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Esterline Technologies Corporation (ESL)
F4Q 2008 Earnings Call
December 11, 2008 5:00 pm ET
Brian Keogh – Investor Relations
Robert Cremin – Chairman, President and Chief Executive Officer
Robert D. George – Vice President and Chief Financial Officer
Robert Springarn - Credit Suisse
Troy Lahr - Stifel Nicolaus & Company, Inc.
[John Croak – T. D. Jefferies & Co.]
Eric Hugel - Stephens Inc.
J. B. Groh - D. A. Davidson & Co.
[Bill Develum – Keaton Capital Management]
Tyler Hojo - Sidoti & Co.
[Rob Magnuson] - Goldman Sachs Asset Management
Previous Statements by ESL
» Esterline Technologies Corporation F4Q09 (Qtr End 10/30/09) Earnings Call Transcript
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» Esterline Technologies Corporation F1Q09 (Qtr End 01/30/09) Earnings Call Transcript
Thanks Mike. Good afternoon and welcome everybody and thanks for joining us. Bob Cremin, Esterline’s Chairman, President and CEO and Bob George, Vice President and CFO are with me today to discuss Esterline’s fiscal 2008 fourth quarter and full year performance. A replay of the call will be available at this toll-free number, 1-866-245-6755. The access code is 245054, or you can visit Esterline.com. In the Investor Relations section you’ll find replay information and also a copy of today’s earnings release.
In the earnings release there’s a paragraph regarding forward-looking statements. This paragraph covers the call as well. Essentially it says, “Forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 are based on management’s current expectations and are not guarantees of future performance. Forward-looking statements always involve risk and uncertainty and we detail those risks in our public filings with the SEC.”
We have some prepared remarks today, then we’ll get to Q&A. As is our practice, we’re going to put a two question limit on the first round, then we’ll circle back for follow-up as time allows. Now I’ll turn the call over to Bob Cremin. Bob.
Hey, thanks Brian and welcome everyone to our year-end conference call and what a year it was. I’ll make some brief comments about 2008 and then I’ll give you a sense of what we’re seeing for 2009. Then I want to drill down into one of our three business segments, Avionics and Controls, to give you a feeling for some of the dynamics that give us insight into 2009 and beyond.
One quick point, you business models are not skewed. Fiscal ’08 and prior results have been restated per GAAP to exclude the recent divestiture of Muirhead, our actuator company. And Bob will give you more detail in a moment. Okay, let’s get into this.
Certainly a key factor in our performance was margin improvement. Both gross margins and operating margins are up nicely. Two areas of Esterline’s focus are contributing here; namely, pricing and velocity. On pricing we’ve had success restoring gross margins on long term agreements as they come up for renewal and we’re not finished yet. We have still more to negotiate. Velocity is also critical to improving margins. We define velocity as the speed of all the processes that occur between the receipt of an order and its conversion to cash.
We’re making good progress in removing inefficiencies from our systems. As we continue to sharpen our skills on high mix, low volume manufacturing, velocity improvements become an ever increasing strategic advantage. In fact, velocity is a focal point of the Esterline performance system, our unique approach to business that includes many of the tools of lean manufacturing. But the Esterline performance system goes beyond lean. It’s our way or approaching business that insures that all employees are focused on and truly engaged in continuous improvement.
Another key performance fact to consider is the trend in research and development expenditures. As predicted, R&D as a percentage of sales is coming down. At this point, we’ve essentially expensed our investments on the T-6B Military Trainer, the Joint Strike Fighter, the Boeing 787, the Airbus A400 Military Transporter and both the Chinese and Russian Regional Jets. I’ve said many times over the last several years we’ve been paying our dues.
Esterline’s R&D investments were made to secure Tier 1 positions on these major programs, and they’re going to fly for decades to come. And don’t overlook the reduction in SG&A. It has followed a similar and proven trend over the last several years. We’re seriously focused on cost containment no matter where we are in the cycle.
Turning specifically to fiscal 2009, we’re looking for EPS performance in the range of $3.70 to $3.90 per share. This of course is on a continuing ops basis.
Further, it does not include credits to R&D expense from the Canadian Strategic Aerospace Defense Initiative, or SADI as it is known. The good news on SADI front is that our application for development of systems from the Canadian government has been approved. However, under U.S. GAAP it appears unlikely that we’ll be able to treat it as a credit to expense. The more likely outcome is that it will be treated as a liability on the balance sheet. From a cash flow perspective, though, it’s still positive. But obviously not from an EPS perspective, it’s not optimal.
Overall however we feel pretty good about ’09. Our backlog stands at $1.1 billion and our order input is solid, including our spare parts business which has held up well so far. You know, look, we don’t control the wheels of industry, but given what we see on our plate today we’re confident that we can perform well in this environment. Let me drill down into Avionics and Controls to highlight some of what shapes this outlook. And I can certainly provide a profile very similar for our other two segments, but for the sake of time I’ll pick those up in Q&A.