News Column

ESTERLINE TECHNOLOGIES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and

June 5, 2014

Results of Operations

Overview

We operate our businesses in three segments: Avionics & Controls, Sensors & Systems and Advanced Materials. Our segments are structured around our technical capabilities. Sales in all segments include domestic, international, defense and commercial customers.

The Avionics & Controls segment includes avionics systems, control and communication systems, and interface technologies capabilities. Avionics systems designs and develops cockpit systems integration and avionics solutions for commercial and military applications. Control and communication systems designs and manufactures technology interface systems for military and commercial aircraft and land- and sea-based military vehicles. Additionally, control and 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. Interface technologies manufactures and develops custom control panels, input systems for medical, industrial, military and gaming industries.

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 airborne countermeasure devices for military 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 December 5, 2013, we announced the acceleration of our plans to consolidate certain facilities and create cost efficiencies through shared services in sales, general and administrative and support functions. Our integration activities are expected to result in charges and expenses of approximately $40 million over the next two years. We expect to incur costs of $25 million to $30 million in fiscal 2014, with the balance to be incurred in fiscal 2015. The costs include severance, relocation of facilities and losses from the write off of certain property, plant and equipment. Expense savings on short-cycle activities will commence in fiscal 2014, with substantially more savings projected in fiscal 2015. We expect these projects to result in savings in excess of $15 million annually commencing in fiscal 2016. The projects have payback periods of approximately two years.

Total restructuring expenses were $3.5 million, or 0.7% of sales, in the second fiscal quarter of 2014, of which $2.1 million is reported separately as restructuring expenses and $1.4 million is included in costs of goods sold. Restructuring expenses were mainly comprised of $1.8 million in severance. Total restructuring expenses were $8.9 million, or 0.9% of sales, in the first six months of fiscal 2014, of which $6.9 million is reported separately as restructuring expenses and $2.1 million is included in costs of goods sold. Restructuring expenses were mainly comprised of $4.1 million in severance and a $2.5 million loss on the write off of certain property, plant and equipment.

On December 20, 2013, we acquired the Sunbank Family of Companies, LLC (Sunbank) for $51 million. The purchase price included $5 million in additional contingent consideration based upon achievement of certain sales

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levels over a two-year period. Sunbank is a manufacturer of electrical cable accessories, connectors, and flexible conduit systems. Sunbank is included in the Sensors & Systems segment.

On February 4, 2013, we acquired the Gamesman Group (Gamesman) for $40.8 million. Gamesman is a global supplier of input devices principally serving the gaming industry. Gamesman is included in the Avionics & Controls segment.

For the second fiscal quarter of 2014, earnings from continuing operations were $37.2 million, or $1.15 per diluted share, compared to $35.5 million, or $1.12 per diluted share, in the second fiscal quarter of 2013. For the first six months of fiscal 2014, earnings from continuing operations were $67.3 million, or $2.08 per diluted share, compared to $60.6 million, or $1.92 per diluted share, during the prior-year period.

Total sales in the second fiscal quarter of 2014 increased 6.0% over the prior-year period, reflecting higher sales mainly in the Sensors & Systems segment, partially offset by lower sales in Advanced Materials. A 19% increase in Sensors & Systems sales mainly reflected higher sales of connection technologies due to increased demand for industrial and commercial aviation applications and incremental sales from the acquisition of Sunbank. The decrease in Advanced Materials sales reflected lower sales of defense technologies. A 1.8% increase in the Avionics & Controls segment principally reflected strong sales from Gamesman. Total sales were impacted by reductions in defense spending mainly due to the continued uncertainty related to defense spending. The impact of this uncertainty is yet to be fully determined, and lack of clarity will likely result in downward pressure for some period of time.

Operating earnings from continuing operations of $55.0 million decreased 4.3% over the prior-year period, mainly due to lower gross margin. Consolidated gross margin decreased to 34.4% in the second fiscal quarter of 2014 compared to 36.3% in the prior-year period. The decrease mainly reflected the reduction in Sensors & Systems gross margin to 32.6% from 38.2% in the prior-year period due to decreased aftermarket sales and lower gross margins of Sunbank.

Research, development and engineering and selling, general and administrative increased modestly over the prior-year period.

Interest expense decreased $3.0 million over the prior-year period due to lower borrowings.

For the second fiscal quarter of 2014, the income tax rate declined to 19.6% from 21.0% in the prior-year period and net earnings were $36.9 million, or $1.14 per diluted share, compared to $35.5 million, or $1.12 per diluted share, in the prior-year period.

For the first six month period of fiscal 2014, total sales increased 8.0% over the prior-year period to $1.0 billion, reflecting higher sales at Avionics & Controls and Sensors & Systems. Consolidated sales reflected a 27-week period in the first six months of fiscal 2014 compared to a 26-week period in the prior-year period. Avionics & Controls segment sales benefited from the incremental sales from the Gamesman acquisition. Sensors & Systems segment sales benefited from favorable foreign exchange rate changes, higher sales volumes of connection technologies and incremental sales from the Sunbank acquisition. Advanced Materials sales decreased on lower sales of combustible ordnance and flare countermeasure devices, substantially offset by higher sales of engineered materials for defense and commercial aviation applications.

Consolidated gross margin decreased to 34.4% in the first six months of fiscal 2014 compared with 35.7% in the prior-year period. This was due to lower gross margins from sales of Sensors & Systems. Research, development and engineering spending increased $4.6 million over the prior-year period to 5.2% of sales. Selling, general and administrative expense, as a percent of sales, decreased 1.7 percentage points over the prior-year period to 18.8% of sales. The decrease in selling, general and administrative expense as a percent of sales mainly reflected higher sales volumes. Earnings from continuing operations were impacted by an increase in the income tax rate to 19.4% from 16.2% in the prior-year period, reflecting certain discrete tax benefits recorded in the prior-year period.

In April 2013, we redeemed the $175.0 million 6.625% Senior Notes due March 2017 (2017 Notes). In connection with the redemption, we wrote off $1.3 million in unamortized debt issuance costs as a charge against interest expense. In addition, we incurred a $3.9 million redemption premium and terminated our $175.0 million interest

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rate swap agreements and received proceeds of $2.9 million. As a result, the redemption of the 2017 Notes resulted in a loss of $0.9 million on extinguishment of debt.

Net earnings were $67.0 million, or $2.07 per diluted share, for the first six months of fiscal 2014 compared to $60.6 million, or $1.92 per diluted share, in the prior-year period.

Results of Operations

Three Month Period Ended May 2, 2014, Compared with Three Month Period Ended April 26, 2013

Sales for the second fiscal quarter increased 6.0% over the prior-year period. Sales by segment were as follows:

(In thousands) Incr./(Decr.) Three Months Ended from prior May 2, April 26, year period 2014 2013 Avionics & Controls 1.8% $ 195,601$ 192,130 Sensors & Systems 19.1% 210,734 176,964 Advanced Materials (5.5)% 123,239 130,468 Total Net Sales $ 529,574$ 499,562



The 1.8% increase in sales of Avionics & Controls mainly reflected higher sales at Gamesman of $5 million.

The 19.1% increase in Sensors & Systems principally reflected increased sales of connection technologies and $10 million from incremental sales from the Sunbank acquisition in December 2013. Advanced sensors sales increased $1 million on improved OEM sales partially offset by lower aftermarket sales. Power systems sales increased $9 million mainly due to higher commercial aviation demand. Segment sales also benefited from a stronger euro and U.K. pound relative to the U.S. dollar compared with the prior-year period.

The 5.5% decrease in sales of Advanced Materials principally reflected decreased sales volumes of defense technologies, partially offset by increased sales volumes of engineered materials of $6 million. The decrease in defense technologies sales volumes was due to lower demand for combustible ordnance and flare countermeasure devices. The increase in engineered materials mainly reflected higher sales for defense and commercial aviation applications.

Overall, gross margin was 34.4% and 36.3% for the second fiscal quarter of 2014 and 2013, respectively. Gross profit was $182.3 million and $181.4 million for the second fiscal quarter of 2014 and 2013, respectively. Gross margin was impacted by $1.4 million in restructuring expense in the second fiscal quarter of 2014 and by $0.9 million due to valuing Sunbank's inventory at fair value.

Avionics & Controls segment gross margin was 36.1% and 36.9% for the second fiscal quarter of 2014 and 2013, respectively. Segment gross profit was $70.7 million compared to $70.8 million in the prior-year period. The slight decrease in segment gross profit principally reflected lower gross profit on sales of cockpit control devices of $6 million, substantially offset by a $5 million increase in gross profit on sales of avionics systems. The decrease in gross profit on cockpit control devices was mainly due to lower sales volumes for defense applications. The increase in gross profit on avionics systems principally reflected higher sales of aviation products for defense applications and a sale of licensed technology.

Sensors & Systems segment gross margin was 32.6% and 38.2% for the second fiscal quarter of 2014 and 2013, respectively. Segment gross profit was $68.7 million compared to $67.6 million in the prior-year period. The increase in gross profit was mainly due to higher sales volumes of connection technologies. The decrease in gross margin reflected lower aftermarket sales of advanced sensors and power systems and higher operating expenses at our advanced sensor operations. In addition, gross margin on segment sales were impacted by valuing Sunbank's inventory at fair value and its lower gross margins than the overall segment margins.

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Advanced Materials segment gross margin was 34.9% compared to 32.9% for the prior-year period. Segment gross profit was $43.0 million in both the second fiscal quarter of 2014 and in the prior-year period. Gross profit in the second fiscal quarter of 2014 compared to the prior-year period reflected higher sales volumes of engineered materials for defense applications, offset by lower gross profit on decreased sales volumes of combustible ordnance and flare countermeasure devices. Gross margin improved in the second fiscal quarter of 2014 due to higher sales of engineered materials for defense applications.

Selling, general and administrative expenses (which include corporate expenses) totaled $98.5 million, or 18.6% of sales, and $98.3 million, or 19.7% of sales, for the second fiscal quarter of 2014 and 2013, respectively.

Research, development and engineering spending was $26.8 million, or 5.1% of sales, for the second fiscal quarter of 2014 compared with $25.7 million, or 5.1% of sales, for the second fiscal quarter of 2013, mainly reflecting higher research, development and engineering for advanced sensors and connection technologies. Fiscal 2014 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 second fiscal quarter of 2014 totaled $72.0 million, or 13.6% of sales, compared with $73.3 million, or 14.7% of sales, for the second fiscal quarter of 2013. Excluding restructuring expenses of $3.3 million, segment earnings were $75.4 million, or 14.2% of sales, for the second fiscal quarter of 2014.

Avionics & Controls segment earnings were $21.6 million, or 11.0% of sales, in the second fiscal quarter of 2014 and $21.5 million, or 11.2% of sales, in the second fiscal quarter of 2013, mainly reflecting a $4 million increase in avionics systems and interface technologies, substantially offset by a decrease in control and communication systems. Avionics systems earnings benefited from increased gross profit, partially offset by $1.0 million in restructuring expense, mainly severance. Interface technologies earnings benefited from incremental earnings of $2 million from Gamesman, which were substantially offset by lower earnings from sales of interface technologies for medical applications. Control and communication systems earnings were mainly impacted by decreased earnings on lower sales of cockpit control devices.

During the second fiscal quarter of 2014, management performed an impairment test of Eclipse Electronic Systems, Inc.'s (Eclipse) long-lived assets including property, plant and equipment and intangible assets due to the uncertain outlook for sales and earnings over the next five years. The net book value of Eclipse's long-lived assets at May 2, 2014, totaled $41.5 million. Although sales are currently being delayed and orders pushed out, the forecast of undiscounted cash flow over the remaining useful life of the intangible assets exceeded the book value of Eclipse, and accordingly, no impairment was recorded. If Eclipse's performance declines further or if there are other changes that impact Eclipse's outlook, we may incur an impairment loss in a future period that could be material.

Sensors & Systems segment earnings were $23.1 million, or 11.0% of sales, for the second fiscal quarter of 2014 compared with $23.2 million, or 13.1% of sales, for the second fiscal quarter of 2013. Sensors & Systems earnings were impacted by lower gross margin and $1.7 million in restructuring expense.

Advanced Materials segment earnings were $27.4 million, or 22.2% of sales, for the second fiscal quarter of 2014 compared with $28.6 million, or 21.9% of sales, for the second fiscal quarter of 2013, primarily reflecting declines of $0.5 million from lower earnings from sales of combustible ordnance and flare countermeasures and restructuring expense, mainly severance. This decrease in segment earnings was substantially offset by increased gross profit on higher sales of elastomer materials for defense applications.

Interest expense for the second fiscal quarter of 2014 and 2013 was $8.4 million and $11.5 million, respectively, reflecting lower borrowings.

In April 2013, we redeemed the 2017 Notes. In connection with the redemption, we wrote off $1.3 million in unamortized debt issuance costs as a charge against interest expense. In addition, we incurred a $3.9 million redemption premium and received proceeds of $2.9 million from terminating our $175.0 million interest rate swap agreements. As a result, the redemption of the 2017 Notes resulted in a loss of $0.9 million on extinguishment of debt.

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The income tax rate was 19.6% and 21.0% for the second fiscal quarter of 2014 and 2013, respectively. In the second fiscal quarter of 2014, we recognized $0.6 million of discrete tax benefits principally related to the reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate. The income tax rate differed from the statutory rate in the second fiscal quarter of 2014 and 2013, 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 May 2, 2014, and April 26, 2013, are as follows:

(In thousands) Gain (Loss) Three Months Ended May 2, April 26, 2014 2013 Forward foreign currency contracts $ 1,287 $ (2,128 )



Forward foreign currency contracts - reclassified from AOCI

(2,242 ) (541 ) Embedded derivatives (1,718 ) 773 Revaluation of monetary assets/liabilities (1,494 ) 73 Total $ (4,167 ) $ (1,823 )



Six Month Period Ended May 2, 2014, Compared with Six Month Period Ended April 26, 2013

Sales for the first six months increased 8.0% over the prior-year period. Sales by segment were as follows:

(In thousands) Incr./(Decr.) Six Months Ended from prior May 2, April 26, year period 2014 2013 Avionics & Controls 8.0% $ 396,040 $ 366,700 Sensors & Systems 14.1% 397,823 348,774 Advanced Materials (0.6)% 240,691 242,050 Total Net Sales $ 1,034,554$ 957,524



The 8.0% increase in sales of Avionics & Controls reflected increased sales volumes of interface technologies of $21 million and avionics systems and control and communication systems of $8 million. The $21 million increase in interface technologies sales mainly reflected incremental sales from the Gamesman acquisition. A $4 million increase in avionics systems mainly reflected higher sales of aviation products for defense applications. A $5 million increase in control and communication systems sales mainly reflected increased sales volumes of control panels and switches of $6 million for commercial aviation applications. Additionally, the increase reflected higher sales volumes of communication systems to enhance security and aural clarity in military communications and secure communication devices of $7 million. These increases were partially offset by reduced sales of cockpit controls of $6 million and embedded communication intercept receivers of $3 million for defense applications.

The 14.1% increase in sales of Sensors & Systems principally reflected increased sales of connection technologies of $34 million and power systems of $10 million. The increase in connection technologies reflected incremental sales from the Sunbank acquisition of $14 million and higher sales volumes of connection technologies for

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commercial aviation and industrial applications. The increase in power systems sales mainly reflected higher OEM sales for commercial aviation applications. Advanced sensors sales increased $6 million on improved OEM sales partially offset by lower aftermarket sales. Segment sales also benefited from a stronger euro and U.K. pound relative to the U.S. dollar compared with the prior-year period.

The 0.6% decrease in sales of Advanced Materials principally reflected lower sales volumes of defense technologies of $17 million, substantially offset by increased sales of engineered materials for defense and commercial aviation applications.

Overall, gross margin as a percentage of sales was 34.4% and 35.7% for the first six months of fiscal 2014 and 2013, respectively. Gross profit was $355.6 million and $341.7 million for the first six months of fiscal 2014 and 2013, respectively. Gross margin was impacted by $2.1 million in restructuring expense in the first six months of fiscal 2014.

Avionics & Controls segment gross margin was 36.4% and 36.7% for the first six months of fiscal 2014 and 2013, respectively. Segment gross profit was $144.2 million compared to $134.7 million in the prior-year period, reflecting a $16 million increase on gross profit from sales of avionics systems and interface technologies, partially offset by a $6 million decrease on gross profit on sales of control and communication systems. Gross profit on avionics systems increased $10 million mainly due to higher sales of aviation products for defense applications. Gross profit on interface technologies increased $6 million mainly due to incremental sales from the Gamesman acquisition. The decrease in gross profit on control and communication systems was due to lower demand for cockpit control devices and embedded communication intercept receivers.

Sensors & Systems segment gross margin was 33.7% and 37.4% for the first six months of fiscal 2014 and 2013, respectively. Segment gross profit was $134.0 million compared to $130.3 million in the prior-year period. The increase in gross profit was mainly due to higher sales volumes of connection technologies. The decrease in gross margin reflected lower aftermarket sales of advanced sensors and power systems and higher operating expenses at our advanced sensor operations.

Advanced Materials segment gross margin was 32.2% for the first six months of fiscal 2014 compared to 31.7% for the same period one year ago. Segment gross profit was $77.4 million compared to $76.8 million in the prior-year period. The slight increase in segment gross profit reflected a $9 million increase in gross profit on higher sales of elastomer materials for commercial aviation and defense applications, partially offset by a decrease in gross profit on sales of defense technologies due to lower sales of combustible ordnance and flare countermeasures.

Selling, general and administrative expenses (which include corporate expenses) totaled $194.7 million, or 18.8% of sales, and $196.9 million, or 20.6% of sales, for the first six months of fiscal 2014 and 2013, respectively. The decrease in selling, general and administrative expense as a percentage of sales mainly reflected higher sales volumes.

Research, development and engineering spending was $53.3 million, or 5.2% of sales, for the first six months of fiscal 2014 compared with $48.7 million, or 5.1% of sales, for the first six months of fiscal 2013. The increase in research, development and engineering spending principally reflects higher spending on avionics systems and advanced sensors. Fiscal 2014 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 six months of fiscal 2014 totaled $133.0 million, or 12.9% of sales, compared with $128.5 million, or 13.4% of sales, for the first six months in fiscal 2013. Excluding restructuring expenses of $8.7 million, segment earnings were $141.8 million, or 13.7% of sales, for the first six months of 2014.

Avionics & Controls segment earnings were $46.3 million, or 11.7% of sales, in the first six months of fiscal 2014 and $40.1 million, or 10.9% of sales, in the first six months of fiscal 2013, mainly reflecting a $7 million increase in avionics systems and a $4 million increase in interface technologies, partially offset by a $5 million decrease in control and communication systems. Avionics systems earnings benefited from increased gross profit, partially offset by $3.1 million in restructuring expense, mainly severance, and higher research, development and engineering

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expense of $2 million. The increase in interface technologies earnings reflected incremental earnings from the Gamesman acquisition. Control and communication systems earnings were mainly impacted by decreased earnings on lower sales of cockpit control devices and embedded communication intercept receivers.

Sensors & Systems segment earnings were $43.3 million, or 10.9% of sales, for the first six months of fiscal 2014 compared with $42.2 million, or 12.1% of sales, for the first six months of fiscal 2013. Sensors & Systems benefited by improved earnings from increased sales of connection technologies, partially offset by lower earnings on sales of advanced sensors and $2.2 million in segment restructuring expense.

Advanced Materials segment earnings were $43.4 million, or 18.0% of sales, for the first six months of fiscal 2014 compared with $46.3 million, or 19.1% of sales, for the first six months of fiscal 2013, primarily reflecting lower earnings from sales of combustible ordnance and countermeasures and restructuring expense of $3.1 million. The restructuring expense mainly reflected a loss from the write off of certain property, plant and equipment resulting from a planned facility closure. This decrease in segment earnings was partially offset by increased gross profit on higher sales of elastomer materials for commercial aviation and defense applications.

Interest expense for the first six months of fiscal 2014 was $17.1 million compared with $21.9 million for the first six months of fiscal 2013, reflecting lower borrowings.

The income tax rate was 19.4% and 16.2% for the first six months of fiscal 2014 and 2013, respectively. In the first six months of 2014, we recognized approximately $1.1 million of discrete tax benefits principally related to the following items: first was approximately $0.6 million of tax benefits due to the release of reserves due to the expiration of a statute of limitations; second was a $0.5 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate. In the first six months of 2013, we recognized $3.6 million of discrete tax benefits principally related to the following items: first item was approximately $1.5 million of tax benefits due to the retroactive extension of the U.S. federal research and experimentation credits; second was approximately $2.3 million of tax benefits related to the settlement of U.S. and foreign tax examinations. The income tax rate differed from the statutory rate in the first six months of fiscal 2014 and 2013, 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 $1.6 million of tax benefits that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of a statute of limitations.

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 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 six month periods ended May 2, 2014, and April 26, 2013, are as follows:

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(In thousands) Gain (Loss) Six Months Ended May 2, April 26, 2014 2013 Forward foreign currency contracts $ 793 $ (1,758 )



Forward foreign currency contracts reclassified from AOCI

(2,741 ) (631 ) Embedded derivatives 805 1,270 Revaluation of monetary assets/liabilities (157 ) (2,394 ) Total $ (1,300 )$ (3,513 )



New orders for the first six months of fiscal 2014 were $1.1 billion compared with $967.7 million for the same period in 2013. Backlog was $1.3 billion at May 2, 2014, April 26, 2013, and at October 25, 2013.

Liquidity and Capital Resources

Cash and cash equivalents at May 2, 2014, totaled $207.4 million, an increase of $28.3 million from October 25, 2013. Net working capital increased to $750.7 million at May 2, 2014, from $683.6 million at October 25, 2013. Sources and uses of cash flows from operating activities principally consist of cash received from the sale of products and cash payments for material, labor and operating expenses. Cash flows provided by operating activities were $84.5 million and $122.7 million in the first six months of fiscal 2014 and 2013, respectively, reflecting an increase in working capital, particularly inventory.

Cash flows used by investing activities were $65.3 million and $65.1 million in the first six months of fiscal 2014 and 2013, respectively. Cash flows used by investing activities in the first six months of fiscal 2014 primarily reflected cash paid for capital expenditures of $21.3 million and acquisitions of $44.0 million. Cash flows used by investing activities in the first six months of fiscal 2013 primarily reflected cash paid for capital expenditures and acquisitions.

Cash flows provided by financing activities were $8.2 million in the first six months of fiscal 2014. Cash flows used by financing activities in the first six months of fiscal 2013 were $46.9 million. Cash flows provided by financing activities in the first six months of fiscal 2014 primarily reflected $23.0 million from issuance of common stock under our employee stock plans and $25.0 million of proceeds from issuance of long-term credit facilities, which were partially offset by repayment of long-term debt and credit facilities of $44.3 million. Cash flows used by financing activities in the first six months of fiscal 2013 primarily reflected repayment of long-term debt and credit facilities for $237.5 million and proceeds from our long-term credit facilities of $175.0 million.

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.

Capital expenditures, consisting of machinery, equipment and computers, are anticipated to be approximately $60 million during fiscal 2014, compared with $55.3 million expended in fiscal 2013 (excluding acquisitions).

Total debt at May 2, 2014, was $667.2 million and consisted of the $250.0 million 7.0% Senior Notes due August 2020, $166.3 million of the $175.0 million term loan, $12.5 million (9.0 million) of the 125.0 million term loan, $130.0 million in borrowings under our secured credit facility, $52.1 million of government refundable advances, $56.0 million under capital lease obligations and $0.3 million under our various foreign currency debt agreements and other debt agreements.

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 25, 2013, that may cause our or the industry's actual results, performance or achievements to be

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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.


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