Esterline Reports Financial Results for Third Fiscal Quarter of 2015
BELLEVUE, WA -- (Marketwired) -- 09/03/15 -- Esterline Corporation (NYSE: ESL)
- Fiscal third quarter sales of $496.2 million
- Earnings from continuing operations of $30.2 million, or $0.97 per diluted share
- Adjusted earnings from continuing operations of $41.2 million, or $1.33 per diluted share
- Year-to-date free cash flow conversion 116% of net income
- Updated full-year 2015 adjusted EPS guidance
Esterline Corporation (NYSE: ESL) (www.esterline.com), a leading specialty manufacturer serving the global aerospace and defense markets, today reported results for the fiscal third quarter ended July 31, 2015. Consolidated revenue of $496.2 million declined 2.0% compared with the year-ago period of $506.3 million. Foreign currency impacts were offset by sales from the Defense, Aerospace, and Training display business (DAT) acquired from Barco N.V. in the second quarter of fiscal 2015. Excluding these items, organic sales volume declined by 2.8%.
GAAP earnings from continuing operations in the third fiscal quarter of 2015 were $30.2 million, or $0.97 per diluted share, compared with $39.8 million, or $1.22 per diluted share, in the prior-year period. Adjusted earnings from continuing operations in the third quarter of fiscal 2015 were $41.2 million, or $1.33 per diluted share. This excludes $0.26 per diluted share related to the company's previously disclosed integration and compliance activities and $0.10 per diluted share from the impact of DAT purchase accounting and integration costs (see Table 1).
Curtis Reusser, Esterline's Chief Executive Officer, said, "During the third quarter we continued our work to reshape Esterline into a stronger company with increased efficiencies that will bring added value to our stakeholders. Activities this quarter included an important restructuring of our executive team and further advancement of our E3 operational excellence program. We were pleased to see solid improvement in our operating margins in the third quarter compared with the first half of this fiscal year." Reusser continued, "Our end markets are fundamentally healthy and commercial aerospace, in particular, is supported by strong orders at the OEM level and robust airline profitability. In the short term, early 2016 sales growth could remain challenged, as most commercial aerospace production rates have stabilized and energy and general industrial markets are still under pressure."
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Table 1: Effect of Certain Items on 3rd Fiscal Quarter
2015 Earnings from Continuing Operations
$ millions EPS
Earnings - U.S. GAAP $ 30.2 $ 0.97
=================================================================
Accelerated Integration Costs 2.3 0.08
Compliance Costs 5.8 0.18
DAT Net Loss 2.9 0.10
Adjusted Earnings $ 41.2 $ 1.33
=================================================================
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Including discontinued operations, net earnings for the fiscal third quarter of 2015 were $28.5 million, or $0.92 per diluted share, compared with $38.9 million, or $1.19 per diluted share, in the prior-year period. Net earnings in the third quarter of fiscal 2015 included a $1.7 million loss from discontinued operations, while the prior-year period included a $0.9 million loss from discontinued operations.
New orders in the third quarter of fiscal 2015 were $508.7 million, including $49.3 million from DAT, compared with $515.1 million in the year-ago period. Backlog at the end of the third quarter of fiscal 2015 was $1.28 billion, compared with $1.25 billion at the end of the third quarter of fiscal 2014. Third quarter backlog for 2015 includes $190.8 million from DAT.
Gross margin as a percentage of sales in the third quarter of fiscal 2015 was 34.2%, compared with 35.0% in the prior-year period. The lower gross margin relative to the prior year primarily reflects lower sales volumes and unfavorable sales mix in Avionics & Controls and Advanced Materials.
Fiscal third quarter selling, general and administrative (SG&A) expense as a percentage of sales was 18.5%, compared with the prior-year level of 17.6%. Higher SG&A was attributable to the addition of DAT and increased compliance costs. On an adjusted basis that excludes incremental compliance costs and the DAT impact, fiscal third quarter 2015 SG&A expense as a percentage of sales was 16.4%, compared with an adjusted prior-year level of 17.1%. Foreign exchange translation drove part of this improvement.
During the fiscal third quarter the company incurred integration and certain pre-tax incremental compliance costs of $9.9 million; $7.1 million was reported in SG&A expense, $1.4 million was reflected in gross margin, and $1.4 million was reported as restructuring charges. In the prior-year period for these activities, the company incurred pre-tax costs of $7.7 million; $3.4 million was reported as restructuring charges, $2.3 million was reported in SG&A expense, and $2.0 million was reflected in gross margin. The company's integration efforts remain on track.
Research, development and engineering (R&D) spending in the third quarter of fiscal 2015 was $29.2 million, or 5.9% of sales, compared with $24.3 million, or 4.8% of sales, in the prior-year period. Excluding the impact of DAT, the company's R&D was 4.6% of sales in the third quarter of fiscal 2015. The company expects full-year R&D spending to be approximately 5.5% of sales.
The company's income tax rate in the third quarter of fiscal 2015 was 17.4%, compared with 23.7% in the prior-year period. The lower tax rate was driven by higher discrete tax benefits and the DAT net loss. The company expects the full-year income tax rate for fiscal 2015 to be approximately 20%.
Cash flow from operations was $104.2 million through the nine months ended July 31, 2015, driving strong free cash flow conversion at 116% of net income. The company repurchased 1.4 million shares in the fiscal 2015 third quarter for $132.2 million. Since the company launched its share repurchase program in July 2014, it has repurchased 2.8 million shares for $289.8 million. The company's total approved share repurchase level is $400 million.
Through the third fiscal quarter of 2015, sales decreased 4.0% to $1.4 billion, compared with $1.5 billion in the prior year. Year-to-date foreign currency translation effects were mostly offset by sales from the recently acquired DAT operations. Excluding these items, organic sales volumes declined by 3.5% in the first nine months of fiscal 2015.
Year-to-date GAAP earnings from continuing operations were $76.9 million, or $2.44 per diluted share, compared with $114.4 million, or $3.53 per diluted share, in the prior-year period. Excluding discrete costs described in Table 2 below, adjusted earnings from continuing operations through the third fiscal quarter of 2015 were $106.5 million, or $3.38 per diluted share, compared with the adjusted year-ago period results of $131.3 million, or $4.05 per diluted share.
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Table 2: Effect of Certain Items on YTD
2015 Earnings from Continuing Operations
$ millions EPS
Earnings - U.S. GAAP $ 76.9 $ 2.44
=================================================================
Accelerated Integration Costs 8.1 0.25
Compliance Costs 12.0 0.38
DAT Closing Expenses 4.7 0.15
DAT Net Loss 8.5 0.27
Long-term Contract Adjustments 7.7 0.25
Pension Expense 2.3 0.07
Non-income Tax Gain (13.7) (0.43)
Adjusted Earnings $ 106.5 $ 3.38
=================================================================
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Adjusted Guidance for 11-month Fiscal 2015
The company has updated its full-year guidance for the 11-month fiscal year ended October 2, 2015, to reflect third quarter results and expectations for the fiscal fourth quarter. The company expects full-year revenue to be in a range of $1.78 billion to $1.80 billion, including approximately $100 million from DAT. Full-year adjusted earnings from continuing operations, which incorporates $3.38 per diluted share for year-to-date adjusted results, are expected in a range of $4.35 to $4.45 per diluted share. The updated adjusted earnings per share guidance excludes fiscal fourth quarter costs expected for integration and compliance, expenses related to the 7% Senior Note redemption, and costs associated with DAT purchase accounting and integration.
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 1-866-953-6859; outside the U.S., use 617-399-3483. The pass code for the call is: 53962953. 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 third fiscal quarter 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), adjusted SG&A expense as a percentage of sales, adjusted R&D expense as a percentage of sales, adjusted gross margin, and free cash flow conversion -- that have not been calculated in accordance with generally accepted accounting principles in the U.S. (GAAP). Adjusted earnings from continuing operations consists 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 and a non-income tax gain, 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 and excludes DAT sales of $32 million from GAAP sales. Fiscal third quarter 2015 adjusted SG&A expense as a percentage of sales excludes the cost of certain compliance costs of $7 million as well as DAT's SG&A expense of $9 million from GAAP SG&A. The calculation also excludes DAT's sales from GAAP sales. Fiscal third quarter 2014 adjusted SG&A expense as a percentage of sales excludes the cost of certain integration and compliance costs of $2 million from GAAP SG&A. Adjusted R&D as a percentage of sales excludes $8 million of DAT R&D expense from GAAP R&D and excludes DAT sales from GAAP sales. Adjusted gross margin excludes the cost of certain integration activities and DAT's gross margin from GAAP gross margin and excludes DAT's sales from GAAP sales. Year-to-date 2015 free cash flow conversion is calculated by dividing free cash flow of $66 million (cash flow from operations of $104 million less capital expenditures of $38 million) by net earnings of $57 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.
In millions, except per share
amounts
Three Months Ended Three Months Ended
July 31, 2015 August 1, 2014
-------------------- -------------------
Per Diluted Per Diluted
Share Share
Earnings from Continuing
Operations Attributable to
Esterline (GAAP), Net of Tax $ 30.2 $ 0.97 $ 39.8 $ 1.22
Accelerated Integration Costs,
Net of $0.5 and $1.2 Tax
Benefit 2.3 0.08 4.2 0.13
Compliance Costs, Net of $1.3
and $0.5 Tax Benefit 5.8 0.18 1.8 0.06
DAT Net Loss, Net of $0.8 Tax
Benefit 2.9 0.10 -- --
--------- --------- --------- ---------
Adjusted Earnings from Continuing
Operations (non-GAAP), Net of Tax $ 41.2 $ 1.33 $ 45.8 $ 1.41
========= ========= ========= =========
In millions, except per share
amounts
Nine Months Ended Nine Months Ended
July 31, 2015 August 1, 2014
-------------------- -------------------
Per Diluted Per Diluted
Share Share
Earnings from Continuing
Operations Attributable to
Esterline (GAAP), Net of Tax $ 76.9 $ 2.44 $ 114.4 $ 3.53
Accelerated Integration Costs,
Net of $2.0 and $3.0 Tax
Benefit 8.1 0.25 11.4 0.35
Compliance Costs, Net of $3.0
and $1.4 Tax Benefit 12.0 0.38 5.5 0.17
DAT Closing Expenses, Net of
$1.3 Tax Benefit 4.7 0.15 -- --
DAT Net Loss, Net of $2.0 Tax
Benefit 8.5 0.27 -- --
Long-term Contract Adjustments,
Net of $2.2 Tax Benefit 7.7 0.25 -- --
Pension Expense, Net of $0.7 Tax
Benefit 2.3 0.07 -- --
Non-Income Tax Gain, Net of $4.4
Tax Expense (13.7) (0.43) -- --
--------- --------- --------- ---------
Adjusted Earnings from Continuing
Operations (non-GAAP), Net of Tax $ 106.5 $ 3.38 $ 131.3 $ 4.05
========= ========= ========= =========
The company provides these non-GAAP financial measures as supplemental information to our 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 investors' and financial analysts' understanding of the company's performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing 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 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 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 Annual 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 31, August 1, July 31, August 1,
2015 2014 2015 2014
----------- ----------- ----------- -----------
Segment Sales
Avionics & Controls $ 207,467 $ 192,860 $ 594,534 $ 571,366
Sensors & Systems 175,530 192,246 515,611 579,131
Advanced Materials 113,220 121,203 332,496 352,613
----------- ----------- ----------- -----------
Net Sales 496,217 506,309 1,442,641 1,503,110
Cost of Sales 326,421 329,222 963,844 976,063
----------- ----------- ----------- -----------
169,796 177,087 478,797 527,047
Expenses
Selling, general and
administrative 91,968 88,884 286,366 270,051
Research, development
and engineering 29,245 24,259 78,700 75,441
Restructuring charges 1,403 3,405 5,375 10,279
Other income -- -- (12,744) -
----------- ----------- ----------- -----------
Total Expenses 122,616 116,548 357,697 355,771
----------- ----------- ----------- -----------
Operating Earnings From
Continuing Operations 47,180 60,539 121,100 171,276
Interest Income (144) (145) (447) (400)
Interest Expense 10,618 7,865 25,023 24,924
Loss on Extinguishment
of Debt -- 533 329 533
----------- ----------- ----------- -----------
Earnings From Continuing
Operations Before
Income Taxes 36,706 52,286 96,195 146,219
Income Tax Expense 6,405 12,403 19,097 31,415
----------- ----------- ----------- -----------
Earnings From Continuing
Operations Including
Noncontrolling
Interests 30,301 39,883 77,098 114,804
Earnings Attributable to
Noncontrolling
Interests (111) (46) (218) (429)
----------- ----------- ----------- -----------
Earnings From Continuing
Operations Attributable
to Esterline, Net of
Tax 30,190 39,837 76,880 114,375
Loss From Discontinued
Operations,
Attributable to
Esterline, Net of Tax (1,693) (929) (20,254) (8,485)
----------- ----------- ----------- -----------
Net Earnings
Attributable to
Esterline $ 28,497 $ 38,908 $ 56,626 $ 105,890
=========== =========== =========== ===========
Earnings (Loss) Per
Share-Basic:
Continuing Operations $ 1.00 $ 1.25 $ 2.48 $ 3.60
Discontinued
Operations (.06) (.03) (.65) (.27)
----------- ----------- ----------- -----------
Earnings (Loss) Per
Share-Basic $ .94 $ 1.22 $ 1.83 $ 3.33
=========== =========== =========== ===========
Earnings (Loss) Per
Share-Diluted:
Continuing Operations $ .97 $ 1.22 $ 2.44 $ 3.53
Discontinued
Operations (.05) (.03) (.64) (.26)
----------- ----------- ----------- -----------
Earnings (Loss) Per
Share-Diluted $ .92 $ 1.19 $ 1.80 $ 3.27
=========== =========== =========== ===========
Weighted Average Number
of Shares Outstanding-
Basic 30,397 31,995 31,003 31,818
Weighted Average Number
of Shares Outstanding-
Diluted 30,914 32,591 31,531 32,427
ESTERLINE TECHNOLOGIES CORPORATION
Consolidated Sales and Earnings From Continuing Operations by Segment
(unaudited)
In thousands
Three Months Ended Nine Months Ended
------------------------ ------------------------
July 31, August 1, July 31, August 1,
2015 2014 2015 2014
----------- ----------- ----------- -----------
Segment Sales
Avionics & Controls $ 207,467 $ 192,860 $ 594,534 $ 571,366
Sensors & Systems 175,530 192,246 515,611 579,131
Advanced Materials 113,220 121,203 332,496 352,613
----------- ----------- ----------- -----------
Net Sales $ 496,217 $ 506,309 $ 1,442,641 $ 1,503,110
=========== =========== =========== ===========
Earnings From Continuing
Operations Before
Income Taxes
Avionics & Controls $ 23,473 $ 30,902 $ 52,024 $ 81,952
Sensors & Systems 23,356 18,055 55,491 61,811
Advanced Materials 24,396 27,724 65,908 75,911
----------- ----------- ----------- -----------
Segment Earnings 71,225 76,681 173,423 219,674
Corporate expense (24,045) (16,142) (65,067) (48,398)
Other income -- -- 12,744 -
Interest income 144 145 447 400
Interest expense (10,618) (7,865) (25,023) (24,924)
Loss on extinguishment
of debt - (533) (329) (533)
----------- ----------- ----------- -----------
Earnings From
Continuing Operations
Before Income Taxes $36,706 $52,286 $96,195 $146,219
=========== =========== =========== ===========
ESTERLINE TECHNOLOGIES CORPORATION
Consolidated Balance Sheet (unaudited)
In thousands
July 31, August 1,
2015 2014
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 187,682 $ 210,456
Accounts receivable, net 373,699 361,827
Inventories 469,700 493,812
Income tax refundable 17,515 7,681
Deferred income tax benefits 36,945 50,716
Prepaid expenses 21,407 24,816
Other current assets 17,196 4,286
Current assets held for sale 14,398 --
----------- -----------
Total Current Assets 1,138,542 1,153,594
Property, Plant and Equipment, Net 306,391 363,205
Other Non-Current Assets
Goodwill 1,040,443 1,132,987
Intangibles, net 459,968 560,893
Debt issuance costs, net 11,035 4,637
Deferred income tax benefits 75,612 68,416
Other assets 22,103 24,726
Non-current assets held for sale 31,558 --
----------- -----------
$ 3,085,652 $ 3,308,458
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 111,415 $ 123,376
Accrued liabilities 267,386 238,968
Current maturities of long-term debt 1,014 12,822
Deferred income tax liabilities 2,993 3,205
Federal and foreign income taxes 3,853 2,309
Current liabilities held for sale 8,885 --
----------- -----------
Total Current Liabilities 395,546 380,680
Long-Term Liabilities
Credit facilities 200,000 115,000
Long-term debt, net of current maturities 712,809 513,119
Deferred income tax liabilities 133,499 178,796
Pension and post-retirement obligations 56,758 62,759
Other liabilities 30,512 47,313
Non-current liabilities held for sale 1,859 --
Total Shareholders' Equity 1,554,669 2,010,791
----------- -----------
$ 3,085,652 $ 3,308,458
=========== ===========
Source: Esterline Technologies