic travel leading the way while international travel has remained muted.Ìý Capital spending on industrial automation has accelerated as companies scramble to build capacity to meet burgeoning demand.Ìý The Space market remains very exciting with billionaires floating in zero gravity and investors piling into SPACS with valuations firmly anchored in outer space.Ìý Finally, medical markets have returned to a more normal situation post COVID.Ìý

On the home front, it was a solid quarter for the business.Ìý Earnings were in line with our April forecast and cash flow was strong.Ìý Remember that Q3 last year was the first full quarter of COVID and we incurred $56 million of restructuring and impairment charges.Ìý In our text, comparisons this year are to adjusted Q3 FY20 numbers excluding these charges.Ìý Sales this quarter were up 8% from last year primarily driven by stronger commercial aircraft and space results.Ìý Earnings per share were up 20% from the adjusted numbers last year and free cash flow conversion was almost 175%.Ìý We started to see our employees return to the office, particularly in the U.S., and we’re developing our plans for future flexible working.Ìý We believe the future of work will be different from the past and that companies that provide flexibility can gain both a productivity and talent advantage.Ìý The supply chain for various commodities is an increasing concern.Ìý To date we’ve managed through the challenges and not yet experienced any significant disruption in our operations.Ìý It will, however, remain a watch item for the coming quarters.Ìý With 3 quarters in the bank, we’re tweaking our sales forecast through the end of the fiscal year and keeping our earnings per share forecast unchanged.Ìý All in all, steady as she goes.

Now let me move to the details starting with the third quarter results.Ìý

Q3 Fiscal ‘21

Sales in the quarter of $707 million were 8% higher than last year.Ìý Sales were higher in all three segments and up across all our major markets with the exception of medical.Ìý In the medical market, our business remains strong but sales have moderated from the surge in demand we saw this time last year.Ìý Taking a look at the P&L, gross margin was up slightly from an adjusted number last year on the higher sales and the positive impact of last year’s restructuring activities.Ìý R&D was up as a result of the Genesys acquisition and slightly higher investments in our industrial business.Ìý SG&A was down as a % of sales.Ìý Interest expense was lower on reduced debt levels and lower rates.Ìý The effective tax rate this quarter was 25.7% resulting in net income of $36 million and earnings per share of $1.12, up 19% and 20% respectively from the adjusted numbers last year.ÌýÌý

Fiscal ’21 Outlook

With 3 quarters behind us, we’re on track to meet our full year EPS guidance of $5.00, plus or minus 15 cents.Ìý Relative to our outlook at the end of Q2, we’re forecasting slightly lower sales in our military aircraft market and slightly higher sales in our industrial markets.Ìý Taken all together, we’re expecting full year sales of $2.82 billion, down marginally from our forecast of 90 days ago, and slightly higher margins to achieve our $5.00/share projection.ÌýÌý

Now to the segments.Ìý I’d remind our listeners that we’ve provided a 3-page supplemental data package, posted on our webcast site, which provides all the detailed numbers for your models.Ìý We suggest you follow this in parallel with the text.

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Aircraft

Aircraft Q3

Sales in the quarter of $272 million were 9% higher than last year.Ìý In each of the last 4 quarters, we’ve reported strong military sales compensating for lower commercial sales.Ìý This quarter we saw a reversal in that pattern with higher commercial sales compensating for marginally lower military sales.Ìý Comparing with the same quarter last year, military OEM sales continued their strong performance, with sales up 19% from a year ago.Ìý Higher funded development, combined with the acquired sales of Genesys made up half the increase with the remaining gains across a wide range of programs, both domestic and foreign.Ìý OEM sales on the F-35 were more or less in line with last year.Ìý Similar to last quarter, the military aftermarket was down markedly from a very strong performance a year ago.Ìý The reductions were across a broad range of programs, including lower spares ordering on the F-35.Ìý We’ve seen a general slowdown in our military aftermarket over the last 4 quarters which we believe is a result of our DOD customers working off a buildup of inventory in the early phases of COVID.ÌýÌý

On the commercial side OEM sales were up sharply from the low point of the pandemic last year.Ìý The majority of the increase is the result of acquired sales from our Genesys acquisition.Ìý Sales on both our wide body and narrow body programs are up marginally from last year.Ìý Remember that sales on these programs are accounted for under ASC 606 and are driven by a combination of orders from our customers, our internal build rate and the level of our inventory receipts.Ìý Each of these factors has moved significantly over the last year.Ìý On a positive note, despite Boeing’s 787 delivery challenges, our internal build rate has been steady for several quarters now and reflects the stable demand profile from our customers.Ìý The commercial aftermarket was up over 50% from a year ago.Ìý Last year’s third quarter was the low point in the pandemic and we’ve seen a nice recovery over the last 4 quarters across our complete aftermarket portfolio.ÌýÌý

On a sequential basis, Q3 sales were down about 10% from Q2 on weaker Military and Commercial OEM sales.Ìý Military aftermarket sales were in line while the commercial aftermarket was slightly higher.Ìý

Aircraft Margins

Margins in the quarter were 7.5%, up over 300 basis points from the adjusted margin last year.Ìý Margins were also up slightly on a sequential basis as our operations continue to improve, despite the headwind of lower sales.Ìý ÌýÌý

Aircraft fiscal 21

We’re updating our forecast from 90 days ago to reflect our experience through 3 quarters.Ìý We’re reducing our military forecast by $40 million, divided equally between the F-35 OEM and the military aftermarket.Ìý On the commercial side, we’re keeping the total sales forecast unchanged and refining the mix – increasing the aftermarket by $10 million while reducing the OEM by the same amount.Ìý Taken all together, we’re forecasting full year sales of $1.14 billion, down 5% from fiscal ’20.Ìý

Despite the lower sales forecast, we’re increasing our full year operating profit marginally, yielding full year margins of 8.6%.Ìý

Ìý

Space & Defense

Space & Defense Q3

Sales in the quarter of $205 million were 11% higher than last year.Ìý This quarter we enjoyed nice growth in both the space and defense markets.Ìý The space business continued its strong performance of the last few years.Ìý The sales increase in Q3 was fueled by the initial activity on the NASA VIPER program, higher avionics sales and continued growth in our integrated space vehicles product line.Ìý

Defense sales were up from a relatively weak quarter a year ago.Ìý Q3 sales of $119 million were 8% higher than last year.Ìý We saw sales increases on vehicle and naval applications as well as in our components business across a broad range of platforms.Ìý Sales on missiles and into security applications were lower.Ìý Sales in the quarter were more or less in line with the average quarterly sales of the last 10 quarters.Ìý

Space & Defense Margins

Margins in the quarter were 10.4%.Ìý This margin performance is down from the results we’ve enjoyed over the last few years.Ìý In the quarter, we experienced cost growth on some of our space development programs which depressed margins by about 200 basis points.Ìý More generally, we’re seeing a shift to more funded development work in this business, a positive trend which bodes well for the long-term but tends to depress margins in the short term.ÌýÌý

Space & Defense fiscal ‘21

We’re leaving our full year sales projection unchanged at $795 million.Ìý We’re also leaving the mix between space and defense unchanged.Ìý Given the lower margin in Q3 and the continued mix shift to funded development work, we’re moderating our full year margins outlook to 11.8%.Ìý
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Ìý

Industrial Systems

Industrial Systems Q3

Sales in the quarter of $230 million were 3% higher than last year.Ìý All of the gain was from foreign exchange movement.Ìý Real sales were down about 1%.Ìý This quarter we saw significant shifts in 2 markets.Ìý Sales into industrial automation were up nicely while sales into medical applications were down.Ìý Energy and Simulation & Test sales were more or less in line with last year.Ìý

Starting with industrial automation, the post-pandemic GDP recovery across much of the globe is fueling investments in capital equipment.Ìý This recovery has been much faster than typical historical cycles and is creating shortages in many product categories.Ìý As a result, companies across a range of industries are scrambling to expand production capacity and the resulting increase in capital investment is fueling stronger orders for our automation components.Ìý This increase in industrial automation is being mirrored by a decrease in our medical business.Ìý Last year we saw a huge increase in orders for our medical pumps and components as health care providers rushed to acquire equipment to meet the demands of COVID.Ìý This COVID-driven demand has now passed and our sales have settled back down to a more normal run rate.Ìý

In our energy market, our sales level has been pretty stable for a couple of years as oil prices have averaged around $60 per barrel.Ìý Finally, our simulation and test business saw stronger test sales compensating for weaker flight simulation sales.Ìý We’ve not yet seen a rebound in our flight simulation business despite the recovery in air traffic over the last few quarters.Ìý For all of fiscal ’21, we estimate that our flight simulation business will be down over 40% from our fiscal ’19 total.Ìý

Industrial Systems Margins

Margins in the quarter were 10.0%, up 90 basis points from adjusted margins last year.ÌýÌý

Industrial Systems fiscal 21

For the full year, we’re increasing our sales projection by $15 million from last quarter to yield full year sales of $880 million.Ìý The additional sales are all in our Industrial Automation markets reflecting the continued strength we’re seeing in this business.Ìý

Ìý

We’re keeping our projection for full year margins unchanged at 10.0%.Ìý

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Summary Guidance

As we enter the last quarter of our fiscal year we’re on track to meet our EPS guidance of $5 per share.Ìý We’re looking forward to bringing more of our employees back to the work place and rebuilding relationships with our customers and suppliers with in-person meetings.Ìý We’re adopting a flexible approach to working which will allow for a smooth transition from COVID conditions to a future which better meets both the needs of the business and the interests of our employees.Ìý Economic activity across the globe is strengthening, giving us confidence for the future.Ìý However, the spread of the Delta variant remains a real concern and could force us to take a step back on our reopening plans at any time.Ìý In addition, both inflation and supply chain constraints will be watch items for the coming quarters.Ìý For now, we believe these risks are muted and that our business will continue to perform well.ÌýÌý

Market Look

Looking at our fiscal 21 forecast by our 5 end markets clearly shows the impact of the pandemic over the last 2 years.Ìý Through the pandemic, we’ve described our markets in the following terms.Ìý Defense, space and medical have been strong, industrial has been pressured and commercial aircraft has been the hardest hit.Ìý The numbers bear this out.Ìý Comparing fiscal ’21 to our pre-COVID fiscal ’19, we see total sales are down only 3%.Ìý However, our mix has moved significantly.Ìý Over this 2 year period, defense went from 37% of sales to 44% and space went from 8% to 12%.Ìý Medical is up one percentage point to 9% while industrial is down from 24% to 22% and commercial aircraft is down 10 percentage points to 13%.Ìý We’ve managed successfully through this transition and look to further recovery in both industrial and commercial aircraft as we move into fiscal ’22.Ìý

Capital Allocation

Turning to capital allocation, we continue to invest in organic growth opportunities and pursue acquisitions which meet our interests.Ìý The M&A market has become much more active over the last few quarters and we’ve looked at many more deals than a year ago.Ìý We’re not sure the risk profile of acquisition targets has changed materially from a few years back, but free money and the hunt for yield, have changed the prices dramatically.Ìý We remain cautious in our assessment of value and, as a result, find ourselves walking away from many deals.Ìý We’ll continue to look, but we’re also comfortable that we have alternative options for allocating capital to create long-term shareholder value.Ìý

Forecast

For the full year fiscal ’21 we’re forecasting sales of $2.82 billion, down $25 million from 90 days ago on lower military aircraft activity.Ìý We’re forecasting earnings per share of $5.00 at the midpoint of our range, unchanged from 90 days ago.Ìý This results in earnings per share in the fourth quarter of $1.20, plus or minus 15 cents.Ìý Our range of plus or minus 15 cents is slightly larger than our pre-COVID norm and reflects the continued uncertainty around the Delta variant, supply chain disruption and the threat of inflation.Ìý Overall, we’re feeling good about the year and looking forward to providing guidance on fiscal ’22 in our next earnings call.Ìý

Ìý

Now let me pass you to Jennifer who will provide more color on our cash flow and balance sheet.

Ìý

Thank you, John. Good morning, everyone.

Ìý

We had an excellent quarter from a free cash flow standpoint, with free cash flow of $63 million and conversion of about 175%. That compares to another standout quarter a year ago, when free cash flow was $90 million. Our third quarter last year marked our first full quarter managing through the pandemic, and we were incredibly focused on preserving cash and ensuring that we had sufficient liquidity to manage through the uncertain times ahead. Year-to-date, in 2021, our free cash flow conversion is nicely over 100%.

The $63 million of free cash flow in Q3 compares with a decrease in our net debt of $47 million.Ìý During the third quarter, we paid our quarterly dividend and repurchased some shares.

Net working capital (excluding cash and debt) as a percentage of sales at the end of Q3 was 29.2% compared to 30.5% a quarter ago. Receivables decreased due to strong collections, including a benefit associated with timing. At the end of the second quarter, receivables were elevated. Key customers in our commercial aircraft business slowed payments and we had unusually strong industrial shipments late in the second quarter. We collected on all of those receivables this quarter and did not have similar circumstances affecting timing at the end of our third quarter.

Capital expenditures in the third quarter were $31 million, up from $20 million in the first quarter and lower than the $38 million in the second quarter. Our levels of capital spend naturally fluctuate from quarter to quarter, and are also affected by specific drivers. We are now catching up on capital investments that we had delayed during the more uncertain times of the pandemic. In addition, we are consolidating some of our operations into new facilities to reduce our footprint over time.

At quarter end, our net debt was $828 million, including $92 million of cash. The major components of our debt were $500 million of senior notes, $363 million of borrowings on our U.S. revolving credit facilities and $56 million outstanding on our securitization facility.Ìý

We have $705 million of unused borrowing capacity on our U.S. revolving credit facility. Our ability to draw on the unused balance is limited by our leverage covenant, which is a maximum of 4.0x on a net debt basis. Based on our leverage, we could have incurred an additional $541 million of net debt as of the end of our third quarter.Ìý We are confident that our existing facilities provide us with the flexibility to invest in our future.

Cash contributions to our global retirement plans totaled $15 million in the quarter, compared to $12 million in the third quarter of 2020. Contributions have increased for our defined contribution plans. In the U.S., participation has increased in our defined contribution plan as our defined benefit plan remains closed to new participants. Global retirement plan expense in the third quarter was $19 million, down from $21 million the third quarter of 2020. This decrease reflects last year’s settlement of about half of the liability for our largest defined benefit plan.

Our effective tax rate was 25.7% in the third quarter, compared to 6.9%, excluding charges associated with the pandemic, in the same period a year ago. This year’s rate includes charges associated with the revaluation of deferred tax liabilities in the UK, mostly offset by adjustments to last year’s provision in the U.S. Last year’s third quarter rate was relatively low. It reflects foreign tax credit utilization associated with a prior year tax return filing. In addition, the rate was affected by a low earnings before income taxes base.Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý

We expect free cash flow generation in 2021 to be in line with our long-term target of 100% conversion. We expect capital expenditures in 2021 to be $130 million, and depreciation and amortization to be $90 million.

Our leverage ratio was 2.4x on a net debt basis as of the end of the third quarter, the same as a year ago. Very strong cash generation was offset by the pressures on EBITDA from the impacts of the pandemic as well as capital allocated towards acquisitions and share repurchases. Our leverage ratio continues to be within our target zone of 2.25x to 2.75x.

Our strong financial situation positions us well to invest and deploy our capital. Funding organic growth is particularly attractive right now, especially considering the pricing we’re seeing on the M&A front. We are continuing to explore opportunities to complete strategic acquisitions and return capital to shareholders.

With that, we’ll turn it back to John for any questions you may have.

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