Esterline Technologies Corporation (ESL)

ESL 
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Esterline Technologies (ESL)

Q3 2013 Earnings Call

August 29, 2013 5:00 pm ET

Executives

Brian Keogh

Richard Bradley Lawrence - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert D. George - Chief Financial Officer, Vice President of Corporate Development and Secretary

Analysts

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Julie Yates - Crédit Suisse AG, Research Division

Howard A. Rubel - Jefferies LLC, Research Division

Omear Khalid - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good afternoon, and welcome, ladies and gentlemen, to Esterline Technologies Third Quarter 2013 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] Also, a replay of today's call will be available for 1 week by calling this toll free number 1 (888) 286-8010. You'll need the following PIN 57697395. At the request of the company, we will open the conference up for questions and answers after the presentation. [Operator Instructions] I would now like to turn the conference over to Mr. Brian Keogh. Please go ahead, sir.

Brian Keogh

Thank you, operator, and good afternoon, everyone. Brad Lawrence, Esterline's Chairman, President and CEO; and Bob George, our Chief Financial Officer, are here today to discuss Esterline's fiscal year-to-date and third quarter 2013 performance. In addition to the number just given, you can also visit esterline.com in the Investor Relations section to access a webcast replay of this call.

As always, I need to remind you that our call today contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. As you know, forward-looking statements always involve risk and uncertainty, which we detailed in our public filings with the SEC.

Thank you again for joining us. I'll now turn the call over to Brad.

Richard Bradley Lawrence

Thank you, Brian, and welcome, everyone, and thanks for joining us to discuss our third quarter results. We're pleased to report relative to our expectations and the environment, a solid performance for the quarter. As anticipated, we had a tailwind from our tax rate, but importantly, operating profitability was right in line with our expectations. And as anticipated when we announced our initial guidance, we continue to see a strong fourth quarter finish to the year, a typical earnings pattern for Esterline over the past several years. Our commercial aerospace markets remain a major source of strength, with continued solid OEM build rates, particularly for single-aisle jets and a generally stable aftermarket. Defense markets, however, continue to be impacted by budget uncertainty. Still, there are number of bright spots in our defense business that give us confidence not only in a solid fourth quarter but position us well with a good mix of programs going forward.

In general, our view of the business, both in the quarter just reported and for the immediate future, remains largely unchanged. We're right where we expected to be. In each of our segments, we're working hard to take full advantage of our revenue opportunities, and at the same time we are laser focused on operating efficiency, maintaining discipline on lean techniques, developing better processes, while keeping a sharp eye on cost control.

In our Sensors & Systems segment, each of our major business platforms, Advanced Sensors, Connection Technologies and Power Systems, are well positioned with good order trends and a solid backlog. We have a number of very constructive meetings at the Paris Air Show this past quarter, and we're encouraged by our relationships with the major OEMs. We're also identifying new partnership opportunities across an increasingly wide range of customers. We're excited about our progress with Rolls-Royce on the XWB engines for the A350. And Airbus has begun low rate initial production for A400M at one aircraft per month. This is an important platform for this segment, and we're leveraging a very efficient facility in Morocco for a good portion of that work.

Also this quarter, Sukhoi began delivering its Superjet 100 to their first Western customer in Mexico. We have about $750,000 of content per copy on this aircraft, which we believe has a strong market position. The aftermarket for this segment is shaping up to be stable. But frankly, it's still not where we had anticipated. Ironically, increasing durability of our sensors is causing some of the pressure we're experiencing. But we expect this to be offset over time by the sheer number of aircraft flying with the popular CFM56 engine.

Meanwhile, helping our Connection Technologies business are early signs of improving industrial market conditions in the Eurozone. Our Avionics & Controls segment is where we are experiencing the greatest impact from defense market pressures. T-6B production at Beechcraft continues at the lower rate of 42 per year. Our signal intelligence receiver business remains in limbo, pending political decisions surrounding the Global Hawk Block 30 program. And program changes for global military land-based vehicles and soldier modernization have impacted our Racal Acoustics Headset business prompting a further $3.5 million goodwill impairment.

Despite these issues, Avionics & Controls is the segment of our business that holds the most potential for growth. We are working diligently on a number of significant opportunities for both new and retrofit cockpits. And we continue hitting the singles and doubles that built our reputation, providing the best quality, highly-engineered components for the world's cockpits.

Read the rest of this transcript for free on seekingalpha.com