SOURCE: Esterline Technologies

Esterline Technologies

August 04, 2016 16:05 ET

Esterline Reports Fiscal 2016 Third Quarter Financial Results

BELLEVUE, WA--(Marketwired - Aug 4, 2016) - Esterline Corporation (NYSE: ESL)

  • Sales up 6.7% to $517.1 million in the fiscal third quarter; strong book-to-bill of 1.1 
  • Earnings from continuing operations of $38.0 million; adjusted earnings from continuing operations of $40.9 million
  • GAAP earnings per diluted share from continuing operations of $1.28; adjusted earnings per diluted share of $1.38

Esterline Corporation (NYSE: ESL) (www.esterline.com), a leading specialty manufacturer serving the global aerospace and defense markets, today reported results for the third fiscal quarter ended July 1, 2016. During the third quarter of fiscal 2016, the company grew consolidated revenue to $517.1 million, an increase of 6.7% compared with the year-ago period results of $484.7 million. This revenue growth was driven by strength in various end markets for the company's Avionics & Controls and Sensors & Systems business segments. In order to provide meaningful comparisons to prior-year periods, the results for our 2015 fiscal year have been recast to the twelve months ended October 2, 2015.

Curtis Reusser, Esterline's Chief Executive Officer, said, "We are pleased to report a strong third quarter, delivering on commitments to our stakeholders despite market fluctuations. Our teams are executing well and making good progress against our objectives for growth, backlog, and profitability, while also continuing to drive a range of operational improvement initiatives."

Earnings from continuing operations in the third quarter of fiscal 2016 increased to $38.0 million, or $1.28 per diluted share, compared with prior-year earnings from continuing operations of $28.2 million, or $0.90 per diluted share. Adjusted earnings from continuing operations for the third fiscal quarter of 2016 were $40.9 million, or $1.38 per diluted share. In the comparable period of the prior year, adjusted earnings from continuing operations were $36.0 million, or $1.15 per diluted share. For the third fiscal quarter of 2016, adjusted earnings exclude $0.19 per diluted share of costs related to previously identified integration, restructuring and compliance activities partially offset by $0.09 per diluted share of a one-time benefit related to long-term contract adjustments (see Table 1).

           
           
Table 1: Effect of Certain Items on 3rd Fiscal Quarter 2016  
Earnings from Continuing Operations  
           
  $ Millions     EPS  
 Earnings (GAAP) $ 38.0     $ 1.28  
               
 Accelerated Integration Costs   1.2       0.04  
 Compliance Costs   2.1       0.08  
 DAT Integration Costs   2.1       0.07  
 Long-term Contract Adjustments   (2.5 )     (0.09 )
               
 Adjusted Earnings (non-GAAP) $ 40.9     $ 1.38  
               

Including discontinued operations, net earnings for the third fiscal quarter of 2016 were $29.4 million, or $0.99 per diluted share, compared with $27.7 million, or $0.88 per diluted share, in the comparable fiscal period in 2015. Net earnings in the third fiscal quarter of 2016 included an $8.7 million loss from discontinued operations, while the prior year included a $0.6 million loss from discontinued operations.

New orders in the third fiscal quarter of 2016 were $552.1 million, compared with $467.4 million in the comparable prior-year period; the company's book-to-bill ratio for the third quarter and first nine months of fiscal 2016 was 1.1. The Avionics & Controls segment accounted for most of the increase in fiscal 2016 third quarter orders. Backlog at the end of the third quarter of 2016 was $1.4 billion, compared with $1.2 billion at the end of the third fiscal quarter of 2015.

Gross profit in the third fiscal quarter of 2016 was $173.6 million, compared with $165.3 million in the prior-year period. Reported gross margin as a percentage of sales in the third fiscal quarter of 2016 was 33.6% compared with 34.1% in the prior-year period. On an adjusted basis, excluding the discrete items consistent with adjusted earnings, the company reported gross margin of $173.0 million, or 33.5% of sales, in the third fiscal quarter of 2016, compared with adjusted gross margin of $169.3 million, or 34.9% of sales, in the prior-year period.

Selling, general and administrative (SG&A) expenses during the third fiscal quarter of 2016 were $96.8 million, or 18.7% of sales, compared with $92.0 million, or 19.0% of sales, in the prior-year period.

Research, development and engineering (R&D) spending in the third fiscal quarter of 2016 was $22.2 million, or 4.3% of sales, compared with $26.4 million, or 5.4% of sales, in the prior-year period. This change was primarily attributable to a change in mix of engineering expenses with greater customer funded and sustaining projects than in the prior-year period. The company continues to expect full-year R&D spending to be approximately 5% of sales.

The company's income tax rate in the third fiscal quarter of 2016 was 17.2% compared with 19.2% in the prior-year period. The higher tax rate in the prior-year period was primarily due to non-deductible compliance expenses. For the full year, the company expects a tax rate in the range of 15% to 17%.

For the nine months of fiscal 2016 ended July 1, year-to-date (YTD) sales were $1.45 billion, roughly even with the same period in the prior year. Fiscal 2016 YTD GAAP earnings from continuing operations were $64.9 million, or $2.18 per diluted share, compared with the prior-year period results of $87.6 million, or $2.76 per diluted share. Excluding the discrete costs described in Table 2 below, adjusted earnings from continuing operations in the first nine months of fiscal 2016 were $86.6 million, or $2.91 per diluted share, compared with the prior-year period results of $113.1 million, or $3.57 per diluted share.

         
         
Table 2: Effect of Certain Items on YTD Fiscal 2016  
Earnings from Continuing Operations  
         
  $ Millions   EPS  
 Earnings (GAAP) $ 64.9   $ 2.18  
             
 Accelerated Integration Costs   4.2     0.14  
 Compliance Costs   7.0     0.23  
 DAT Integration Costs   8.9     0.30  
 Long-term Contract Adjustments   1.6     0.06  
             
 Adjusted Earnings (non-GAAP) $ 86.6   $ 2.91  
             

Cash flow from operations for the nine months ended July 1, 2016, was $114.7 million, compared with $117.2 million in the prior-year period. After capital expenditures of $58.5 million, free cash flow was $56.2 million in the first nine months of fiscal 2016. In the prior-year period, free cash flow was $80.9 million. Capital expenditures in fiscal 2016 are higher than the prior year due to approximately $15 million used to purchase and improve the primary facility of the DAT business. Additionally, during the third fiscal quarter of 2016, the company repurchased 102,267 of its shares for approximately $6.7 million. This brings the total number of shares repurchased since the inception of the company's share repurchase program in the third fiscal quarter of 2014 to 3.1 million shares for a total purchase amount of $308.5 million. A total of $91.5 million remains under the $400 million share repurchase authorization. 

Conference Call Information

Esterline will host a conference call to discuss this announcement today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). The U.S. dial-in number is 877-307-0078; outside the U.S., use 531-289-2890. The pass code for the call is: 49084439. The company has posted a presentation on its website (www.esterline.com) under "Presentations" in the Investor Relations section to provide additional information about its fiscal 2016 third quarter and YTD operational and financial results. The presentation is also included as Exhibit 99.2 to the company's report on Form 8-K, which is being submitted today to the SEC.

Non-GAAP Financial Information

This press release and the related presentation providing supplemental financial information include non-GAAP financial measures -- adjusted earnings from continuing operations, adjusted earnings from continuing operations per diluted share, adjusted earnings before interest and tax (EBIT), operating earnings from continuing operations adjusted to exclude depreciation and amortization expense (EBITDA), adjusted gross margin, and free cash flow -- that have not been calculated in accordance with generally accepted accounting principles in the U.S. (GAAP). Adjusted earnings from continuing operations consist of earnings from continuing operations attributable to Esterline less the costs associated with certain integration activities -- including restructuring charges -- and incremental compliance costs as well as discrete items associated with our acquisition of the DAT business in January 2015, adjustments to reserves on long-term contracts incurred in the periods presented and unique amounts related to pension expense, in each case, as further detailed in the tables below. Adjusted earnings from continuing operations per diluted share divides each element of adjusted earnings from continuing operations by the weighted average number of shares outstanding, diluted for the periods presented. EBIT is defined as operating earnings from continuing operations. Adjusted EBIT excludes the same costs excluded from adjusted earnings from continuing operations set forth in the table below. Third fiscal quarter 2016 adjusted gross margin excludes the cost of certain integration activities and adjustments to long-term contract reserves that have a total net impact of reducing GAAP gross margin by $(0.6) million. Fiscal third quarter 2015 adjusted gross margin excludes certain integration costs and purchase accounting charges totaling $4.0 million. In accordance with the SEC's requirements, below is the reconciliation of the non-GAAP adjusted earnings from continuing operations to the comparable GAAP earnings from continuing operations and additional relevant reconciliations are included in the presentation providing supplemental financial information.

                       
In millions, except per share amounts                      
  Three     Recast Three  
  Months Ended     Months Ended  
  July 1, 2016     June 26, 2015  
        Diluted           Diluted  
        EPS           EPS  
                               
Earnings from Continuing Operations Attributable to Esterline (GAAP), Net of Tax $ 38.0     $ 1.28     $ 28.2     $ 0.90  
  Accelerated Integration Costs, Net of Tax of $0.3 and $0.4   1.2       0.04       2.0       0.07  
  Compliance Costs, Net of Tax of $0.6 and $0.8   2.1       0.08       3.3       0.10  
  DAT Integration and Purchase Acctg Adjustments, Net of Tax of $0.7 and $0.9   2.1       0.07       2.5       0.08  
  Long-term Contract Adjustments, Net of Tax of $0.2   (2.5 )     (0.09 )     --       --  
Adjusted Earnings from Continuing Operations (non-GAAP), Net of Tax $ 40.9     $ 1.38     $ 36.0     $ 1.15  
                               
In millions, except per share amounts                              
  Nine     Recast Nine  
  Months Ended     Months Ended  
  July 1, 2016     June 26, 2015  
        Diluted           Diluted  
        EPS           EPS  
                               
Earnings from Continuing Operations Attributable to Esterline (GAAP), Net of Tax $ 64.9     $ 2.18     $ 87.6     $ 2.76  
  Accelerated Integration Costs, Net of Tax of $0.7 and $2.5   4.2       0.14       9.4       0.29  
  Compliance Costs, Net of Tax of $1.2 and $2.4   7.0       0.23       8.9       0.29  
  DAT Integration and Purchase Acctg Adjustments, Net of Tax of $1.5 and $1.7   8.9       0.30       6.2       0.20  
  DAT Closing Expenses, Net of Tax of $1.3   --       --       4.7       0.14  
  Long-term Contract Adjustments, Net of Tax of $0.3 and $2.2   1.6       0.06       7.7       0.25  
  Pension Expense, Net of Tax of $0.7   --       --       2.3       0.07  
  Non-Income Tax Gain, Net of Tax of $4.4   --       --       (13.7 )     (0.43 )
Adjusted Earnings from Continuing Operations (non-GAAP), Net of Tax $ 86.6     $ 2.91     $ 113.1     $ 3.57  
                               

The company provides these non-GAAP financial measures as supplemental information to the GAAP financial measures. Management uses these non-GAAP financial measures to (a) evaluate the company's historical and prospective financial performance and its performance relative to its competitors, (b) allocate resources, and (c) measure the operational performance of the company's business units.

In addition, management believes including these non-GAAP financial measures enhances investors' and financial analysts' understanding of the company's performance as well as their ability to assess and compare the company's historical results of operations.

These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measures, and free cash flow is not necessarily indicative of amounts available for discretionary use. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation and items that comprise the calculation. The company compensates for these limitations by using these non-GAAP financial measures as a supplement to the GAAP measures and by providing reconciliations of the non-GAAP and comparable GAAP financial measures. The non-GAAP financial measures should be read only in conjunction with the company's consolidated financial statements prepared in accordance with GAAP.

This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or the company's 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 forward-looking statements are only predictions based on the current intent and expectations of the management of Esterline, are not guarantees of future performance or actions, and involve risks and uncertainties that are difficult to predict and may cause Esterline's or its industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Esterline's actual results and the timing and outcome of events may differ materially from those expressed in or implied by the forward-looking statements due to risks detailed in Esterline's public filings with the Securities and Exchange Commission including its most recent Transition Report on Form 10-K.

                       
ESTERLINE TECHNOLOGIES CORPORATION                    
Consolidated Statement of Operations (unaudited)        
         
In thousands, except per share amounts                    
                       
  Three Months Ended     Nine Months Ended  
  July 1,     June 26,     July 1,     June 26,  
  2016     2015     2016     2015  
        (Recast)           (Recast)  
Segment Sales                              
  Avionics & Controls $ 222,583     $ 200,078     $ 607,493     $ 594,025  
  Sensors & Systems   186,337       175,544       514,836       529,976  
  Advanced Materials   108,172       109,101       326,550       333,543  
                               
Net Sales   517,092       484,723       1,448,879       1,457,544  
                               
Cost of Sales   343,508       319,433       981,403       963,996  
    173,584       165,290       467,476       493,548  
Expenses                              
  Selling, general and administrative   96,769       92,028       293,283       289,549  
  Research, development and engineering   22,211       26,401       72,760       75,075  
  Restructuring charges   559       1,135       2,430       6,062  
  Other income   --       --       --       (12,744 )
    Total Expenses   119,539       119,564       368,473       357,942  
                               
Operating Earnings from Continuing Operations   54,045       45,726       99,003       135,606  
                               
  Interest Income   (30 )     (87 )     (211 )     (406 )
  Interest Expense   7,659       10,393       22,169       24,409  
  Loss on Extinguishment of Debt   --       329       --       329  
                               
Earnings from Continuing Operations Before Income Taxes   46,416       35,091       77,045       111,274  
Income Tax Expense   7,975       6,744       11,358       23,430  
Earnings from Continuing Operations                              
Including Noncontrolling Interests   38,441       28,347       65,687       87,844  
Earnings Attributable to Noncontrolling Interests   (395 )     (125 )     (781 )     (216 )
Earnings from Continuing Operations Attributable to Esterline, Net of Tax   38,046       28,222       64,906       87,628  
Loss from Discontinued Operations, Attributable to Esterline, Net of Tax   (8,690 )     (558 )     (15,493 )     (21,034 )
                               
Net Earnings Attributable to Esterline $ 29,356     $ 27,664     $ 49,413     $ 66,594  
                               
Earnings (Loss) Per Share--Basic:                              
  Continuing Operations $ 1.30     $ .92     $ 2.19     $ 2.81  
  Discontinued Operations   (.30 )     (.02 )     (.52 )     (.67 )
                               
Earnings (Loss) Per Share--Basic $ 1.00     $ .90     $ 1.67     $ 2.14  
                               
Earnings (Loss) Per Share--Diluted:                              
  Continuing Operations $ 1.28     $ .90     $ 2.18     $ 2.76  
  Discontinued Operations   (.29 )     (.02 )     (.52 )     (.66 )
                               
Earnings (Loss) Per Share--Diluted $ .99     $ .88     $ 1.66     $ 2.10  
                               
Weighted Average Number of Shares Outstanding--Basic   29,381       30,831       29,517       31,183  
                               
Weighted Average Number of Shares Outstanding--Diluted   29,601       31,322       29,788       31,702  
                               
                               
                               
ESTERLINE TECHNOLOGIES CORPORATION              
Consolidated Sales and Earnings From Continuing Operations by Segment (unaudited)        
In thousands                      
                       
  Three Months Ended     Nine Months Ended  
  July 1,     June 26,     July 1,     June 26,  
  2016     2015     2016     2015  
        (Recast)           (Recast)  
Segment Sales                              
  Avionics & Controls $ 222,583     $ 200,078     $ 607,493     $ 594,025  
  Sensors & Systems   186,337       175,544       514,836       529,976  
  Advanced Materials   108,172       109,101       326,550       333,543  
                               
Net Sales $ 517,092     $ 484,723     $ 1,448,879     $ 1,457,544  
                               
Earnings from Continuing Operations Before Income Taxes                              
  Avionics & Controls $ 28,517     $ 16,836     $ 40,579     $ 62,096  
  Sensors & Systems   27,942       22,968       61,670       56,682  
  Advanced Materials   15,512       24,514       51,710       65,538  
    Segment Earnings   71,971       64,318       153,959       184,316  
                               
  Corporate expense   (17,926 )     (18,592 )     (54,956 )     (61,454 )
  Other income   --       --       --       12,744  
  Interest income   30       87       211       406  
  Interest expense   (7,659 )     (10,393 )     (22,169 )     (24,409 )
  Loss on extinguishment of debt   --       (329 )     --       (329 )
                               
Earnings from Continuing Operations Before Income Taxes $ 46,416     $ 35,091     $ 77,045     $ 111,274  
                               
                               
                               
ESTERLINE TECHNOLOGIES CORPORATION      
Consolidated Balance Sheet (unaudited)      
In thousands      
  July 1,   October 2,
  2016   2015
Assets          
Current Assets          
  Cash and cash equivalents $ 237,845   $ 191,355
  Escrow cash   1,125     --
  Accounts receivable, net   393,632     380,748
  Inventories   466,975     446,768
  Income tax refundable   4,957     12,575
  Deferred income tax benefits   --     41,082
  Prepaid expenses   20,611     23,008
  Other current assets   5,370     5,427
  Current assets of businesses held for sale   18,034     27,851
    Total Current Assets   1,148,549     1,128,814
           
Property, Plant and Equipment, Net   326,775     309,399
           
Other Non-Current Assets          
  Goodwill   1,027,873     1,041,991
  Intangibles, net   405,531     452,040
  Deferred income tax benefits   69,259     28,979
  Other assets   15,395     14,348
  Non-current assets of businesses held for sale   10,735     24,917
  $ 3,004,117   $ 3,000,488
           
Liabilities and Shareholders' Equity          
Current Liabilities          
  Accounts payable $ 128,635   $ 117,976
  Accrued liabilities   246,967     259,734
  Current maturities of long-term debt   16,340     13,376
  Federal and foreign income taxes   6,322     2,404
  Current liabilities of businesses held for sale   12,283     17,106
    Total Current Liabilities   410,547     410,596
           
Long-Term Liabilities          
  Credit facilities   170,000     160,000
  Long-term debt, net of current maturities   688,753     701,457
  Deferred income tax liabilities   57,690     73,849
  Pension and post-retirement obligations   73,653     75,019
  Other liabilities   24,868     29,367
  Non-current liabilities of businesses held for sale   1,222     2,409
           
Total Shareholders' Equity   1,577,384     1,547,791
  $ 3,004,117   $ 3,000,488