Esterline Technologies Corporation (ESL)

ESL 
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Esterline Corporation (ESL)

Q2 2014 Results Earnings Conference Call

May 29, 2014; 05:00 p.m. ET

Executives

Curtis Reusser - President & Chief Executive Officer

Bob George - Chief Financial Officer

Brian Keogh - Director, Corporate Communications

Analysts

Sam Pearlstein - Wells Fargo

Howard Rubel - Jefferies& Company Inc.

Julie Yates - Credit Suisse

Tyler Hojo - Sidoti & Co.

Michael Ciarmoli - KeyBanc Capital Markets

Noah Poponak - Goldman Sachs

Ken Herbert - Canaccord

Presentation

Operator

Good afternoon and welcome ladies and gentlemen to the Esterline Technologies, second quarter 2014 earnings call.

At this time I’d like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open up the conference for questions-and-answers after the presentation. (Operator Instructions).

I will now turn the conference over to Mr. Brian Keogh. Please go ahead, sir.

Brian Keogh

Thank you Sara and good afternoon everyone. Curtis Reusser, Esterline's President and CEO; and Bob George, Chief Financial Officer are here today to discuss Esterline's 2014, second quarter and year-to-date performance.

Before I go further I wanted to remind everyone that our Investor Day is coming up on Thursday, June 19 in Boston and we’d love to see you there. It is an invitation-only event, so if you are able to attend, please send us an email at the following address. Its investor@esterline.com and request an invite and we’ll get that out to you.

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 detail in our public filings with the SEC.

We also will discuss certain financial information on this call that is considered non-GAAP under the SEC's Regulation G. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the section in today's press release titled non-GAAP financial information. If you don't have the release, it can be found at esterline.com under the News and Press Center tab.

I’ll now turn the call over to Curtis. Curtis.

Curtis Reusser

Thank you Brian and good afternoon to everybody on the call today. We’re pleased to report a solid second quarter. The performance reflects good trends throughout the business and goes a long way to de-risk our ability to achieve our full year financial objectives. More importantly, the steady performance is helping us focus on the bigger picture, which I’ll come back to at the end of my remarks today.

To start, I’ll provide a few highlights and then turn the call over to Bob for a detailed review of the numbers. After that I’ll wrap-up before we take your questions.

So on the revenue side, we had an increase for the quarter that was a healthy 6% as we grew the top line to $530 million. Importantly, a significant portion of that growth was organic.

On the earnings side, of course we used GAAP standards to convey our performance, but as in prior quarters, we are also providing adjustments for our integration and incremental compliance costs.

On a GAAP basis net income was up 3.9% to $37.2 million or $1.15 per diluted share. After adjustments, our net income was $41.8 million or a $1.28 per diluted share, an increase of over 15% year-over-year. This kind of performance clearly indicates that we’re benefiting from our investments on a number of key programs.

As you know the commercial aerospace market remains strong. The Boeing 787 ramp-up continues on track and narrow body production at both Airbus and Boeing continues at all time highs. Our adjacent markets are also contributing well and there are even a few bright sports for us in the defense arena, specifically the JSF and the A400M at Airbus.

If there is a key takeaway for this quarter, I’d say it’s steady progress. We’re executing well, progressing on all our initiatives and seeing good trends in our order book, all of which gives us confidence in the future.

So lets talk briefly about each of our three segments. I’ll start with the Sensors & Systems segments, which had sales of $211 million for the quarter, which is up 19% versus last year. The top line growth in this segment was driven primarily by Power Systems and Connection Technologies, which includes the Sunbank acquisition.

Regarding Sunbank, although acquisition accounted for the quarter impacted overall gross margin, we are already beginning to see the benefits of synergies with our Souriau connector product like. We believe that longer term Sunbank will enable increased efficiency across our connector business, expanding the range and scope of our growth opportunities.

Also the recovery of Europe’s industrial sector continues, which is positive for this segment, especially in our connector business. Sensors and systems is also where we have the lion’s share of our A400M content, this military transport program illustrates several points about our overall business that are worth noting.

First, it’s a significant platform that is now ramping up to be a steady source of new long-term business for Esterline with a very important customer. It also highlights that there are defense related opportunities within our portfolio, despite the current state of macro budgeting issues, and I’d point to the A400M as a good example of how our defense exposure is diversified pretty evenly between the U.S. and other international markets.

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