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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 April 29, 2022, our most recent Form 8K filed on April 29, 2022, 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 .

Good morning. Thanks for joining us. This morning we’ll report on the second quarter of fiscal ‘22 and affirm our guidance for the remainder of the year.Ìý

Let me start with the key financials. It was a strong quarter with adjusted earnings per share of $1.49, 12% higher than the adjusted $1.33 we recorded in Q2 FY21.Ìý Adjusted EPS this quarter was also slightly above the high end of our guidance from 90 days ago. The situation around COVID and supply chain disruption continued to present challenges during the quarter but our teams managed these well. Adjusted free cash flow in the quarter, excluding the impact of our securitization facility, was negative $24 million. Finally, there is no change to our guidance for the full year. Full year sales will be $3 billion with adjusted earnings per share of $5.50, plus or minus $0.20.Ìý

Now let me move to the headlines.Ìý

1.ÌýÌýÌý First, the world has changed considerably since we reported our Q1 earnings at the end of January. The Russian invasion of Ukraine has reset expectations around long-term defense spending, particularly in Europe. At this stage, the impact on our overall defense business is difficult to estimate. We believe, however, that there will be no material change over the next 6 months, with potential tailwinds in future fiscal years.Ìý

2.ÌýÌýÌý Second, COVID, supply chain, labor attrition and inflation continue to weigh on economic activity and make short term financial forecasting difficult. To date, we have managed well through these challenges as evidenced by our results this quarter. However, they will continue to be major distractions to normal business operations through the remainder of this fiscal year.Ìý

3.ÌýÌýÌý Third, we took charges this quarter across our segments tied to the delayed recovery in the commercial aircraft business, the Russian actions in Ukraine and further refinements in our portfolio. The total charges had an adverse impact on earnings per share of $0.59 cents in the quarter. I’ll provide more details on each of the charges as I move through the segment discussions.Ìý

4.ÌýÌýÌý Finally, we’re pleased with the results of our second quarter which came in ahead of forecast. Ninety days ago, our plan for the year included a considerable ramp up in earnings in the second half. The underlying outlook for the year has not changed, rather some of the forecasted Q3 and Q4 earnings increase actually accelerated into the second quarter. As a result of the stronger Q2, we are now forecasting Q3 and Q4 to be pretty much in line with Q2 in terms of both sales and earnings.Ìý

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

Q2 Fiscal ‘22

Sales in the quarter of $771 million were 5% higher than last year. We saw increases in each of our 3 operating groups. Taking a look at the P&L, we incurred a $2 million charge as we wrote down some inventory and receivables associated with exiting our activities with Russia. Despite this charge, our gross margin was up slightly on the higher sales and a better mix. R&D and SG&A expenses were more or less in line with last year as a % of sales. We incurred restructuring costs of $8 million in the quarter as well as an impairment charge of $15 million. Both charges were associated with resizing the business and continuing our portfolio shaping activities. Interest expense was slightly lower than last year. The effective tax rate this quarter was 24.9% resulting in GAAP net earnings of $29 million and earnings per share of $0.91.Ìý

In order to compare the underlying operating performance with Q2 last year, there are adjustments we need to make to each quarter. In Q2 FY21, we recorded an 18c gain on a pension curtailment in Europe. Excluding this gain, the adjusted net earnings last year were $43 million and the adjusted EPS was $1.33. This year, we incurred the inventory write-down, restructuring and impairment charge in the quarter. Excluding the impact of these one-time charges in Q2 FY22, our net earnings this year were $48 million and our earnings per share were $1.49. On an adjusted basis, net earnings and earnings per share were both up 12% over the same quarter last year.Ìý

Fiscal ’22 Outlook

Our full year outlook remains unchanged from 90 days ago. We’re forecasting sales of $3 billion, up 6% from last year, and adjusted earnings per share of $5.50, up 13% from last year. We anticipate a slight acceleration in earnings in the second half. We’re keeping our full year EPS range unchanged at plus or minus 20c to reflect the continued uncertainty in the global economic climate, particularly in relation to supply chain issues.Ìý

Now to the segments. I’d remind our listeners that we’ve provided a 4-page supplemental data package, posted on our webcast site, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. 

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Aircraft

Our aircraft business provides flight control products to 2 very distinct markets, each with their own macroeconomic drivers. On the military side, the Russian invasion of Ukraine has changed the narrative around defense spending. In the U.S., both sides of the aisle are aligned on the importance of strong defense spending, while the European nations are redefining their level of commitment to defense budgets. The impact of these shifts on our business will play out over many years to come, although we don’t believe there will be any material impact in the present fiscal year.

On the commercial side, the overall atmosphere continues to improve with U.S. airlines showing stronger results and projecting further growth over the coming months. Aftermarket activity is on the rise and we are seeing this filter through in our numbers. On the other hand, the recent crash of a 737 in China, the continued delay in resuming 787 deliveries and the decision by Airbus to temper the future ramp on the A350 are weighing on the longer-term outlook for our business. China’s new front in their battle with COVID and the risk of recession in Europe arising from the Ukrainian conflict are also items we are watching. On balance we remain bullish about the commercial business but believe the recovery to pre-pandemic activity continues to move to the right.

This shift in our longer-term view of the commercial recovery, drove us to take further actions in the second quarter to resize the business. Back in 2020, we made a significant adjustment to our commercial workforce and incurred impairment charges as a result of the pandemic. At that time, the level of adjustment was based on our internal model of when we would see a recovery in the commercial business. Our intention was to ensure we had sufficient labor and capital to respond to the increase in production rates the OEM’s were forecasting. The delays in expected volume recovery at our major customers made it clear that we needed to make further adjustments to our staffing and asset base this quarter. As a result, we incurred $15 million of impairment charges and $4 million of restructuring charges this quarter.ÌýÌý

Aircraft Q2

Sales in the quarter of $311 million were 2% higher than last year. This quarter, our growth came from the aftermarket, both on the military and commercial side.Ìý Military aftermarket sales were up nicely with growth across a broad range of programs. We saw particular strength on the V-22 and F-15 platforms. In contrast, our military OEM sales were down from a year ago. The largest component of this drop was lower F-35 sales, driven mostly by the timing of material receipts. We also saw lower foreign military sales, compensated by higher V-22 activity. In last year’s second quarter, we had $5 million of sales from our Navigation AIDS business. We divested this business in Q1 this year, further driving the negative sales comparison with a year ago.Ìý

On the commercial side, OEM sales were about flat with last year. Lower 787 sales were compensated primarily by higher business jet sales, as well as slightly higher activity on the 737 and A350 programs. We’re keeping the OEM production rates on our major programs fairly steady in order to maintain the health of our supply chain and the efficiency of our plants. Therefore, the fluctuation in sales numbers from quarter to quarter is less a reflection of internal production volatility, and more the impact of the timing of material receipts.Ìý

Commercial aftermarket sales were way up this quarter. This is a combination of 2 items – underlying strength in the book of business and some one-time activities that booked this quarter. Each item contributed about half of the growth in the quarter. The underlying business continues to surprise to the upside with increases across all major platforms. The 787 continued to lead the way as international travel recovers. We also benefited from several one-time items in the quarter including some test equipment sales. These items will not repeat in future quarters.ÌýÌý

Aircraft Margins

GAAP operating margins in the quarter of 4.0% included 600 basis points of headwind from the resizing activities I have described. Adjusted operating margins of 10.0% were up nicely from the same quarter a year ago and also from our first quarter. The strength in the aftermarket on both the military and commercial sides of the house drove the margin gain.ÌýÌý

Aircraft fiscal 22

We’re keeping our full-year sales forecast unchanged from 90 days ago at $1.25 billion, up 7% from fiscal ’21. However, we’re adjusting the mix between military and commercial based on the experience of the first half. In total, military sales will be marginally lower than our previous forecast while commercial sales will be marginally higher.Ìý

We’re keeping our full-year adjusted margin forecast unchanged at 10.1%. This implies a strengthening from the run rate of the first half. We’ve already seen a nice margin pick up in the second quarter and believe we will see some further improvement as we move through the next 2 quarters.Ìý

Space & Defense

Similar to last quarter, underlying demand in both our Space and Defense markets remains strong. The shift in the global defense posture over the last 90 days should ensure our business in both markets remains strong for years to come. While our Space portfolio has growth opportunities in both commercial and defense related markets, our present book of business is dominated by U.S. government contracts. Therefore, increases in future defense spending, and the emphasis on Space as the next frontier in any future conflict, bode well for our business.ÌýÌý

In other news, we concluded some portfolio refinement this quarter and incurred a $2 million charge.Ìý

Space & Defense Q2

Sales in the quarter of $223 million were 8% higher than last year. Both the Space and the Defense portfolios are driving growth in this business with the lead passing from one market to the other from one quarter to the next. This quarter, it was the defense side of the house that drove the growth. Defense sales were up 15%, driven by strong growth on our RIwP SHORAD program. Sales into missile applications were down marginally, compensated by slightly higher component sales.Ìý

On the Space side, growth in our satellite business compensated for lower hypersonic activity and slightly softer sales across a range of our heritage components businesses. As I mentioned last quarter, our hypersonic development activity is winding down and we will have a period of lower activity as the government decides which programs to move forward to the next phase of development and production.Ìý

Space & Defense Margins

GAAP margins of 10.8% included 80 basis points of portfolio refinement charges. Adjusted margins of 11.6% were up from our first quarter results and are in line with our forecast for the full year.ÌýÌý

Space & Defense fiscal ‘22

There is no change to our sales forecast for the full year. Full year Space sales of $350 million assume a second half in line with the first. Full year Defense sales of $530 million assume a slight acceleration in the run rate as both our missile and components portfolios grow.Ìý

For the full year, we’re keeping our adjusted margin forecast unchanged at 11.5%, slightly better than the performance of the first half.ÌýÌý

 

Industrial Systems

Underlying demand for our industrial products was strong over the last quarter.Ìý Higher energy prices, increased pilot training and the general demand for automation equipment to expand production capacity bode well for continued strength in our business over the next few quarters. Growth across the industrial world remains healthy, although COVID spikes, particularly in China, and geo-political events in Europe have increased the risk of an economic slowdown next year.Ìý

The direct impact of the Russian actions in Ukraine show up in our industrial segment. Very soon after the invasion, we made the decision to cease all business with Russia. Our on-going sales into Russia were small so there is no material impact to our outlook for the year. However, this decision, combined with some minor portfolio refinements across the footprint, resulted in a $4 million hit to earnings in the quarter – just over half associated with Russian charges and the remainder portfolio shaping.Ìý

Industrial Systems Q2

Sales in the quarter of $236 million were 5% higher than last year. Excluding the impact of foreign exchange movements and lost sales from portfolio shaping activities, underlying sales were up over 10% organically. Simulation and test sales were way up on increased flight simulation activity. Sales into this sub-market almost doubled from a year ago. It would appear that flight training activity is finally recovering after the pandemic slowdown. Energy sales were up on higher generation and exploration activity. Industrial automation sales were about flat, but adjusting for portfolio shaping activities, organic sales into this market were up mid-single digits over last year. Finally, sales into medical markets were down slightly on lower component sales for ventilator applications. On a positive note, across the portfolio our bookings continue to be strong and our backlog is growing. Our challenge is meeting the demand from our customers given the supply chain constraints.Ìý

Industrial Systems Margins

GAAP margins in the quarter of 8.8% include 170 basis points of restructuring and impairment charges. Adjusted margins of 10.5% were in line with last year, and up nicely from the first quarter. In Q1 we incurred some production disruption and moving expenses as we consolidated facilities in Europe and the U.S.Ìý

Industrial Systems fiscal 22

There is no change to our sales forecast from last quarter. For the full year, we anticipate sales of $910 million. This total assumes a modest pickup in the second half as we work to accelerate shipments to meet customer demand.Ìý

Our forecast for full year adjusted margins is also unchanged at 9.5%. This margin is slightly ahead of the run rate of the first half.Ìý

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Summary Guidance

Overall it was a very good quarter, with adjusted earnings per share above our forecast from 90 days ago. We saw an acceleration of some planned earnings upside later in the year into the second quarter so that our overall forecast for the full year remains unchanged at $5.50 plus or minus $0.20. This full year forecast assumes a second half performance slightly ahead of the first half, but in line with the second quarter both in terms of sales and margins. Cash flow in the quarter was soft but this should recover in the second half.Ìý

As we look to the next 6 months, there are both risks to our plan as well as opportunities to do better. On the risk side, an escalation of hostilities in Ukraine, or a spread to other parts of Europe, could materially change the outlook. Also, further aggressive lockdowns in China as they fight the Omicron variant could exasperate the supply chain challenges and slow overall economic growth. On the opportunity side, the rebound in global travel could drive further commercial aircraft aftermarket upside and an easing of supply chain constraints could provide the opportunity to accelerate sales in each of our operating groups to meet customer demand. As always, we try to weigh the possibilities of both upside opportunities and downside risks and provide the market with our best estimate of the outcome.Ìý

Overall, our business remains very healthy and we believe there are many opportunities to see continued growth in both sales and margins over the years to come.Ìý

For the third quarter, we anticipate earnings per share of $1.45, plus or minus $0.15. Our range continues to be relatively wide due to the uncertainties in global economic conditions. Despite these uncertainties, our backlog is strong and our outlook remains bullish.ÌýÌý

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

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Thank you, John. Good morning, everyone.

As a reminder, we amended our securitization facility in the first quarter. Under the facility, a receivables financing subsidiary may sell receivables to a financial institution up to $100 million. We reached that level at the end of our second quarter, and we were at $90 million at the end of our first quarter. Due to the structure of this facility, the associated receivables are not recognized on our balance sheet. The new structure reduces our working capital levels. To provide a comparable look at our cash generation and financial position, I’ll first share free cash flow and net working capital metrics without the benefit of the new facility. I’ll also include the metrics as calculated off our financial statements near the end of my comments for your reference.

We’re keeping our forecast for free cash flow unchanged for the year. Free cash flow in the quarter was negative $24 million. We saw pressures this quarter on working capital, most notably as we worked down significant customer advances that we received in the first quarter. Receivables also grew in the second quarter. We continued investing in capital expenditures at a similar rate to the past few quarters. We’re able to make these investments from the strong financial position we’re in. Over the past eight quarters, our free cash flow conversion on adjusted net earnings has been over 100%.

The negative $24 million of free cash flow in Q2 compares with an increase in our net debt, adding in debt related to the securitization, of $52 million. During the second quarter, we acquired Team Accessories for $12 million. Team Accessories is based in Ireland and specializes in maintenance, repair and overhaul of engine and airframe components. This business will be part of our commercial aftermarket service offerings. We also had cash outlays of $8 million for the quarterly dividend payment and $4 million for share repurchases.

Net working capital (excluding cash and debt) as a percentage of sales at the end of Q2 was 29.0%, up from 27.6% a quarter ago but in line with the levels we saw in 2021. The increase during the quarter largely resulted from an expected work down of significant customer advances on military programs that we received in the first quarter. We also saw growth in receivables. We experienced growth in receivables on commercial aircraft programs where our production level is higher than the rate at which customers are taking deliveries. We’re maintaining steady production levels to ensure a healthy supply chain and efficiencies in our facilities. Timing of invoicing from strong sales late in the quarter also drove higher levels of receivables. In addition, an advance that built up from pandemic-relief on the defense business unwound this quarter. The growth in receivables as a percentage of sales was offset by a growth in payables. On the inventory front, this quarter marks our fifth straight quarter of decreasing inventories as a percentage of sales. We continue to make progress on our initiatives to reduce inventory levels, while being very mindful of ensuring sufficient inventory levels on hand in a supply chain constrained environment.

Capital expenditures in the second quarter were $37 million, in line with our spend over the past few quarters. This level of capital expenditures reflects our investment in facilities to support growth and provide next generation manufacturing capabilities.

At quarter end, our net debt was $711 million, including $122 million of cash. The major components of our debt were $500 million of senior notes and $320 million of borrowings on our U.S. revolving credit facilities. In addition, we had $100 million associated with the securitization facility that does not show up on our balance sheet.

We have $756 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 $581 million of net debt as of the end of our second quarter. We are confident that our existing facilities provide us with the flexibility to invest in our future.

Our leverage ratio was 2.3x on a net debt basis as of the end of the second quarter, compared to 2.7x a year ago. Strong cash generation and earnings drove this improvement. Our leverage ratio is at the low end of our target range of 2.25x to 2.75x.

Cash contributions to our global retirement plans totaled $17 million in the quarter, compared to $14 million in the second quarter of 2021. Contributions have increased for our defined contribution plans as participation grows in our U.S. plan. Global retirement plan expense in the second quarter was $21 million, up from $13 million in the same quarter a year ago. In the second quarter of 2021, we recorded a $6 million curtailment gain associated with terminating our defined benefit pension plan in the Netherlands, which reduced our pension expense last year. The remaining increase in global retirement plan expense relates to the growth in our defined contribution plans.

Our effective tax rate was 24.9% in the second quarter, compared to 21.6% in the same period a year ago. Adjusting for impairment charges and restructuring activities in the second quarter this year, our effective tax rate was 24.4%. In the second quarter of 2021, there was no tax expense associated with the curtailment gain on the termination of the Netherlands defined benefit pension plan. Excluding this benefit, the effective tax rate in the second quarter of 2021 was 23.9%. The increase in our adjusted effective tax rate is due to the relative mix of earnings.

In the second quarter, we incurred $0.59 of impairment and restructuring charges, of which two-thirds were non-cash charges.Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý Ìý

We’re keeping our forecast for free cash flow the same as our forecast from 90 days ago. We expect free cash flow generation, excluding the benefit from our securitization facility, to be $78 million in 2022, or about 45% on adjusted net earnings. Working capital, more specifically, receivables, will consume cash this year. Customer advances, inventories and payables will all be sources of cash, and will partially offset the consumption of cash by receivables. We expect capital expenditures in 2022 to be $150 million. Depreciation and amortization are expected to be $94 million.

I’d also like to share some of the metrics and amounts you’ll be able to calculate from our financial statements. These reflect GAAP accounting for the securitization facility. Free cash flow in the quarter was negative $14 million, and free cash flow generation for the year is projected to be $178 million, which is about 100% conversion on adjusted net earnings. Net working capital was 25.6% of sales at the end of the quarter.

Our financial situation continues to be strong. We’re positioned nicely to fund organic growth and make investments in our operations that will serve us well for years to come.

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

John. (Note: Q&A is not available.)

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