UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 26, 2013.
Or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6357
ESTERLINE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2595091 | |
(State or other Jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
500 108th Avenue N.E., Bellevue, Washington 98004
(Address of principal executive offices)(Zip Code)
Registrants telephone number, including area code (425) 453-9400
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | þ | Accelerated filer | ¨ | |||||||||
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of August 28, 2013, 31,375,484 shares of the issuers common stock were outstanding.
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of July 26, 2013 and October 26, 2012
(In thousands, except share amounts)
July 26,
2013 |
October 26,
2012 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 199,248 | $ | 160,675 | ||||
Cash in escrow |
4,017 | 5,016 | ||||||
Accounts receivable, net of allowances
|
332,069 | 383,362 | ||||||
Inventories |
||||||||
Raw materials and purchased parts |
163,744 | 146,390 | ||||||
Work in process |
184,543 | 174,824 | ||||||
Finished goods |
97,503 | 88,623 | ||||||
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|
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|
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445,790 | 409,837 | |||||||
Income tax refundable |
9,084 | 4,832 | ||||||
Deferred income tax benefits |
47,329 | 46,000 | ||||||
Prepaid expenses |
21,524 | 21,340 | ||||||
Other current assets |
3,774 | 4,631 | ||||||
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|
|
|
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Total Current Assets |
1,062,835 | 1,035,693 | ||||||
Property, Plant and Equipment |
746,003 | 701,541 | ||||||
Accumulated depreciation |
382,848 | 345,140 | ||||||
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363,155 | 356,401 | |||||||
Other Non-Current Assets |
||||||||
Goodwill |
1,106,867 | 1,098,962 | ||||||
Intangibles, net |
584,485 | 609,045 | ||||||
Debt issuance costs, net of accumulated
|
6,637 | 8,818 | ||||||
Deferred income tax benefits |
93,374 | 97,952 | ||||||
Other assets |
7,558 | 20,246 | ||||||
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$ | 3,224,911 | $ | 3,227,117 | |||||
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2
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of July 26, 2013 and October 26, 2012
(In thousands, except share amounts)
July 26,
2013 |
October 26,
2012 |
|||||||
(Unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 117,041 | $ | 108,689 | ||||
Accrued liabilities |
258,447 | 269,553 | ||||||
Credit facilities |
109 | 0 | ||||||
Current maturities of long-term debt |
21,939 | 10,610 | ||||||
Deferred income tax liabilities |
1,215 | 5,125 | ||||||
Federal and foreign income taxes |
1,954 | 2,369 | ||||||
|
|
|
|
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Total Current Liabilities |
400,705 | 396,346 | ||||||
Long-Term Liabilities |
||||||||
Credit facilities |
170,000 | 240,000 | ||||||
Long-term debt, net of current maturities |
562,444 | 598,060 | ||||||
Deferred income tax liabilities |
198,809 | 205,198 | ||||||
Pension and post-retirement obligations |
125,673 | 132,074 | ||||||
Other liabilities |
32,616 | 34,904 | ||||||
Shareholders Equity |
||||||||
Common stock, par value $.20 per share,
|
6,274 | 6,174 | ||||||
Additional paid-in capital |
599,489 | 569,235 | ||||||
Retained earnings |
1,219,227 | 1,120,356 | ||||||
Accumulated other comprehensive loss |
(100,696 | ) | (85,284 | ) | ||||
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|
|
|
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Total Esterline shareholders equity |
1,724,294 | 1,610,481 | ||||||
Noncontrolling interests |
10,370 | 10,054 | ||||||
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|
|
|||||
Total Shareholders Equity |
1,734,664 | 1,620,535 | ||||||
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|
|
|||||
$ | 3,224,911 | $ | 3,227,117 | |||||
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3
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Month Periods Ended July 26, 2013 and July 27, 2012
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
July 26,
2013 |
July 27,
2012 |
July 26,
2013 |
July 27,
2012 |
|||||||||||||
Net Sales |
$ | 478,068 | $ | 485,949 | $ | 1,435,592 | $ | 1,461,662 | ||||||||
Cost of Sales |
299,166 | 313,853 | 914,969 | 946,962 | ||||||||||||
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178,902 | 172,096 | 520,623 | 514,700 | |||||||||||||
Expenses |
||||||||||||||||
Selling, general & administrative |
101,822 | 91,869 | 298,711 | 285,516 | ||||||||||||
Research, development & engineering |
24,103 | 27,198 | 72,837 | 83,138 | ||||||||||||
Gain on settlement of contingency |
0 | 0 | 0 | (11,891 | ) | |||||||||||
Goodwill impairment |
3,454 | 52,169 | 3,454 | 52,169 | ||||||||||||
Other income |
0 | (1,263 | ) | 0 | (1,263 | ) | ||||||||||
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Total Expenses |
129,379 | 169,973 | 375,002 | 407,669 | ||||||||||||
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Operating Earnings from |
||||||||||||||||
Continuing Operations |
49,523 | 2,123 | 145,621 | 107,031 | ||||||||||||
Interest Income |
(132 | ) | (109 | ) | (381 | ) | (320 | ) | ||||||||
Interest Expense |
9,050 | 12,159 | 30,976 | 35,171 | ||||||||||||
Loss on Extinguishment of Debt |
0 | 0 | 946 | 0 | ||||||||||||
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Earnings (Loss) from Continuing Operations
|
40,605 | (9,927 | ) | 114,080 | 72,180 | |||||||||||
Income Tax Expense |
1,151 | 6,963 | 13,027 | 20,677 | ||||||||||||
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Earnings (Loss) from Continuing Operations
|
39,454 | (16,890 | ) | 101,053 | 51,503 | |||||||||||
Earnings Attributable to
|
(241 | ) | (214 | ) | (1,207 | ) | (628 | ) | ||||||||
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Earnings (Loss) from Continuing Operations
|
39,213 | (17,104 | ) | 99,846 | 50,875 | |||||||||||
Loss from Discontinued Operations Attributable
|
(975 | ) | 0 | (975 | ) | 0 | ||||||||||
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Net Earnings (Loss) Attributable to Esterline |
$ | 38,238 | $ | (17,104 | ) | $ | 98,871 | $ | 50,875 | |||||||
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Earnings (Loss) Per Share Attributable to Esterline Basic: |
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Continuing operations |
$ | 1.25 | $ | (.55 | ) | $ | 3.21 | $ | 1.66 | |||||||
Discontinued operations |
(.03 | ) | .00 | (.03 | ) | .00 | ||||||||||
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Earnings (Loss) Per Share Attributable
|
$ | 1.22 | $ | (.55 | ) | $ | 3.18 | $ | 1.66 | |||||||
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Earnings (Loss) Per Share Attributable to Esterline Diluted: |
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Continuing operations |
$ | 1.23 | $ | (.55 | ) | $ | 3.15 | $ | 1.63 | |||||||
Discontinued operations |
(.03 | ) | .00 | (.03 | ) | .00 | ||||||||||
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Earnings (Loss) Per Share Attributable
|
$ | 1.20 | $ | (.55 | ) | $ | 3.12 | $ | 1.63 | |||||||
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Comprehensive Income (Loss) |
$ | 45,201 | $ | (81,625 | ) | $ | 83,459 | $ | (46,809 | ) |
4
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Month Periods Ended July 26, 2013 and July 27, 2012
(Unaudited)
(In thousands)
Nine Months Ended | ||||||||
July 26,
2013 |
July 27,
2012 |
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Cash Flows Provided (Used) by Operating Activities |
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Net earnings including noncontrolling interests |
$ | 100,078 | $ | 51,503 | ||||
Adjustments to reconcile net earnings including noncontrolling
|
||||||||
Depreciation and amortization |
87,941 | 79,265 | ||||||
Deferred income taxes |
(12,238 | ) | (19,636 | ) | ||||
Share-based compensation |
7,667 | 7,686 | ||||||
Gain on sale of capital assets |
(915 | ) | (1,139 | ) | ||||
Gain on settlement of contingency |
0 | (11,891 | ) | |||||
Goodwill impairment |
3,454 | 52,169 | ||||||
Working capital changes, net of effect of acquisitions: |
||||||||
Accounts receivable |
51,063 | 20,975 | ||||||
Inventories |
(32,774 | ) | (27,494 | ) | ||||
Prepaid expenses |
(135 | ) | (5,423 | ) | ||||
Other current assets |
(836 | ) | 188 | |||||
Accounts payable |
5,424 | (2,339 | ) | |||||
Accrued liabilities |
4,277 | 16,923 | ||||||
Federal and foreign income taxes |
(5,321 | ) | 2,151 | |||||
Other liabilities |
(10,394 | ) | (15,074 | ) | ||||
Other, net |
(1,012 | ) | 3,510 | |||||
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196,279 | 151,374 | |||||||
Cash Flows Provided (Used) by Investing Activities |
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Purchases of capital assets |
(37,765 | ) | (39,456 | ) | ||||
Proceeds from sale of capital assets |
915 | 1,139 | ||||||
Acquisition of business, net of cash acquired |
(40,689 | ) | 0 | |||||
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(77,539 | ) | (38,317 | ) | |||||
Cash Flows Provided (Used) by Financing Activities |
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Proceeds provided by stock issuance under share-based
|
20,450 | 7,331 | ||||||
Excess tax benefits from stock options exercised |
2,237 | 221 | ||||||
Proceeds from long-term credit facilities |
175,000 | 0 | ||||||
Repayment of long-term debt |
(209,541 | ) | (44,131 | ) | ||||
Repayment of credit facilities |
(70,000 | ) | (60,000 | ) | ||||
Proceeds from government assistance |
5,114 | 17,203 | ||||||
Dividends paid to noncontrolling interests |
(1,044 | ) | 0 | |||||
Debt and other issuance costs |
(453 | ) | 0 | |||||
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(78,237 | ) | (79,376 | ) | |||||
Effect of Foreign Exchange Rates on Cash |
(1,930 | ) | (5,643 | ) | ||||
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Net Increase (Decrease) in Cash and Cash Equivalents |
38,573 | 28,038 | ||||||
Cash and Cash Equivalents Beginning of Period |
160,675 | 185,035 | ||||||
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Cash and Cash Equivalents End of Period |
$ | 199,248 | $ | 213,073 | ||||
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Supplemental Cash Flow Information |
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Cash Paid for Interest |
$ | 25,873 | $ | 27,039 | ||||
Cash Paid for Taxes |
30,608 | 37,554 |
5
ESTERLINE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Month Periods Ended July 26, 2013 and July 27, 2012
1. | The consolidated balance sheet as of July 26, 2013, the consolidated statement of operations and comprehensive income (loss) for the three and nine month periods ended July 26, 2013, and July 27, 2012, and the consolidated statement of cash flows for the nine month periods ended July 26, 2013, and July 27, 2012, are unaudited but, in the opinion of management, all of the necessary adjustments, consisting of normal recurring accruals, have been made to present fairly the financial statements referred to above in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the above statements do not include all of the footnotes required for complete financial statements. The results of operations and cash flows for the interim periods presented are not necessarily indicative of results that can be expected for the full year. |
2. | The notes to the consolidated financial statements in the Companys Annual Report on Form 10-K for the fiscal year ended October 26, 2012, provide a summary of significant accounting policies and additional financial information that should be read in conjunction with this Form 10-Q. |
3. | The timing of the Companys revenues is impacted by the purchasing patterns of customers and, as a result, revenues are not generated evenly throughout the year. Moreover, the Companys first fiscal quarter, November through January, includes significant holiday periods in both Europe and North America. |
4. | Basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the year. Diluted earnings per share includes the dilutive effect of stock options and restricted stock units. Common shares issuable from stock options excluded from the calculation of diluted earnings per share because they were anti-dilutive were 219,800 in the third fiscal quarter of 2013. There were no anti-dilutive shares in the third fiscal quarter of 2012. Shares used for calculating earnings per share are disclosed in the following table. |
(In thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
July 26,
2013 |
July 27,
2012 |
July 26,
2013 |
July 27,
2012 |
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Shares Used for Basic Earnings Per Share |
31,297 | 30,835 | 31,100 | 30,712 | ||||||||||||
Shares Used for Diluted Earnings Per Share |
31,870 | 30,835 | 31,663 | 31,266 |
5. | The Companys comprehensive income (loss) is as follows: |
(In thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
July 26,
2013 |
July 27,
2012 |
July 26,
2013 |
July 27,
2012 |
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Net Earnings (Loss) |
$ | 38,238 | $ | (17,104 | ) | $ | 98,871 | $ | 50,875 | |||||||
Change in Fair Value of Derivative
|
(848 | ) | (5,343 | ) | (2,434 | ) | (4,958 | ) | ||||||||
Change in Pension and Post-retirement
|
2,031 | 1,760 | 4,006 | 4,074 | ||||||||||||
Foreign Currency Translation Adjustment |
5,780 | (60,938 | ) | (16,984 | ) | (96,800 | ) | |||||||||
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Comprehensive Income (Loss) |
$ | 45,201 | $ | (81,625 | ) | $ | 83,459 | $ | (46,809 | ) | ||||||
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(1) |
Net of tax benefit of $247 and $2,296 for the third fiscal quarter of 2013 and 2012, respectively. Net of tax benefit of $728 and $2,388 for the first nine months of fiscal 2013 and 2012, respectively. |
(2) |
Net of tax expense of $(1,092) and $(929) for the third fiscal quarter of 2013 and 2012, respectively. Net of tax expense of $(2,167) and $(2,341) for the first nine months of fiscal 2013 and 2012, respectively. |
6
The Companys accumulated other comprehensive loss is comprised of the following:
(In thousands) |
July 26,
2013 |
October 26,
2012 |
||||||
Net unrealized gain (loss) on derivative contracts |
$ | (811 | ) | $ | 1,623 | |||
Pension and post-retirement obligations |
(95,173 | ) | (99,179 | ) | ||||
Currency translation adjustment |
(4,712 | ) | 12,272 | |||||
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Total accumulated other comprehensive loss |
$ | (100,696 | ) | $ | (85,284 | ) | ||
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6. | On February 4, 2013, the Company acquired the Gamesman Group (Gamesman) for $40.8 million. Gamesman is a global supplier of input devices principally serving the gaming industry. Gamesman is included in the Avionics & Controls segment. |
7. | During the third fiscal quarter of 2013, the Company recorded a $1.5 million liability related to environmental remediation at a previously sold business for which the Company provided indemnification. A loss of $1.0 million, net of tax, is reflected in discontinued operations on the Consolidated Statement of Operations and Comprehensive Income (Loss). |
8. | During the third fiscal quarter of 2013, management performed a Step One impairment test for Racal Acoustics, Inc. (Racal Acoustics), which is included in the Avionics & Controls segment, upon identification of an indicator of impairment due to further deterioration in Racal Acoustics fiscal 2013 and five-year forecast resulting from further delays and reductions in global defense programs. As required under U.S. GAAP, a Step Two impairment test was required because the current fair value of the business using a discounted cash flow and market approach was less than its carrying amount of the business. Under Step Two, the fair value of all of Racal Acoustics assets and liabilities was estimated, including tangible assets, existing technology, and trade names, for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of the goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Assumptions used in measuring the value of these assets and liabilities included the discount rates, royalty rates, and obsolescence rates used in valuing the intangible assets, and pricing of comparable transactions in the market in valuing the tangible assets. The excess of the carrying amount of goodwill over the implied fair value of goodwill resulted in an estimated impairment charge of $3.5 million. There were no impairments on Racal Acoustics other long-lived assets subject to amortization at July 26, 2013. |
9. | The income tax rates were 11.4% and 28.6% for the first nine months of fiscal 2013 and 2012, respectively. In the first nine months of fiscal 2013, the Company recognized $12.4 million of discrete tax benefits principally related to the following items. The first item was approximately $1.5 million of tax benefits due to the retroactive extension of the U.S. federal research and experimentation credits. The second item was approximately $2.3 million of tax benefits related to the settlement of U.S. and foreign tax examinations. The third item was a $4.3 million tax benefit related to the release of tax reserves due to the expiration of a statute of limitations. The fourth item was a $3.8 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate. |
In the first nine months of fiscal 2012, the Company recognized $7.2 million of discrete tax benefits principally related to three items. The first item was a $2.3 million tax benefit due to a change in French tax laws associated with the holding company structure and the financing of the Souriau acquisition. The second item was a $2.9 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate. The third item was a $1.7 million tax benefit as a result of reconciling the prior years income tax return to the U.S. income tax provision. The income tax rate differed from the statutory rate in the first nine months of fiscal 2013 and 2012, as both years benefited from various tax credits and certain foreign interest expense deductions.
10. | As of July 26, 2013, the Company had three share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $7.7 million for the first nine months of fiscal 2013 and 2012. During the first nine months of fiscal 2013 and 2012, the Company issued 502,946 and 242,135 shares, respectively, under its share-based compensation plans. |
7
Employee Stock Purchase Plan (ESPP)
The ESPP is a safe-harbor designed plan whereby shares are purchased by participants at a discount of 5% of the market value on the purchase date and, therefore, compensation cost is not recorded.
Employee Sharesave Scheme
Under the employee sharesave scheme for U.K. employees, participants are allowed the option to purchase shares at a discount of 5% of the market price of the stock as of the beginning of the offering period. The term of these options is three years. The sharesave scheme is not a safe-harbor design, and therefore, compensation cost is recognized on this plan. Under the sharesave scheme, option exercise prices are equal to the fair market value of the Companys common stock on the date of grant. The Company granted 16,722 and 45,063 options in the first nine month periods ended July 26, 2013, and July 27, 2012, respectively. The weighted-average grant date fair value of options granted during the nine month periods ended July 26, 2013, and July 27, 2012, was $20.24 and $19.85 per share, respectively.
The fair value of the awards under the employee sharesave scheme was estimated using a Black-Scholes pricing model which uses the assumptions noted in the following table. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the time of grant.
Nine Months Ended | ||||||||
July 26,
2013 |
July 27,
2012 |
|||||||
Volatility |
36.97% | 38.96% | ||||||
Risk-free interest rate |
0.40% | 0.38% | ||||||
Expected life (years) |
3 | 3 | ||||||
Dividends |
0 | 0 |
Equity Incentive Plan
Under the equity incentive plan, option exercise prices are equal to the fair market value of the Companys common stock on the date of grant. The Company granted 244,700 and 343,400 options to purchase shares in the nine month periods ended July 26, 2013, and July 27, 2012, respectively. The weighted-average grant date fair value of options granted during the nine month periods ended July 26, 2013, and July 27, 2012, was $29.24 and $24.33 per share, respectively.
The fair value of each option granted by the Company was estimated using a Black-Scholes pricing model, which uses the assumptions noted in the following table. The Company uses historical data to estimate volatility of the Companys common stock and option exercise and employee termination assumptions. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the time of the grant.
Nine Months Ended | ||||||||
July 26,
2013 |
July 27,
2012 |
|||||||
Volatility |
41.89 44.25% | 41.62 44.29% | ||||||
Risk-free interest rate |
0.79 1.88% | 0.91 2.11% | ||||||
Expected life (years) |
4.5 9.5 | 4.5 9.5 | ||||||
Dividends |
0 | 0 |
The Company granted 32,200 restricted stock units during the nine month period ended July 26, 2013. The weighted-average grant date fair value of restricted stock units granted during the nine month period ended July 26, 2013, was $62.52 per share. The fair value of each restricted stock unit granted by the Company is equal to the fair market value of the Companys common stock on the date of grant. There were no restricted stock units granted in the nine month period ended July 27, 2012.
8
11. | The Companys pension plans principally include a U.S. pension plan maintained by Esterline and a non-U.S. plan maintained by CMC Electronics, Inc. (CMC). Components of periodic pension cost consisted of the following: |
12. | In March 2011, the Company entered into a secured credit facility for $460 million made available through a group of banks. The credit facility is secured by substantially all of the Companys assets and interest is based on standard inter-bank offering rates. The credit facility expires in March 2016. The spread ranges from LIBOR plus 1.5% to LIBOR plus 2.25% depending on the leverage ratios at the time the funds are drawn. At July 26, 2013, the Company had $170.0 million outstanding under the secured credit facility at an interest rate of LIBOR plus 1.75%, which is currently 1.94%. |
In July 2011, the Company amended the secured credit facility to provide for a 125.0 million term loan (Euro Term Loan). The interest rate on the Euro Term Loan ranges from Euro LIBOR plus 1.5% to Euro LIBOR plus 2.25% depending on the leverage ratios at the time the funds are drawn. At July 26, 2013, the Company had 35.9 million outstanding or $47.6 million under the Euro Term Loan at an interest rate of Euro LIBOR plus 1.75%, which is currently 1.83%. The loan amortizes at 1.25% of the original principal balance quarterly through March 2016, with the remaining balance due in July 2016.
In April 2013, the Company amended the secured credit facility to provide for $175.0 million term loan (U.S. Term Loan). The interest rate on the U.S. Term Loan ranges from LIBOR plus 1.5% to LIBOR plus 2.25% depending on the leverage ratios at the time the funds are drawn. At July 26, 2013, the Company had $172.8 million outstanding under the U.S. Term Loan at an interest rate of LIBOR plus 1.75%, which is currently 1.95%. The loan amortizes at 1.25% of the original principal balance quarterly through March 2016, with the remaining balance due in July 2016.
In April 2013, the Company redeemed the $175.0 million 6.625% Senior Notes due March 2017 (2017 Notes). In connection with the redemption, the Company wrote off $1.3 million in unamortized debt issuance costs as a charge against interest expense. In addition, the Company incurred a $3.9 million redemption premium and received proceeds of $2.9 million from the termination of its $175.0 million interest rate swap agreements. As a result, the redemption of the 2017 Notes resulted in a net loss of $0.9 million on extinguishment of debt.
9
Based on quoted market prices, the approximate fair value of the Companys $250.0 million 7.0% Senior Notes due August 2020 (2020 Notes) was approximately $272.5 million and $277.5 million as of July 26, 2013, and October 26, 2012, respectively. The approximate fair value of the Companys 2017 Notes was $181.3 million as of October 26, 2012. The carrying amounts of the secured credit facility, U.S. Term Loan and Euro Term Loan approximate fair value. Estimates of fair value for the 2020 Notes are based on quoted market prices, and are considered Level 2 inputs as defined in the fair value hierarchy, described in Note 13.
Government refundable advances of $57.2 million at July 26, 2013, consist of payments received from the Canadian government to assist in research and development related to commercial aviation. The repayment of this advance is based on year-over-year commercial aviation revenue growth at CMC beginning in 2014. Imputed interest on the advance was 4.37% at July 26, 2013.
13. | Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. An assets or liabilitys level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy of fair value measurements is described below: |
Level 1 Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets and liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, a valuation of these instruments does not require a significant degree of judgment.
Level 2 Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.
The following table sets forth the Companys financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy at July 26, 2013, and October 26, 2012.
(In thousands) | Level 2 | |||||||
July 26,
2013 |
October 26,
2012 |
|||||||
Assets: |
||||||||
Derivative contracts designated as hedging instruments |
$ | 1,507 | $ | 7,753 | ||||
Derivative contracts not designated as hedging instruments |
1,161 | 1,387 | ||||||
Embedded derivatives |
1,215 | 51 | ||||||
Liabilities: |
||||||||
Derivative contracts designated as hedging instruments |
$ | 2,915 | $ | 2,143 | ||||
Derivative contracts not designated as hedging instruments |
1,480 | 361 | ||||||
Embedded derivatives |
77 | 470 |
The Companys embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Companys functional currency or the suppliers or customers functional currency. The fair value is determined by calculating the difference between quoted exchange rates at the time the contract was entered into and the period-end exchange rate. These contracts are categorized as Level 2 in the fair value hierarchy.
The Companys derivative contracts consist of foreign currency exchange contracts and interest rate swap agreements. These derivative contracts are over the counter and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy.
10
14. | The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Companys policy is to execute such instruments with banks the Company believes to be creditworthy and not to enter into derivative financial instruments for speculative purposes. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged. |
All derivative financial instruments are recorded at fair value in the Consolidated Balance Sheet. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Balance Sheet in Accumulated Other Comprehensive Income (AOCI) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.
The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. At July 26, 2013, the Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies, which subjects the Companys cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At July 26, 2013, and October 26, 2012, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $388.0 million and $358.4 million, respectively. These notional values consist primarily of contracts for the European euro, British pound sterling and Canadian dollar, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. In fiscal 2010, the Company entered into interest rate swap agreements for $175.0 million on the 2017 Notes. The swap agreements exchanged the fixed interest rate on the 2017 Notes of 6.625% for a variable interest rate. In the second quarter of fiscal 2013, the swap agreements were terminated and the Company redeemed the 2017 Notes with the proceeds from the $175.0 million U.S. Term Loan. The Company recorded a gain on the swap termination of $2.9 million. The gain is included in the Loss on Extinguishment of Debt in the Consolidated Statement of Operations and Comprehensive Income (Loss).
Embedded Derivative Instruments
The Companys embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Companys functional currency or the suppliers or customers functional currency.
11
Net Investment Hedge
In July 2011, the Company entered into a Euro Term Loan for 125.0 million under the secured credit facility. The Company designated the Euro Term Loan a hedge of the investment in a certain French business unit. The foreign currency gain or loss that is effective as a hedge is reported as a component of other comprehensive income in shareholders equity. To the extent that this hedge is ineffective, the foreign currency gain or loss is recorded in earnings. There was no ineffectiveness since inception of the hedge.
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Consolidated Balance Sheet at July 26, 2013, and October 26, 2012, consisted of:
(In thousands) | Fair Value | |||||||||||
Classification |
July 26,
2013 |
October 26,
2012 |
||||||||||
Foreign Currency Forward Exchange Contracts: |
||||||||||||
Other current assets | $ | 2,282 | $ | 3,694 | ||||||||
Other assets | 386 | 1,294 | ||||||||||
Accrued liabilities | 2,662 | 2,228 | ||||||||||
Other liabilities | 1,733 | 276 | ||||||||||
Embedded Derivative Instruments: |
||||||||||||
Other current assets | $ | 801 | $ | 51 | ||||||||
Other assets | 414 | 0 | ||||||||||
Accrued liabilities | 77 | 148 | ||||||||||
Other liabilities | 0 | 322 | ||||||||||
Interest Rate Swap: |
||||||||||||
Long-term debt, net | ||||||||||||
of current maturities | $ | 0 | $ | 4,152 |
12
The effect of derivative instruments on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and nine month periods ended July 26, 2013, and July 27, 2012, consisted of:
During the first nine months of fiscal 2013 and 2012, the Company recorded losses of $1.5 million and $9.2 million, respectively, on foreign currency forward exchange contracts that have not been designated as an accounting hedge. These foreign currency exchange losses are included in selling, general and administrative expense.
There was no significant impact to the Companys earnings related to the ineffective portion of any hedging instruments during the first nine months of fiscal 2013 and 2012. In addition, there was no significant impact to the Companys earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the first nine months of fiscal 2013 and 2012.
Amounts included in AOCI are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $0.3 million of net loss into earnings over the next 12 months. The maximum duration of the Companys foreign currency cash flow hedge contracts at July 26, 2013, is 24 months.
15. |
The Company is subject to U.S. export laws and regulations, including the International Traffic in Arms Regulations (ITAR), that generally restrict the export of defense products, technical data, and defense services. The Company has filed voluntary disclosure reports concerning certain technical and administrative violations of the ITAR with the U.S. Department of States Directorate of Defense Trade Controls (DDTC) Office of Defense Trade Controls Compliance (DDTC Office of Compliance). The infractions reported by the Company were unintentional, did not result in any exports of sensitive military technology, and virtually all the reported transactions would have been allowed had the Company followed the correct regulatory procedures. To address these problems, the Company has made a number of investments in its export compliance functions, including: additional staffing; ongoing implementation of a new software system; employee training; and establishment of a regular compliance audit program and corrective action process. The DDTC Office of Compliance acknowledged the Companys progress and continuing improvements, but nevertheless informed the Company that it intends to impose civil monetary fines and administrative sanctions based on the information it had concerning the Companys earlier history in handling ITAR-controlled transactions, including the substance of the Companys prior voluntary disclosures and other aspects of ITAR compliance errors. Management has been in discussions with the agency and provided supplemental information with the intent of reaching a settlement. |
13
On August 15, 2013, the DDTC Office of Compliance proposed a total penalty of $20 million with $10 million suspended and eligible for offset credit based on verified expenditures for past and future remedial compliance measures. Based on this proposal, the Company estimated and recorded a $10 million charge as of July 26, 2013, for this matter. The Company intends to continue discussions with the DDTC Office of Compliance on final settlement terms, and the final settlement is subject to approval by the agency. While the Company cannot be certain of the outcome, management believes that the final resolution of this matter will not be materially different from our estimated accrual. |
16. | Segment information: |
Business segment information for continuing operations includes the segments of Avionics & Controls, Sensors & Systems and Advanced Materials.
(1) | Includes a $3.5 million estimated impairment charge against Racal Acoustics goodwill. |
(2) | Includes a $52.2 million impairment charge against Racal Acoustics goodwill. |
17. | The following schedules set forth condensed consolidating financial information as required by Rule 3-10 of Securities and Exchange Commission Regulation S-X as of July 26, 2013, and October 26, 2012, and for the applicable periods ended July 26, 2013, and July 27, 2012, for (a) Esterline Technologies Corporation (the Parent); (b) on a combined basis, the current subsidiary guarantors (Guarantor Subsidiaries) of the secured credit facility, 2017 Notes (for periods prior to the ending of the fiscal quarter ended April 26, 2013), and 2020 Notes; and (c) on a combined basis, the subsidiaries that are not guarantors of the secured credit facility, 2017 Notes (for periods prior to the ending of the fiscal quarter ended April 26, 2013), and 2020 Notes (Non-Guarantor Subsidiaries). The Guarantor Subsidiaries are direct and indirect wholly-owned subsidiaries of Esterline Technologies Corporation and have fully and unconditionally, jointly and severally, guaranteed the secured credit facility, the 2017 Notes (for periods prior to the ending of the fiscal quarter ended April 26, 2013) and the 2020 Notes. |
14
Condensed Consolidating Balance Sheet as of July 26, 2013.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 21,690 | $ | 1,347 | $ | 176,211 | $ | 0 | $ | 199,248 | ||||||||||
Cash in escrow |
4,017 | 0 | 0 | 0 | 4,017 | |||||||||||||||
Accounts receivable, net |
492 | 125,887 | 205,690 | 0 | 332,069 | |||||||||||||||
Inventories |
0 | 177,073 | 268,717 | 0 | 445,790 | |||||||||||||||
Income tax refundable |
0 | 9,084 | 0 | 0 | 9,084 | |||||||||||||||
Deferred income tax benefits |
27,798 | 149 | 19,382 | 0 | 47,329 | |||||||||||||||
Prepaid expenses |
47 | 5,104 | 16,373 | 0 | 21,524 | |||||||||||||||
Other current assets |
112 | 119 | 3,543 | 0 | 3,774 | |||||||||||||||
|
||||||||||||||||||||
Total Current Assets |
54,156 | 318,763 | 689,916 | 0 | 1,062,835 | |||||||||||||||
Property, Plant &
|
1,910 | 168,012 | 193,233 | 0 | 363,155 | |||||||||||||||
Goodwill |
0 | 313,555 | 793,312 | 0 | 1,106,867 | |||||||||||||||
Intangibles, Net |
0 | 116,843 | 467,642 | 0 | 584,485 | |||||||||||||||
Debt Issuance Costs, Net |
5,589 | 0 | 1,048 | 0 | 6,637 | |||||||||||||||
Deferred Income
|
33,374 | (2 | ) | 60,002 | 0 | 93,374 | ||||||||||||||
Other Assets |
(69 | ) | 1,535 | 6,092 | 0 | 7,558 | ||||||||||||||
Amounts Due From (To)
|
0 | 564,986 | 0 | (564,986 | ) | 0 | ||||||||||||||
Investment in Subsidiaries |
2,540,780 | 934,953 | 238,493 | (3,714,226 | ) | 0 | ||||||||||||||
|
||||||||||||||||||||
Total Assets |
$ | 2,635,740 | $ | 2,418,645 | $ | 2,449,738 | $ | (4,279,212 | ) | $ | 3,224,911 | |||||||||
|
15
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Liabilities and Shareholders Equity |
|
|||||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Accounts payable |
$ | 2,393 | $ | 27,967 | $ | 86,681 | $ | 0 | $ | 117,041 | ||||||||||
Accrued liabilities |
26,665 | 85,485 | 146,297 | 0 | 258,447 | |||||||||||||||
Credit facilities |
0 | 0 | 109 | 0 | 109 | |||||||||||||||
Current maturities of
|
8,750 | 173 | 13,016 | 0 | 21,939 | |||||||||||||||
Deferred income tax
|
(94 | ) | (9 | ) | 1,318 | 0 | 1,215 | |||||||||||||
Federal and foreign
|
(430 | ) | (22,441 | ) | 24,825 | 0 | 1,954 | |||||||||||||
|
||||||||||||||||||||
Total Current Liabilities |
37,284 | 91,175 | 272,246 | 0 | 400,705 | |||||||||||||||
Credit Facilities |
170,000 | 0 | 0 | 0 | 170,000 | |||||||||||||||
Long-Term Debt, Net |
414,063 | 55,627 | 92,754 | 0 | 562,444 | |||||||||||||||
Deferred Income Tax
|
61,523 | (6 | ) | 137,292 | 0 | 198,809 | ||||||||||||||
Pension and Post-
|
19,860 | 41,464 | 64,349 | 0 | 125,673 | |||||||||||||||
Other Liabilities |
10,183 | 194 | 22,239 | 0 | 32,616 | |||||||||||||||
Amounts Due To (From)
|
188,163 | 0 | 415,444 | (603,607 | ) | 0 | ||||||||||||||
Shareholders Equity |
1,734,664 | 2,230,191 | 1,445,414 | (3,675,605 | ) | 1,734,664 | ||||||||||||||
|
||||||||||||||||||||
Total Liabilities and
|
$ | 2,635,740 | $ | 2,418,645 | $ | 2,449,738 | $ | (4,279,212 | ) | $ | 3,224,911 | |||||||||
|
16
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the three month period ended July 26, 2013.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net Sales |
$ | 0 | $ | 216,949 | $ | 262,068 | $ | (949 | ) | $ | 478,068 | |||||||||
Cost of Sales |
0 | 132,786 | 167,329 | (949 | ) | 299,166 | ||||||||||||||
|
||||||||||||||||||||
0 | 84,163 | 94,739 | 0 | 178,902 | ||||||||||||||||
Expenses |
||||||||||||||||||||
Selling, general
|
0 | 38,045 | 63,777 | 0 | 101,822 | |||||||||||||||
Research, development
|
0 | 12,684 | 11,419 | 0 | 24,103 | |||||||||||||||
Gain on settlement of
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Goodwill impairment |
0 | 0 | 3,454 | 0 | 3,454 | |||||||||||||||
Other income |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
||||||||||||||||||||
Total Expenses |
0 | 50,729 | 78,650 | 0 | 129,379 | |||||||||||||||
|
||||||||||||||||||||
Operating Earnings from
|
0 | 33,434 | 16,089 | 0 | 49,523 | |||||||||||||||
Interest Income |
(4,028 | ) | (2,028 | ) | (13,198 | ) | 19,122 | (132 | ) | |||||||||||
Interest Expense |
6,489 | 7,052 | 14,631 | (19,122 | ) | 9,050 | ||||||||||||||
Loss on Extinguishment
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from
|
(2,461 | ) | 28,410 | 14,656 | 0 | 40,605 | ||||||||||||||
Income Tax Expense
|
(671 | ) | 6,264 | (4,442 | ) | 0 | 1,151 | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from
|
(1,790 | ) | 22,146 | 19,098 | 0 | 39,454 | ||||||||||||||
Earnings Attributable to
|
0 | 0 | (241 | ) | 0 | (241 | ) | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from
|
(1,790 | ) | 22,146 | 18,857 | 0 | 39,213 | ||||||||||||||
Loss from Discontinued
|
(975 | ) | 0 | 0 | 0 | (975 | ) | |||||||||||||
Equity in Net Earnings of
|
41,003 | 294 | 50 | (41,347 | ) | 0 | ||||||||||||||
|
||||||||||||||||||||
Net Earnings (Loss)
|
$ | 38,238 | $ | 22,440 | $ | 18,907 | $ | (41,347 | ) | $ | 38,238 | |||||||||
|
||||||||||||||||||||
Comprehensive Income
|
$ | 45,816 | $ | 22,610 | $ | 26,689 | $ | (49,914 | ) | $ | 45,201 |
17
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the nine month period ended July 26, 2013.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net Sales |
$ | 0 | $ | 653,959 | $ | 784,389 | $ | (2,756 | ) | $ | 1,435,592 | |||||||||
Cost of Sales |
0 | 405,830 | 511,895 | (2,756 | ) | 914,969 | ||||||||||||||
|
||||||||||||||||||||
0 | 248,129 | 272,494 | 0 | 520,623 | ||||||||||||||||
Expenses |
||||||||||||||||||||
Selling, general
|
0 | 112,881 | 185,830 | 0 | 298,711 | |||||||||||||||
Research, development
|
0 | 37,448 | 35,389 | 0 | 72,837 | |||||||||||||||
Gain on settlement of
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Goodwill impairment |
0 | 0 | 3,454 | 0 | 3,454 | |||||||||||||||
Other income |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
||||||||||||||||||||
Total Expenses |
0 | 150,329 | 224,673 | 0 | 375,002 | |||||||||||||||
|
||||||||||||||||||||
Operating Earnings from
|
0 | 97,800 | 47,821 | 0 | 145,621 | |||||||||||||||
Interest Income |
(11,680 | ) | (5,723 | ) | (41,022 | ) | 58,044 | (381 | ) | |||||||||||
Interest Expense |
23,722 | 20,019 | 45,279 | (58,044 | ) | 30,976 | ||||||||||||||
Loss on Extinguishment
|
946 | 0 | 0 | 0 | 946 | |||||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from
|
||||||||||||||||||||
Before Income Taxes |
(12,988 | ) | 83,504 | 43,564 | 0 | 114,080 | ||||||||||||||
Income Tax Expense
|
(2,894 | ) | 15,178 | 743 | 0 | 13,027 | ||||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from
|
(10,094 | ) | 68,326 | 42,821 | 0 | 101,053 | ||||||||||||||
Earnings Attributable to
|
0 | 0 | (1,207 | ) | 0 | (1,207 | ) | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from
|
(10,094 | ) | 68,326 | 41,614 | 0 | 99,846 | ||||||||||||||
Loss from Discontinued
|
(975 | ) | 0 | 0 | 0 | (975 | ) | |||||||||||||
Equity in Net Earnings of
|
109,940 | 677 | 80 | (110,697 | ) | 0 | ||||||||||||||
|
||||||||||||||||||||
Net Earnings (Loss)
|
$ | 98,871 | $ | 69,003 | $ | 41,694 | $ | (110,697 | ) | $ | 98,871 | |||||||||
|
||||||||||||||||||||
Comprehensive Income
|
$ | 87,090 | $ | 68,102 | $ | 35,100 | $ | (106,833 | ) | $ | 83,459 |
18
Condensed Consolidating Statement of Cash Flows for the nine month period ended July 26, 2013.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Cash Flows Provided (Used) by Operating Activities |
|
|||||||||||||||||||
Net earnings (loss) including
|
$ | 100,078 | $ | 69,003 | $ | 41,694 | $ | (110,697 | ) | $ | 100,078 | |||||||||
Depreciation & amortization |
0 | 35,547 | 52,394 | 0 | 87,941 | |||||||||||||||
Deferred income taxes |
11,252 | (332 | ) | (23,158 | ) | 0 | (12,238 | ) | ||||||||||||
Share-based compensation |
0 | 3,321 | 4,346 | 0 | 7,667 | |||||||||||||||
Gain on sale of capital assets |
0 | (322 | ) | (593 | ) | 0 | (915 | ) | ||||||||||||
Gain on settlement of
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Goodwill impairment |
0 | 0 | 3,454 | 0 | 3,454 | |||||||||||||||
Working capital changes, net
|
||||||||||||||||||||
Accounts receivable |
(311 | ) | 14,744 | 36,630 | 0 | 51,063 | ||||||||||||||
Inventories |
0 | (17,500 | ) | (15,274 | ) | 0 | (32,774 | ) | ||||||||||||
Prepaid expenses |
29 | 287 | (451 | ) | 0 | (135 | ) | |||||||||||||
Other current assets |
22 | 433 | (1,291 | ) | 0 | (836 | ) | |||||||||||||
Accounts payable |
449 | 1,616 | 3,359 | 0 | 5,424 | |||||||||||||||
Accrued liabilities |
9,740 | 7,382 | (12,845 | ) | 0 | 4,277 | ||||||||||||||
Federal & foreign
|
1,607 | (3,706 | ) | (3,222 | ) | 0 | (5,321 | ) | ||||||||||||
Other liabilities |
11,907 | (13,422 | ) | (8,879 | ) | 0 | (10,394 | ) | ||||||||||||
Other, net |
1,284 | (675 | ) | (1,621 | ) | 0 | (1,012 | ) | ||||||||||||
|
||||||||||||||||||||
136,057 | 96,376 | 74,543 | (110,697 | ) | 196,279 | |||||||||||||||
Cash Flows Provided (Used) by Investing Activities |
|
|||||||||||||||||||
Purchases of capital assets |
(105 | ) | (11,949 | ) | (25,711 | ) | 0 | (37,765 | ) | |||||||||||
Proceeds from sale
|
0 | 322 | 593 | 0 | 915 | |||||||||||||||
Acquisition of business,
|
0 | 0 | (40,689 | ) | 0 | (40,689 | ) | |||||||||||||
|
||||||||||||||||||||
(105 | ) | (11,627 | ) | (65,807 | ) | 0 | (77,539 | ) |
19
20
Condensed Consolidating Balance Sheet as of October 26, 2012.
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 16,770 | $ | 1,324 | $ | 142,581 | $ | 0 | $ | 160,675 | ||||||||||
Cash in escrow |
5,016 | 0 | 0 | 0 | 5,016 | |||||||||||||||
Accounts receivable, net |
181 | 140,631 | 242,550 | 0 | 383,362 | |||||||||||||||
Inventories |
0 | 159,573 | 250,264 | 0 | 409,837 | |||||||||||||||
Income tax refundable |
0 | 4,832 | 0 | 0 | 4,832 | |||||||||||||||
Deferred income tax benefits |
22,874 | 105 | 23,021 | 0 | 46,000 | |||||||||||||||
Prepaid expenses |
76 | 5,391 | 15,873 | 0 | 21,340 | |||||||||||||||
Other current assets |
134 | 552 | 3,945 | 0 | 4,631 | |||||||||||||||
|
||||||||||||||||||||
Total Current Assets |
45,051 | 312,408 | 678,234 | 0 | 1,035,693 | |||||||||||||||
Property, Plant &
|
2,811 | 161,998 | 191,592 | 0 | 356,401 | |||||||||||||||
Goodwill |
0 | 314,641 | 784,321 | 0 | 1,098,962 | |||||||||||||||
Intangibles, Net |
0 | 126,142 | 482,903 | 0 | 609,045 | |||||||||||||||
Debt Issuance Costs, Net |
7,508 | 0 | 1,310 | 0 | 8,818 | |||||||||||||||
Deferred Income Tax
|
36,610 | (283 | ) | 61,625 | 0 | 97,952 | ||||||||||||||
Other Assets |
8,082 | 1,561 | 10,603 | 0 | 20,246 | |||||||||||||||
Amounts Due From (To)
|
0 | 491,143 | 0 | (491,143 | ) | 0 | ||||||||||||||
Investment in Subsidiaries |
2,457,859 | 1,179,938 | 170,223 | (3,808,020 | ) | 0 | ||||||||||||||
|
||||||||||||||||||||
Total Assets |
$ | 2,557,921 | $ | 2,587,548 | $ | 2,380,811 | $ | (4,299,163 | ) | $ | 3,227,117 | |||||||||
|
21
(In thousands) | ||||||||||||||||||||
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Accounts payable |
$ | 1,944 | $ | 26,351 | $ | 80,394 | $ | 0 | $ | 108,689 | ||||||||||
Accrued liabilities |
17,495 | 79,103 | 172,955 | 0 | 269,553 | |||||||||||||||
Credit facilities |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Current maturities of
|
0 | 174 | 10,436 | 0 | 10,610 | |||||||||||||||
Deferred income tax
|
213 | (1 | ) | 4,913 | 0 | 5,125 | ||||||||||||||
Federal and foreign
|
(3,418 | ) | (23,822 | ) | 29,609 | 0 | 2,369 | |||||||||||||
|
||||||||||||||||||||
Total Current Liabilities |
16,234 | 81,805 | 298,307 | 0 | 396,346 | |||||||||||||||
Credit Facilities |
240,000 | 0 | 0 | 0 | 240,000 | |||||||||||||||
Long-Term Debt, Net |
429,152 | 44,107 | 124,801 | 0 | 598,060 | |||||||||||||||
Deferred Income Tax
|
46,730 | (7 | ) | 158,475 | 0 | 205,198 | ||||||||||||||
Pension and Post-Retirement
|
20,507 | 54,886 | 56,681 | 0 | 132,074 | |||||||||||||||
Other Liabilities |
5,189 | 4,194 | 25,521 | 0 | 34,904 | |||||||||||||||
Amounts Due To (From)
|
179,574 | 0 | 369,962 | (549,536 | ) | 0 | ||||||||||||||
Shareholders Equity |
1,620,535 | 2,402,563 | 1,347,064 | (3,749,627 | ) | 1,620,535 | ||||||||||||||
|
||||||||||||||||||||
Total Liabilities and
|
$ | 2,557,921 | $ | 2,587,548 | $ | 2,380,811 | $ | (4,299,163 | ) | $ | 3,227,117 | |||||||||
|
22
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the three month period ended July 27, 2012.
(In thousands)
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net Sales |
$ | 0 | $ | 227,022 | $ | 260,229 | $ | (1,302 | ) | $ | 485,949 | |||||||||
Cost of Sales |
0 | 144,787 | 170,368 | (1,302 | ) | 313,853 | ||||||||||||||
|
||||||||||||||||||||
0 | 82,235 | 89,861 | 0 | 172,096 | ||||||||||||||||
Expenses |
||||||||||||||||||||
Selling, general
|
0 | 35,862 | 56,007 | 0 | 91,869 | |||||||||||||||
Research, development
|
0 | 13,062 | 14,136 | 0 | 27,198 | |||||||||||||||
Gain on settlement of
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Goodwill impairment |
0 | 0 | 52,169 | 0 | 52,169 | |||||||||||||||
Other income |
0 | 0 | (1,263 | ) | 0 | (1,263 | ) | |||||||||||||
|
||||||||||||||||||||
Total Expenses |
0 | 48,924 | 121,049 | 0 | 169,973 | |||||||||||||||
|
||||||||||||||||||||
Operating Earnings from |
||||||||||||||||||||
Continuing Operations |
0 | 33,311 | (31,188 | ) | 0 | 2,123 | ||||||||||||||
Interest Income |
(3,574 | ) | (5,090 | ) | (14,319 | ) | 22,874 | (109 | ) | |||||||||||
Interest Expense |
8,648 | 7,396 | 18,989 | (22,874 | ) | 12,159 | ||||||||||||||
Loss on Extinguishment
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from |
||||||||||||||||||||
Continuing Operations |
||||||||||||||||||||
Before Income Taxes |
(5,074 | ) | 31,005 | (35,858 | ) | 0 | (9,927 | ) | ||||||||||||
Income Tax Expense |
||||||||||||||||||||
(Benefit) |
(4,058 | ) | 22,476 | (11,455 | ) | 0 | 6,963 | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from |
||||||||||||||||||||
Continuing Operations |
||||||||||||||||||||
Including Noncontrolling |
||||||||||||||||||||
Interests |
(1,016 | ) | 8,529 | (24,403 | ) | 0 | (16,890 | ) | ||||||||||||
Earnings Attributable to |
||||||||||||||||||||
Noncontrolling Interests |
0 | 0 | (214 | ) | 0 | (214 | ) | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from |
||||||||||||||||||||
Continuing Operations |
||||||||||||||||||||
Attributable to Esterline |
(1,016 | ) | 8,529 | (24,617 | ) | 0 | (17,104 | ) | ||||||||||||
Loss from Discontinued |
||||||||||||||||||||
Operations Attributable |
||||||||||||||||||||
To Esterline, Net of Tax |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Equity in Net Earnings of |
||||||||||||||||||||
Consolidated Subsidiaries |
(16,088 | ) | 2,080 | (50 | ) | 14,058 | 0 | |||||||||||||
|
||||||||||||||||||||
Net Earnings (Loss) |
||||||||||||||||||||
Attributable to Esterline |
$ | (17,104 | ) | $ | 10,609 | $ | (24,667 | ) | $ | 14,058 | $ | (17,104 | ) | |||||||
|
||||||||||||||||||||
Comprehensive Income |
||||||||||||||||||||
(Loss) |
$ | (76,776 | ) | $ | 10,140 | $ | (83,910 | ) | $ | 68,921 | $ | (81,625 | ) |
23
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the nine month period ended July 27, 2012.
(In thousands)
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Net Sales |
$ | 0 | $ | 670,767 | $ | 793,626 | $ | (2,731 | ) | $ | 1,461,662 | |||||||||
Cost of Sales |
0 | 419,969 | 529,724 | (2,731 | ) | 946,962 | ||||||||||||||
|
||||||||||||||||||||
0 | 250,798 | 263,902 | 0 | 514,700 | ||||||||||||||||
Expenses |
||||||||||||||||||||
Selling, general
|
0 | 107,639 | 177,877 | 0 | 285,516 | |||||||||||||||
Research, development
|
0 | 38,080 | 45,058 | 0 | 83,138 | |||||||||||||||
Gain on settlement of
|
0 | 0 | (11,891 | ) | 0 | (11,891 | ) | |||||||||||||
Goodwill impairment |
0 | 0 | 52,169 | 0 | 52,169 | |||||||||||||||
Other income |
0 | 0 | (1,263 | ) | 0 | (1,263 | ) | |||||||||||||
|
||||||||||||||||||||
Total Expenses |
0 | 145,719 | 261,950 | 0 | 407,669 | |||||||||||||||
|
||||||||||||||||||||
Operating Earnings from
|
0 | 105,079 | 1,952 | 0 | 107,031 | |||||||||||||||
Interest Income |
(10,559 | ) | (12,468 | ) | (47,717 | ) | 70,424 | (320 | ) | |||||||||||
Interest Expense |
26,311 | 20,613 | 58,671 | (70,424 | ) | 35,171 | ||||||||||||||
Loss on Extinguishment
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from |
||||||||||||||||||||
Continuing Operations |
||||||||||||||||||||
Before Income Taxes |
(15,752 | ) | 96,934 | (9,002 | ) | 0 | 72,180 | |||||||||||||
Income Tax Expense |
||||||||||||||||||||
(Benefit) |
(6,087 | ) | 32,840 | (6,076 | ) | 0 | 20,677 | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from |
||||||||||||||||||||
Continuing Operations |
||||||||||||||||||||
Including Noncontrolling |
||||||||||||||||||||
Interests |
(9,665 | ) | 64,094 | (2,926 | ) | 0 | 51,503 | |||||||||||||
Earnings Attributable to |
||||||||||||||||||||
Noncontrolling Interests |
0 | 0 | (628 | ) | 0 | (628 | ) | |||||||||||||
|
||||||||||||||||||||
Earnings (Loss) from |
||||||||||||||||||||
Continuing Operations |
||||||||||||||||||||
Attributable to Esterline |
(9,665 | ) | 64,094 | (3,554 | ) | 0 | 50,875 | |||||||||||||
Loss from Discontinued |
||||||||||||||||||||
Operations Attributable |
||||||||||||||||||||
To Esterline, Net of Tax |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Equity in Net Earnings of |
||||||||||||||||||||
Consolidated Subsidiaries |
60,540 | 10,791 | (140 | ) | (71,191 | ) | 0 | |||||||||||||
|
||||||||||||||||||||
Net Earnings (Loss) |
||||||||||||||||||||
Attributable to Esterline |
$ | 50,875 | $ | 74,885 | $ | (3,694 | ) | $ | (71,191 | ) | $ | 50,875 | ||||||||
|
||||||||||||||||||||
Comprehensive Income |
||||||||||||||||||||
(Loss) |
$ | (42,128 | ) | $ | 74,733 | $ | (101,142 | ) | $ | 21,728 | $ | (46,809 | ) |
24
Condensed Consolidating Statement of Cash Flows for the nine month period ended July 27, 2012.
(In thousands)
Parent |
Guarantor
Subsidiaries |
Non-
Guarantor Subsidiaries |
Eliminations | Total | ||||||||||||||||
Cash Flows Provided (Used) by Operating Activities |
|
|||||||||||||||||||
Net earnings (loss) including
|
$ | 51,503 | $ | 74,885 | $ | (3,694 | ) | $ | (71,191 | ) | $ | 51,503 | ||||||||
Depreciation & amortization |
0 | 28,556 | 50,709 | 0 | 79,265 | |||||||||||||||
Deferred income taxes |
19,199 | (20,844 | ) | (17,991 | ) | 0 | (19,636 | ) | ||||||||||||
Share-based compensation |
0 | 3,344 | 4,342 | 0 | 7,686 | |||||||||||||||
Gain on sale of capital assets |
0 | (464 | ) | (675 | ) | 0 | (1,139 | ) | ||||||||||||
Gain on settlement of
|
0 | 0 | (11,891 | ) | 0 | (11,891 | ) | |||||||||||||
Goodwill impairment |
0 | 0 | 52,169 | 0 | 52,169 | |||||||||||||||
Working capital changes, net
|
||||||||||||||||||||
Accounts receivable |
12 | 16,088 | 4,875 | 0 | 20,975 | |||||||||||||||
Inventories |
0 | (17,107 | ) | (10,387 | ) | 0 | (27,494 | ) | ||||||||||||
Prepaid expenses |
(36 | ) | (393 | ) | (4,994 | ) | 0 | (5,423 | ) | |||||||||||
Other current assets |
9 | (95 | ) | 274 | 0 | 188 | ||||||||||||||
Accounts payable |
51 | (409 | ) | (1,981 | ) | 0 | (2,339 | ) | ||||||||||||
Accrued liabilities |
7,489 | (2,201 | ) | 11,635 | 0 | 16,923 | ||||||||||||||
Federal & foreign
|
8,148 | (1,745 | ) | (4,252 | ) | 0 | 2,151 | |||||||||||||
Other liabilities |
5,718 | (17,698 | ) | (3,094 | ) | 0 | (15,074 | ) | ||||||||||||
Other, net |
(83 | ) | 958 | 2,635 | 0 | 3,510 | ||||||||||||||
|
||||||||||||||||||||
92,010 | 62,875 | 67,680 | (71,191 | ) | 151,374 | |||||||||||||||
Cash Flows Provided (Used) by Investing Activities |
|
|||||||||||||||||||
Purchases of capital assets |
(1,466 | ) | (18,728 | ) | (19,262 | ) | 0 | (39,456 | ) | |||||||||||
Proceeds from sale
|
0 | 464 | 675 | 0 | 1,139 | |||||||||||||||
Acquisition of business,
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
||||||||||||||||||||
(1,466 | ) | (18,264 | ) | (18,587 | ) | 0 | (38,317 | ) |
25
(In thousands)
26
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We operate our businesses in three segments: Avionics & Controls, Sensors & Systems, and Advanced Materials.
The Avionics & Controls segment includes avionics systems, control systems, interface technologies and communication systems capabilities. Avionics systems designs and develops cockpit systems integration and avionics solutions for commercial and military applications. Control systems designs and manufactures technology interface systems for military and commercial aircraft and land- and sea-based military vehicles. Interface technologies manufactures and develops custom control panels, input systems for medical, industrial, military and gaming industries. Communication systems designs and manufactures military audio and data products for severe battlefield environments, embedded communication intercept receivers for signal intelligence applications, as well as communication control systems to enhance security and aural clarity in military applications.
The Sensors & Systems segment includes power systems, connection technologies, and advanced sensors capabilities. Power systems develops and manufactures electrical power switching and other related systems, principally for aerospace and defense customers. Connection technologies develops and manufactures highly engineered connectors for harsh environments and serves the aerospace, defense & space, power generation, rail and industrial equipment markets. Advanced sensors develops and manufactures high-precision temperature and pressure sensors for aerospace and defense customers.
The Advanced Materials segment includes engineered materials and defense technologies capabilities. Engineered materials develops and manufactures thermally engineered components and high-performance elastomer products used in a wide range of commercial aerospace and military applications. Defense technologies develops and manufactures combustible ordnance components and warfare countermeasure devices for military customers. Sales in all segments include domestic, international, defense and commercial customers.
Our current business and strategic plan focuses on the continued development of our products principally for aerospace and defense markets. We are concentrating our efforts to expand our capabilities in these markets, anticipate the global needs of our customers, and respond to such needs with comprehensive solutions. These efforts focus on continuous research and new product development, acquisitions and strategic realignments of operations to expand our capabilities as a more comprehensive supplier to our customers across our entire product offering.
On February 4, 2013, we acquired the Gamesman Group (Gamesman) for $40.8 million. Gamesman is a global supplier of input devices principally serving the gaming industry. Gamesman is included in the Avionics & Controls segment.
For the third fiscal quarter of 2013, earnings from continuing operations were $39.2 million, or $1.23 per diluted share, compared to a loss from continuing operations of $17.1 million, or $0.55 per diluted share, in the third fiscal quarter of 2012.
During the third fiscal quarter of 2013, we recorded a $3.5 million, or $0.11 per diluted share, estimated impairment charge against goodwill of Racal Acoustics, Inc. (Racal Acoustics), our military headset business, which is included in our Avionics & Controls segment, due to further deterioration in Racal Acoustics fiscal 2013 and five-year forecast resulting from further delays and reductions in global defense programs. In the prior-year period, we recorded a $52.2 million, or $1.69 per diluted share, impairment charge against goodwill of Racal Acoustics. The results for the third fiscal quarter of 2013 also were impacted by a $10 million charge, or $0.31 per diluted share, related to our pending matter with the DDTC as more fully discussed below.
For the third quarter of fiscal 2013, sales declined 1.6% to $478.0 million compared to the prior-year period. Gross margin for the third quarter of fiscal 2013 was 37.4% compared with 35.4% in the prior-year period. Research, development and engineering spending in the third quarter of fiscal 2013 decreased $3.1 million over the prior-year period to 5.0% of sales. Selling, general and administrative expense, as a percent of sales, in the third quarter of fiscal 2013 increased 2.4 percentage points over the prior-year period to 21.3% of sales.
27
The income tax rate was 2.8% compared with (70.1%) for the third fiscal quarter of 2013 and 2012, respectively. The (70.1)% income tax rate in the third fiscal quarter of 2012 reflected a $10.0 million loss from continuing operations before income taxes and income tax expense of $7.0 million. In the third quarter of fiscal 2013 and 2012, we recognized $8.7 million and $5.3 million, respectively, of discrete income tax benefits.
For the third fiscal quarter of 2013, loss from discontinued operations was $1.0 million, net of tax, or $0.03 per diluted share. The loss related to environmental remediation at a previously sold business for which we provided an environmental indemnification.
For the third fiscal quarter of 2013, net earnings were $38.2 million, or $1.20 per diluted share, compared to a net loss of $17.1 million, or $0.55 per diluted share, in the third fiscal quarter of 2012.
For the first nine months of fiscal 2013, earnings from continuing operations were $99.8 million, or $3.15 per diluted share, compared to $50.9 million, or $1.63 per diluted share, during the prior-year period. During the first nine months of fiscal 2013, earnings from continuing operations were impacted by a $3.5 million, or $0.11 per diluted share, estimated impairment charge against goodwill of Racal Acoustics, our military headset business. In the prior-year period, we were impacted by a $52.2 million, or $1.67 per diluted share, impairment charge against goodwill of Racal Acoustics. For the first nine months of fiscal 2013, earnings were also impacted by a $10 million charge, or $0.32 per diluted share, related to our pending matter with the DDTC as more fully discussed below. Earnings from continuing operations in the prior-year period benefited from an $11.9 million gain, or $9.5 million after tax, upon settlement of a contingency related to proceeds from a transaction that preceded our acquisition of CMC Electronics, Inc. (CMC).
The income tax rate was 11.4% and 28.6% for the first nine months of fiscal 2013 and 2012, respectively. In the first nine months of fiscal 2013 and 2012, we recognized $12.4 million and $7.2 million, respectively, in discrete income tax benefits.
Sales decreased by 1.8% to $1.4 billion in the first nine months of fiscal 2013, reflecting lower Avionics & Controls sales, while Sensors & Systems and Advanced Materials sales were essentially even with the prior-year period. Avionics & Controls was impacted by reductions in defense spending mainly due to the continued uncertainty of U.S. congressional budget cuts, or sequestration, on defense spending. While we believe we have adequately anticipated the impact on our financial results for fiscal 2013, the impact of sequestration is yet to be fully determined and additional reductions in defense spending over the next decade could occur.
Gross margin increased to 36.3% in the first nine months of fiscal 2013 compared with 35.2% in the prior-year period. The prior-year period included the $12.0 million effect of purchase accounting to recognize the fair value of the Souriau Groups (Souriau) acquired inventory as expense over the first inventory turn. Advanced Materials gross profit was favorably impacted by higher sales volumes of engineered materials for defense applications.
Research, development and engineering spending in the first nine months of fiscal 2013 decreased $10.3 million over the prior-year period to 5.1% of sales. Selling, general and administrative expense, as a percent of sales, in the first nine months of fiscal 2013 increased 1.3 percentage points over the prior-year period to 20.8% of sales.
We are subject to U.S. export laws and regulations, including the International Traffic in Arms Regulations (ITAR), that generally restrict the export of defense products, technical data, and defense services. We have filed voluntary disclosure reports concerning certain technical and administrative violations of the ITAR with the U.S. Department of States Directorate of Defense Trade Controls (DDTC) Office of Defense Trade Controls Compliance (DDTC Office of Compliance). The infractions we reported were unintentional, did not result in any exports of sensitive military technology, and virtually all the reported transactions would have been allowed had we followed the correct regulatory procedures. To address these problems, we have made a number of investments in our export compliance functions, including: additional staffing; ongoing implementation of a new software system; employee training; and establishment of a regular compliance audit program and corrective action process. The DDTC Office of Compliance acknowledged our progress and continuing improvements, but nevertheless informed us that it intends to impose civil monetary fines and administrative sanctions based on the information it had concerning our earlier history in handling ITAR-controlled transactions, including the substance of our prior voluntary disclosures and other aspects of ITAR compliance errors. Management has been in discussions with the agency and provided
28
supplemental information with the intent of reaching a settlement. On August 15, 2013, the DDTC Office of Compliance proposed a total penalty of $20 million with $10 million suspended and eligible for offset credit based on verified expenditures for past and future remedial compliance measures. Based on this proposal, we estimated and recorded a $10 million charge as of July 26, 2013, for this matter. We intend to continue discussions with the DDTC Office of Compliance on final settlement terms, and the final settlement is subject to approval by the agency. While we cannot be certain of the outcome, management believes that the final resolution of this matter will not be materially different from our estimated accrual.
For the first nine months of fiscal 2013, net earnings were $98.9 million, or $3.12 per diluted share, compared to $50.9 million, or $1.63 per diluted share, during the prior-year period.
Results of Operations
Three Month Period Ended July 26, 2013, Compared with Three Month Period Ended July 27, 2012
Sales for the third fiscal quarter decreased 1.6% over the prior-year period. Sales by segment were as follows:
(In thousands)
Incr./(Decr.)
from prior year period |
Three Months Ended | |||||||||
July 26,
2013 |
July 27,
2012 |
|||||||||
Avionics & Controls |
(7.9)% | $ | 179,572 | $ | 195,059 | |||||
Sensors & Systems |
2.5% | 175,864 | 171,603 | |||||||
Advanced Materials |
2.8% | 122,632 | 119,287 | |||||||
|
|
|
|
|||||||
Total Net Sales |
$ | 478,068 | $ | 485,949 | ||||||
|
|
|
|
The 7.9% decrease in sales of Avionics & Controls mainly reflected similarly reduced sales volumes of avionics systems and control systems totaling $7 million, and communication systems of $17 million, which were partially offset by an increase in sales of interface technologies of $8 million. The decrease in communication systems principally reflected reduced sales of embedded communication intercept receivers of $8 million and lower sales of communication systems to enhance aural clarity in military communications of $7 million. The increase in sales of interface technologies was due to high sales for medical and gaming applications, including $5 million in sales from the Gamesman acquisition.
The 2.5% increase in sales of Sensors & Systems principally reflected a $3 million increase in connection technologies due to the effects of a stronger euro relative to the U.S. dollar. Sales in the third fiscal quarter of 2013 reflected a weaker pound sterling to the U.S. dollar compared to the prior-year period and a stronger euro relative to the U.S. dollar compared to the prior-year period. The average exchange rate from the pound sterling to the U.S. dollar decreased from 1.58 in the third fiscal quarter of 2012 to 1.53 in the third fiscal quarter of 2013. The average exchange rate from the euro to the U.S. dollar increased from 1.26 in the third fiscal quarter of 2012 to 1.31 in the third fiscal quarter of 2013.
The 2.8% increase in sales of Advanced Materials principally reflected increased sales volumes of engineered materials for defense applications.
Overall, gross margin as a percentage of sales was 37.4%, compared with 35.4% in the same period a year ago. Gross profit was $178.9 million compared with $172.1 million in the same period a year ago.
Avionics & Controls segment gross margin was 39.4% and 39.0% for the third fiscal quarter of 2013 and 2012, respectively. Segment gross profit was $70.7 million compared with $76.1 million in the prior-year period. The decrease in segment gross profit was principally due to lower gross profit on communication systems of $9 million, reflecting lower sales volumes of embedded communication intercept receivers of $5 million and a decrease in gross profit on sales of communication systems to enhance security and aural clarity in military communication applications.
Sensors & Systems segment gross margin was 36.4% and 35.5% for the third fiscal quarter of 2013 and 2012, respectively. Segment gross profit was $64.0 million compared with $60.8 million in the prior-year period. The increase in gross profit was mainly due to an increase in power systems gross profit reflecting improved product mix and cost reduction actions.
29
Advanced Materials segment gross margin for the third fiscal quarter of 2013 was 36.1% compared with 29.5% for the prior-year period. Segment gross profit was $44.2 million compared with $35.1 million in the prior-year period. The increase in segment gross profit was principally due to strong gross margin on sales of engineered materials primarily for defense applications.
Selling, general and administrative expenses (which include corporate expenses) totaled $101.8 million, or 21.3% of sales, and $91.9 million, or 18.9% of sales, for the third fiscal quarter of 2013 and 2012, respectively. The increase in selling, general and administrative expense mainly reflects a $10 million charge related to the DDTC matter.
Research, development and engineering spending was $24.1 million, or 5.0% of sales, for the third fiscal quarter of 2013 compared with $27.2 million, or 5.6% of sales, for the third fiscal quarter of 2012. The decrease in research, development and engineering spending principally reflects similarly reduced spending on avionics systems, communication systems, and advanced sensors totaling $3 million. Fiscal 2013 research, development and engineering spending is expected to be approximately 5.0% of sales.
Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the third fiscal quarter of 2013 totaled $70.3 million, or 14.7% of sales, compared with $10.0 million, or 2.1% of sales, for the third fiscal quarter in 2012. In the third fiscal quarter of 2013 and 2012, we recorded an estimated impairment charge of $3.5 million and a $52.2 million impairment charge, respectively, against goodwill of Racal Acoustics. Excluding the impairment charge recorded in each period, segment earnings totaled $73.8 million, or 15.4% of sales, and $62.2 million, or 12.8% of sales, for the third fiscal quarter of 2013 and 2012, respectively.
Avionics & Controls segment earnings were $20.6 million, or 11.5% of sales, in the third fiscal quarter of 2013 compared with losses of $(25.6) million, or (13.1)% of sales, in the third fiscal quarter of 2012. The third fiscal quarter of 2013 and 2012 reflected an estimated impairment charge of $3.5 million and a $52.2 million impairment charge, respectively, against goodwill of Racal Acoustics. During the third fiscal quarter of 2013, management performed a Step One impairment test for Racal Acoustics upon identification of an indicator of impairment, due to further deterioration of Racal Acoustics fiscal 2013 and five-year forecast resulting from further delays and reductions in global defense programs. As required under U.S. GAAP, a Step Two impairment test was required because the current fair value of the business using a discounted cash flow and market approach was less than the carrying amount of the business. Under the Step Two impairment test, all assets and liabilities were valued at fair value. The excess of the carrying amount of goodwill over the implied fair value of goodwill resulted in an estimated impairment charge of $3.5 million.
Excluding the impairment charge recorded in each period, Avionics & Controls segment earnings were $24.1 million, or 13.4% of sales, in the third fiscal quarter of 2013 compared with $26.6 million, or 13.6% of sales, in the third fiscal quarter of 2012. Avionics systems earnings benefited from improved gross margin and decreased research, development and engineering expense. Communication systems earnings were impacted by decreased gross profit on lower sales of embedded communication intercept receivers and systems to enhance security and aural clarity in military communication applications.
Sensors & Systems segment earnings were $21.6 million, or 12.3% of sales, for the third fiscal quarter of 2013 compared with $18.3 million, or 10.7% of sales, for the third fiscal quarter of 2012, principally reflecting increased earnings from sales of advanced sensors and power systems. Advanced sensors benefited from lower research, development and engineering expense. Power systems benefited mainly from improved mix and expense control.
Advanced Materials segment earnings were $28.1 million, or 22.9% of sales, for the third fiscal quarter of 2013 compared with $17.3 million, or 14.5% of sales, for the third fiscal quarter of 2012, primarily reflecting a $9 million increase in earnings from strong sales of engineered materials for defense applications.
Interest expense for the third fiscal quarter of 2013 was $9.1 million compared with $12.2 million for the third fiscal quarter of 2012, reflecting reduced borrowings.
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The income tax rate was 2.8% for the third fiscal quarter of 2013 compared with (70.1)% for the third fiscal quarter of 2012. The (70.1)% income tax rate in the third fiscal quarter of 2012 reflected a $10.0 million loss from continuing operations before income taxes and income tax expense of $7.0 million. In the third fiscal quarter of 2013, we recognized $8.7 million of discrete tax benefits principally related to the following items. The first item was a $4.3 million income tax benefit related to the release of income tax reserves due to the expiration of a statute of limitations. The second item was a $3.8 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate.
In the third fiscal quarter of 2012, we recognized $5.3 million of discrete tax benefits principally related to the following items. The first item was a $2.9 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate. The second item was a $1.7 million tax benefit as a result of reconciling the prior years U.S. income tax return to the U.S. income tax provision. The income tax rate differed from the statutory rate in the third fiscal quarter of 2013 and 2012, as both quarters benefited from various tax credits and certain foreign interest expense deductions.
To the extent that sales are transacted in a currency other than the functional currency of the operating unit, we are subject to foreign currency fluctuation risk.
We use forward contracts to hedge our foreign currency exchange risk. To the extent that these contracts qualify as hedges under U.S. GAAP, the amount of gain or loss is deferred in Accumulated Other Comprehensive Income (AOCI) until the related sale occurs. Also, we are subject to foreign currency gains or losses from embedded derivatives on backlog denominated in a currency other than the functional currency of our operating companies or its customers. Gains and losses on forward contracts, embedded derivatives, and revaluation of assets and liabilities denominated in a currency other than the functional currency of the Company for the three-month periods ended July 26, 2013, and July 27, 2012, are as follows:
(In thousands)
Three Months Ended | ||||||||
July 26,
2013 |
July 27,
2012 |
|||||||
Forward foreign currency contracts gain (loss) |
$ | 237 | $ | (4,037 | ) | |||
Forward foreign currency contracts reclassified
|
(551 | ) | (205 | ) | ||||
Embedded derivatives gain |
255 | 1,304 | ||||||
Revaluation of monetary assets/liabilities gain |
322 | 1,515 | ||||||
|
|
|
|
|||||
Total |
$ | 263 | $ | (1,423 | ) | |||
|
|
|
|
Nine Month Period Ended July 26, 2013, Compared with Nine Month Period Ended July 27, 2012
Sales for the first nine months decreased by 1.8% over the prior-year period. Sales by segment were as follows:
(In thousands)
Incr./(Decr.)
from prior year period |
Nine Months Ended | |||||||||
July 26,
2013 |
July 27,
2012 |
|||||||||
Avionics & Controls |
(4.1)% | $ | 546,272 | $ | 569,656 | |||||
Sensors & Systems |
(0.6)% | 524,638 | 527,958 | |||||||
Advanced Materials |
0.2% | 364,682 | 364,048 | |||||||
|
|
|
|
|||||||
Total Net Sales |
$ | 1,435,592 | $ | 1,461,662 | ||||||
|
|
|
|
The 4.1% decrease in sales of Avionics & Controls reflected decreased sales volumes of avionics systems of $15 million and communication systems of $26 million, partially offset by increased sales volumes of interface technologies. The decrease in avionics systems reflected mainly lower cockpit integration sales for retrofits of military transport aircraft and the T-6B. The decrease in communication systems principally reflected reduced sales
31
of embedded communication intercept receivers of $16 million and systems to enhance security and aural clarity in military communication applications of $7 million. The $20 million increase in interface technologies mainly reflected increased sales for medical and gaming applications, including approximately $11 million in sales from the Gamesman acquisition.
The 0.6% decrease in sales of Sensors & Systems principally reflected similarly reduced sales volumes of advanced sensors and connection technologies totaling $8 million, partially offset by increased sales volumes of power systems. The decrease in advanced sensors was mainly due to lower aftermarket sales, and the decrease in connection technologies was due to reduced demand for industrial applications. The increase in power systems reflected increased demand for commercial aviation products.
The 0.2% increase in sales of Advanced Materials principally reflected increased sales volumes of engineered materials and metal finishing services, substantially offset by lower demand for defense technologies.
Overall, gross margin as a percentage of sales was 36.3% and 35.2% for the first nine months of fiscal 2013 and 2012, respectively. Gross profit was $520.6 million and $514.7 million for the first nine months of fiscal of 2013 and 2012, respectively.
Avionics & Controls segment gross margin was 37.6% and 38.5% for the first nine months of fiscal 2013 and 2012, respectively. Segment gross profit was $205.4 million compared with $219.5 million in the prior-year period, mainly reflecting a decrease in gross profit from sales of communication systems due to lower demand for embedded communication intercept receivers.
Sensors & Systems segment gross margin was 37.0% and 33.8% for the first nine months of fiscal 2013 and 2012, respectively. Segment gross profit was $194.3 million compared with $178.5 million in the prior-year period. The increase in gross profit was mainly due to increased gross profit for connection technologies, which was impacted by a $12 million charge recorded in the first quarter of fiscal 2012 due to recording Souriaus acquired inventory at its fair value.
Advanced Materials segment gross margin was 33.2% for the first nine months of fiscal 2013 compared to 32.0% for the same period one year ago. Segment gross profit was $121.0 million compared to $116.6 million in the prior-year period. The increase in gross profit was principally due to a $5 million increase in gross profit on higher sales of elastomer materials for defense applications.
Selling, general and administrative expenses (which include corporate expenses) totaled $298.7 million, or 20.8% of sales, and $285.5 million, or 19.5% of sales, for the first nine months of fiscal 2013 and 2012, respectively. The $13.2 million increase in selling, general and administrative expenses reflects an $18.0 million increase in corporate expense and a reduction in Avionics & Controls expense. The increase in corporate expense was due to the $10.0 million loss contingency related to the DDTC matter, professional fees for regulatory compliance, the cost of opening a corporate office in France and acquisition expenses. The decrease in Avionics & Controls expense reflected a $1 million reduction of our allowance for doubtful accounts for Hawker Beechcraft; in addition, the prior-year period reflected bad debt expense of $2.3 million due to the bankruptcy of Hawker Beechcraft.
Research, development and engineering spending was $72.8 million, or 5.1% of sales, for the first nine months of fiscal 2013 compared with $83.1 million, or 5.7% of sales, for the first nine months of fiscal 2012. The decrease in research, development and engineering spending principally reflects lower spending on avionics systems. Fiscal 2013 research, development and engineering spending is expected to be approximately 5.0% of sales.
Total segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first nine months of fiscal 2013 totaled $198.8 million, or 13.9% of sales, compared with $129.1 million, or 8.8% of sales, for the first nine months in fiscal 2012. The increase in segment earnings mainly reflects the $52.2 million impairment charge against goodwill of Racal Acoustics in the prior-year period. We also recorded an estimated impairment charge of $3.5 million against goodwill of Racal Acoustics in the third fiscal quarter of 2013. If the impairment charges in each period in fiscal 2013 and 2012 are excluded, segment earnings totaled $202.3 million, or 14.1% of sales, and $181.2 million, or 12.4% of sales, for the first nine months of 2013 and 2012, respectively.
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Avionics & Controls segment earnings were $60.7 million, or 11.1% of sales, in the first nine months of fiscal 2013 and $12.7 million, or 2.2% of sales, in the first nine months of fiscal 2012. Excluding the impairment charges, segment earnings were $64.1 million, or 11.7% of sales, and $64.9 million, or 11.4% of sales, in the first nine months of fiscal 2013 and 2012, respectively. The decrease in segment earnings from the prior-year period mainly reflects an $11 million decrease in communication systems earnings, and an $8 million increase in avionics systems earnings. The decrease in communication systems earnings reflected the decrease in gross profit on lower sales volumes. Avionics systems earnings mainly benefited from lower research, development and engineering expense.
Sensors & Systems segment earnings were $63.8 million, or 12.2% of sales, for the first nine months of fiscal 2013 compared with $49.8 million, or 9.4% of sales, for the first nine months of fiscal 2012, which reflected the $12.0 million inventory charge due to recording Souriaus acquired inventory at its fair value in the first three months of fiscal 2012. Sensors & Systems earnings also benefited from increased gross margin of power systems of $5 million.
Advanced Materials segment earnings were $74.4 million, or 20.4% of sales, for the first nine months of fiscal 2013 compared with $66.5 million, or 18.3% of sales, for the first nine months of fiscal 2012, primarily reflecting increased gross profit on higher sales of elastomer materials.
In the second quarter of fiscal 2012, management concluded that all contingencies relating to a dispute between CMC and a former parent company were resolved, and accordingly, we recorded a gain of approximately $11.9 million or $9.5 million after tax.
Interest expense for the first nine months of fiscal 2013 was $31.0 million compared with $35.2 million for the first nine months of fiscal 2012, reflecting reduced borrowings.
The income tax rates were 11.4% and 28.6% for the first nine months of fiscal 2013 and 2012, respectively. In the first nine months of fiscal 2013, we recognized $12.4 million of discrete tax benefits principally related to the following items. The first item was approximately $1.5 million of tax benefits due to the retroactive extension of the U.S. federal research and experimentation credits. The second item was approximately $2.3 million of tax benefits related to the settlement of U.S. and foreign tax examinations. The third item was a $4.3 million tax benefit related to the release of tax reserves due to the expiration of a statute of limitations. The fourth item was a $3.8 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate.
In the first nine months of fiscal 2012, we recognized $7.2 million of discrete tax benefits principally related to three items. The first item was a $2.3 million tax benefit due to a change in French tax laws associated with the holding company structure and the financing of the Souriau acquisition. The second item was a $2.9 million reduction of net deferred income tax liabilities as a result of the enactment of tax laws reducing the U.K. statutory income tax rate. The third item was a $1.7 million tax benefit as a result of reconciling the prior years income tax return to the U.S. income tax provision. The income tax rate differed from the statutory rate in the first nine months of fiscal 2013 and 2012, as both years benefited from various tax credits and certain foreign interest expense deductions.
To the extent that sales are transacted in a currency other than the functional currency of the operating unit, we are subject to foreign currency fluctuation risk.
33
We use forward contracts to hedge our foreign currency exchange risk. To the extent that these contracts qualify as hedges under U.S. GAAP, the amount of gain or loss is deferred in Accumulated Other Comprehensive Income (AOCI) until the related sale occurs. Also, we are subject to foreign currency gains or losses from embedded derivatives on backlog denominated in a currency other than the functional currency of our operating companies or its customers. Gains and losses on forward contracts, embedded derivatives, and revaluation of assets and liabilities denominated in currency other than the functional currency of the Company for the nine month periods ended July 26, 2013, and July 27, 2012, are as follows:
(In thousands)
Nine Months Ended | ||||||||
July 26,
2013 |
July 27,
2012 |
|||||||
Forward foreign currency contracts gain (loss) |
$ | (1,512 | ) | $ | (9,202 | ) | ||
Forward foreign currency contracts reclassified
|
(1,187 | ) | 207 | |||||
Embedded derivatives gain |
1,521 | 1,046 | ||||||
Revaluation of monetary assets/liabilities gain (loss) |
(2,070 | ) | 2,141 | |||||
|
|
|
|
|||||
Total |
$ | (3,248 | ) | $ | (5,808 | ) | ||
|
|
|
|
New orders for the first nine months of fiscal 2013 were $1.43 billion compared with $1.45 billion for the same period in 2012. Backlog was $1.3 billion at July 26, 2013, compared with $1.2 billion at the end of the prior-year period and $1.3 billion at the end of fiscal 2012.
Liquidity and Capital Resources
Cash and cash equivalents at July 26, 2013, totaled $199.2 million, an increase of $38.6 million from October 26, 2012. Net working capital increased to $662.1 million at July 26, 2013, from $639.3 million at October 26, 2012. Sources and uses of cash flows from operating activities principally consist of cash received from the sale of products and cash payments for material, labor and operating expenses. Cash flows provided by operating activities were $196.3 million and $151.4 million in the first nine months of fiscal 2013 and 2012, respectively, reflecting increased cash collections from customers and lower payments for income taxes, partially offset by increased payments for inventory.
Cash flows used by investing activities were $77.5 million and $38.3 million in the first nine months of fiscal 2013 and 2012, respectively. Cash flows used by investing activities in the first nine months of fiscal 2013 primarily reflected cash paid for acquisitions of $40.7 million, net of cash acquired, and capital expenditures of $37.8 million. Cash flows used by investing activities in the first nine months of fiscal 2012 primarily reflected cash paid for capital expenditures.
Cash flows used by financing activities were $78.2 million and $79.4 million in the first nine months of fiscal 2013 and 2012, respectively. Cash flows used by financing activities in the first nine months of fiscal 2013 primarily reflected proceeds from our new credit facility of $175.0 million and repayment of long-term debt and credit facilities of $279.5 million. Cash flows used by financing activities in the first nine months of fiscal 2012 primarily reflected $104.1 million in cash repayments of long-term debt and credit facilities.
Capital expenditures, consisting of machinery, equipment and computers, are anticipated to be approximately $65.0 million during fiscal 2013, compared to $49.4 million expended in fiscal 2012. Capital expenditures for the first nine months of fiscal 2013 totaled $49.3 million, including $11.6 million under capital lease obligations resulting from a lease amendment entered into during the third fiscal quarter of 2013 at a facility in our Avionics & Controls segment.
Total debt at July 26, 2013, was $754.5 million and consisted of $250.0 million of 2020 Notes, $172.8 million of the U.S. Term Loan, $47.6 million (35.9 million) of the Euro Term Loan Facility, $170.0 million in borrowings under our secured credit facility, $57.2 million of government refundable advances, $56.3 million under capital lease obligations and $0.6 million of various foreign currency debt agreements and other debt agreements.
We believe cash on hand and funds generated from operations are adequate to service operating cash requirements and capital expenditures through the next twelve months.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements. 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,
34
predict, should or will or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risk factors set forth in Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K for the fiscal year ended October 26, 2012, that may cause our or the industrys actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except as required by law.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no significant changes in our exposure to market risk during the first nine months of fiscal 2013. A discussion of our exposure to market risk is provided in the Companys Annual Report on Form 10-K for the fiscal year ended October 26, 2012.
Item 4. | Controls and Procedures |
Our principal executive and financial officers evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 26, 2013. Based upon that evaluation, they concluded as of July 26, 2013, that our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. In addition, our principal executive and financial officers concluded as of July 26, 2013, that our disclosure controls and procedures were also effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During the time period covered by this report, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe that adequate reserves for these liabilities have been made and that there is no litigation pending that could have a material adverse effect on our results of operations and financial condition.
We are subject to U.S. export laws and regulations, including the International Traffic in Arms Regulations (ITAR), that generally restrict the export of defense products, technical data, and defense services. We have filed voluntary disclosure reports concerning certain technical and administrative violations of the ITAR with the U.S. Department of States Directorate of Defense Trade Controls (DDTC) Office of Defense Trade Controls Compliance (DDTC Office of Compliance). The infractions we reported were unintentional, did not result in any exports of sensitive military technology, and virtually all the reported transactions would have been allowed had we followed the correct regulatory procedures. To address these problems, we have made a number of investments in our export compliance functions, including: additional staffing; ongoing implementation of a new software system; employee training; and establishment of a regular compliance audit program and corrective action process. The DDTC Office of Compliance acknowledged our progress and continuing improvements, but nevertheless informed us that it intends to impose civil monetary fines and administrative sanctions based on the information it had concerning our earlier history in handling ITAR-controlled transactions, including the substance of our prior voluntary disclosures and other aspects of ITAR compliance errors. Management has been in discussions with the agency and provided supplemental information with the intent of reaching a settlement. On August 15, 2013, the DDTC Office of Compliance proposed a total penalty of $20 million with $10 million suspended and eligible for offset credit based on verified expenditures for past and future remedial compliance measures. Based on this proposal, we estimated and recorded a $10 million charge as of July 26, 2013, for this matter. We intend to continue discussions with the DDTC Office of Compliance on final settlement terms, and the final settlement is subject to approval by the agency. While we cannot be certain of the outcome, management believes that the final resolution of this matter will not be materially different from our estimated accrual.
Item 5. | Other Information |
Disclosure Pursuant to Section 13(r) of the Securities Exchange Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934, as amended. Section 13(r) requires us to disclose whether we or any of our affiliates knowingly engaged in certain activities, transactions, or dealings relating to Iran or with any person the property and interests in property of which are blocked pursuant to Executive Order Nos. 132224 or 13382 (relating to blocking property and prohibiting transactions with: (i) persons who commit, threat to commit, or support terrorism; and (ii) weapons of mass destruction proliferators and their supporters).
CMC Electronics Inc. (CMC), one of our Canadian subsidiaries, sells subscriptions to a navigation database that is used in the flight-management systems it manufactures and sells for use in airplanes and other aircraft. The navigation database is updated approximately once a month, and the updates are automatically made available electronically to CMCs subscribing customers in an email notification. Customers may download the updates using instructions provided in the email.
In March 2013, CMC quoted and provided a one-year subscription to the navigation database to Ukrainian-Mediterranean Airlines (UM Air) for use in flight-management systems installed in UM Airs fleet of MD-83 aircraft. CMC received $8,814 from UM Air in March 2013 for that subscription. On May 31, 2013, the Office of Foreign Assets Control of the U.S. Department of the Treasury designated UM Air as a Specially Designated Global Terrorist (SDGT) pursuant to Executive Order No. 132224. On June 19, 2013, in accordance with the pre-existing subscription agreement, CMCs system automatically delivered an email notification to UM Air containing instructions on how to download the latest update to the navigation database, and UM Air downloaded the update. Within 4 days thereafter, CMC ran its periodic prohibited party screening of its customer base and discovered that UM Air had been designated as an SDGT. CMC promptly stopped UM Air from downloading further updates to its navigation database, and ceased any further transactions with UM Air. The net profit on the subscription sold to UM Air was $6,027. CMC has not engaged in any activity with UM Air since June 19, 2013, and CMC does not intend to conduct further transactions with UM Air, including under the subscription agreement. CMC has also enhanced its customer screening practices to more timely identify and address such issues in the future.
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Item 6. | Exhibits |
10.1 | First Amendment to Lease between The Prudential Insurance Company of America and Mason Electric, Co. dated July 29, 2004. | |||||
10.2 | Second Amendment to Lease between Sylmar Cascades Properties, L.P. and Mason Electric, Co. dated January 19, 2007. | |||||
10.3 | Third Amendment to Lease between Sylmar Cascades Properties, L.P. and Mason Electric, Co. dated January 1, 2013. | |||||
11 | Schedule setting forth computation of basic and diluted earnings per common share for the three and nine month periods ended July 26, 2013, and July 27, 2012. | |||||
31.1 | Certification of Chief Executive Officer. | |||||
31.2 | Certification of Chief Financial Officer. | |||||
32.1 | Certification (of R. Bradley Lawrence) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
32.2 | Certification (of Robert D. George) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
101.INS | XBRL Instance Document | |||||
101.SCH | XBRL Taxonomy Extension Schema | |||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | |||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ESTERLINE TECHNOLOGIES CORPORATION | ||||
(Registrant) | ||||
Dated: August 30, 2013 | By: |
/s/ Robert D. George |
||
Robert D. George | ||||
Chief Financial Officer, Vice President, and | ||||
Corporate Development | ||||
(Principal Financial Officer) |
38
EXHIBIT 10.1
FIRST AMENDMENT TO LEASE
This First Amendment to Lease (the Amendment) is entered into as of July 29, 2004, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation (Landlord), and MASON ELECTRIC CO., a Delaware corporation (Tenant), with respect to the following facts and circumstances:
A. Landlord and Tenant have previously entered into that certain Lease dated as of August 6, 2003 (the Original Lease) of certain premises more particularly described in the Original Lease. Capitalized terms used and not otherwise defined herein shall have the meanings given those terms in the Original Lease.
B. Landlord and Tenant desire to amend the Original Lease on the terms and conditions provided herein.
IT IS, THEREFORE, agreed as follows:
1. Measurement . The following amendments are made to the Original Lease to reflect the remeasurement of the Premises:
1.1 The area of the Premises is increased to 95,714 square feet, which is comprised of 88,254 square feet on the ground floor and 7,460 square feet in the Existing Mezzanine. The Excess Space contains 1,309 square feet.
1.2 The area of the Building is 200,632 square feet.
1.3 Tenants Share is 47.0538%.
1.4 The Schedule of Base Rent in Paragraph 4.1 of the Original Lease is revised in its entirety to read as follows:
Months | Monthly Base Rent |
Monthly Base Rent
Per Square Foot |
||||
1-4
5-10
11-24
25-48
49-72
73-96
97 - Expiration of
|
Abated
$25,206.14
$50,412.27
$53,905.26
$57,681.46
$61,740.87
$66,083.50 |
Abated
$0.267
$0.534
$0.571
$0.611
$0.654
$0.700 |
1.5 The amount of the security deposit under Paragraph 5 of the Original Lease is hereby decreased to $50,412.27.
1.6 On the execution and delivery of this Amendment by Tenant, Tenant shall receive as a credit against Base Rent (a) an amount equal to the excess of the amount paid by Tenant upon the execution of the Original Lease pursuant to the second paragraph of Paragraph 4.1 of the Original Lease over the Base Rent for the fifth month after the Commencement Date (as adjusted pursuant to this Amendment), and (b) an amount equal to the excess of the amount paid by Tenant for the security deposit upon the execution of the Original Lease over the security deposit (after adjustment pursuant to this Amendment).
2. Parking . Exhibit B to the Original Lease is hereby deleted in its entirety and replaced with Exhibit B attached hereto. As provided in the Original Lease, Tenants Parking Area shall contain 232 parking spaces outside of the loading dock area shown on Exhibit B (the Loading Dock Area) and 20 tandem parking spaces in the Loading Dock Area. As and to the extent provided in the Original Lease, Tenant may increase the number of parking stalls in the Loading Dock Area by restriping.
3. Tenant Improvement Allowance . The amount of the Tenant Improvement Allowance payable by Landlord under the Original Lease is hereby increased to $504,806.00. As of the date of this Amendment, Landlord has not yet paid the Tenant Improvement Allowance to Tenant, and Landlord reaffirms Landlords obligation to pay the Tenant Improvement Allowance to Tenant in accordance with the Original Lease.
4. Commencement Date . The Commencement Date is hereby agreed to be May 17, 2004.
5. Tenant Estoppel . As additional consideration for this Amendment, Tenant hereby certifies that:
(a) The Original Lease (as amended hereby) is in full force and effect.
(b) To Tenants knowledge, there are no uncured defaults on the part of Landlord or Tenant under the Original Lease.
(c) There are no existing offsets or defenses which Tenant has against the enforcement of the Original Lease (as amended hereby) by Landlord; provided that nothing in this Section 5 shall limit Landlords obligation under the Original Lease to pay the Tenant Improvement Allowance.
(d) Tenant has accepted Landlords Work as substantially completed.
6. Landlord Estoppel . As additional consideration for this Amendment, Landlord hereby certifies that:
(a) The Original Lease (as amended hereby) is in full force and effect.
(b) To Landlords knowledge, there are no uncured defaults on the part of Landlord or Tenant under the Original Lease.
(c) There are no existing offsets or defenses which Landlord has against the enforcement of the Original Lease (as amended hereby) by Tenant.
(d) Landlord has completed any inspection of the improvements required by the Original Lease.
7. Reaffirmation . Except as specifically provided herein, the terms and conditions of the Original Lease as amended hereby are confirmed and continue in full force and effect.
8. Successors . This Amendment shall be binding on the heirs, administrators, successors and assigns (as the case may be) of the parties hereto.
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9. Counterparts . This Amendment may be executed in counterparts, all of which shall constitute the same Agreement, notwithstanding that all parties to this Amendment are not signatory to the same or original counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability and binding effect of this Amendment. Signature pages may be detached from the counterparts and attached to a single copy of this Amendment to physically form one (1) document.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first above written.
LANDLORD | ||||
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA |
||||
By: |
UNIRE REAL ESTATE GROUP, INC., Its Managing Agent |
|||
By: |
/s/ MARK F. HARRYMAN - Pres |
|||
[Printed Name and Title] |
TENANT | ||||
MASON ELECTRIC CO.,
a Delaware Corporation |
||||
By: |
/s/ ROYA HADAEGH, Dir of Finance |
|||
[Printed Name and Title] |
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EXHIBIT B
(See Attached.)
EXHIBIT B
TENANTS PARKING AREA
GUARANTORS CONSENT
Esterline Technologies Corporation, a Delaware corporation (Guarantor), as Guarantor under that certain Lease Guaranty dated as of August 6, 2003 ( the Guaranty), in favor of The Prudential Insurance Company of America, a New Jersey corporation, hereby consents to the foregoing Amendment and agrees that the Guaranty is in full force and effect.
Dated:
ESTERLINE TECHNOLOGIES CORPORATION,
a Delaware corporation |
||
By: |
|
|
[Printed Name and Title] |
EXHIBIT 10.2
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (Second Amendment) is entered into effective as of January 19, 2007 (Effective Date), and is entered into by and between Sylmar Cascades Properties, L.P., a California limited partnership, successor-in-interest to Balboa Cascades LLC, a Delaware limited liability company, successor-in-interest to The Prudential Insurance Company of America, a New Jersey corporation, (Landlord) and Mason Electric Co., a Delaware corporation (Tenant).
RECITALS
A. Tenant and Landlords predecessor-in-interest have previously entered into that certain Lease dated as of August 6, 2003, as amended by First Amendment to Lease dated as of July 29, 2004 (collectively the Lease) whereby Landlord leased to Tenant certain Premises in that building having a street address of 13955 Balboa Boulevard, Sylmar, California as more specifically set forth in the Lease.
B. The parties have agreed to relocate seven (7) of Tenants exclusive parking spaces.
NOW, THEREFORE, Landlord and Tenant hereby agree as follows:
1. Definitions . All capitalized terms not defined herein shall have the meanings ascribed to them in the Lease.
2. Parking . Tenant hereby releases any and all right and interest Tenant may have to use the seven (7) parking spaces (Released Spaces) identified on Exhibit A attached hereto and by this reference incorporated herein, and is hereby granted the exclusive right to the seven (7) parking spaces directly across from such Released Spaces, as more particularly identified on Exhibit A as the New Parking Spaces.
3. Amendment to Lease . This Second Amendment represents the entire agreement between Landlord and Tenant regarding the subject matter contained in this Second Amendment and there are no other terms, obligations, covenants, representations, statements or conditions oral or otherwise of any kind whatsoever between the parties regarding the subject matter contained in this Second Amendment except as set forth in this Second Amendment. No amendment or modification to the Lease as amended by this Second Amendment shall be effective unless it is in writing and executed by both Landlord and Tenant. Except as expressly modified by the terms of this Second Amendment, the Lease remains unchanged and in full force and effect.
4. Conflict . In the event of any conflict between this Second Amendment and the Lease, the terms of this Second Amendment shall control.
5. Counterparts . This Second Amendment may be executed in counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Second Amendment as of the date first above written.
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EXHIBIT A
EXHIBIT 10.3
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE ( Third Amendment ) is entered into as of the later date set forth beneath the parties signatures below ( Execution Date ) and effective as of January 1, 2013 ( Effective Date ), by and between SYLMAR CASCADES PROPERTIES, L.P., a California limited partnership, successor-in-interest to Balboa Cascades LLC, a Delaware limited liability company, successor-in-interest to The Prudential Insurance Company of America, a New Jersey corporation, ( Landlord ) and MASON ELECTRIC CO., a Delaware corporation ( Tenant ).
RECITALS
A. Tenant and Landlord or Landlords predecessor-in-interest, as applicable, have previously entered into that certain (i) Lease dated as of August 6, 2003 ( Original Lease ), (ii) First Amendment to Lease dated as of July 29, 2004 and (iii) Second Amendment to Lease dated as of January 19, 2007 (collectively the Lease ), whereby Landlord leased to Tenant certain Premises in that building having a street address of 13955 Balboa Boulevard, Sylmar, California as more specifically set forth in the Lease for a term expiring at 5:00 p.m. Pacific Time on May 16, 2014 ( Original Term Expiration Date ).
B. The parties desire to amend the Lease to extend the term thereof on the terms and conditions hereinafter set forth.
NOW, THEREFORE, Landlord and Tenant hereby agree as follows:
1. Definitions . All capitalized terms not defined herein shall have the meanings ascribed to them in the Lease. The Lease as amended by this Third Amendment is sometimes referred to herein as the Amended Lease .
2. Extension of Term . Notwithstanding any provision of the Lease to the contrary, but subject to the Termination Option (as defined below), the term of the Lease is hereby extended to 5:00 p.m. Pacific Time on December 31, 2022. The portion of the term of the Amended Lease commencing on January 1, 2013 and expiring on December 31, 2022 is referred to herein as the Extension Term . Tenant shall have the one-time option ( Termination Option ) to terminate the Extension Term effective as of 5:00p.m. Pacific Time on December 31, 2019 ( Early Termination Date ), which Termination Option is exercisable only by delivery to Landlord of (a) written notice of Tenants exercise of the Termination Option ( Termination Notice ) (which Termination Notice shall be irrevocable) on or before March 31, 2019, together with a payment in the amount of Two Hundred Seventeen Thousand Six Hundred Eighty-Four and 61/100 Dollars ($217,684.61) in immediately available funds ( First Termination Payment Installment ) concurrently with such Termination Notice and (b) a payment in the amount of Two Hundred Seventeen Thousand Six Hundred Eighty-Four and 61/100 Dollars ($217,684.61) in immediately available funds ( Second Termination Payment Installment ) on or before the Early Termination Date. The First Termination Payment Installment and the Second Termination Payment Installment are sometimes collectively referred to herein as the Termination Payment . Tenant acknowledges and agrees that time is of the essence with respect to any delivery of the Termination Notice, the First Termination Payment Installment and the Second Termination Payment Installment. If Tenant timely delivers the Termination Notice and each portion of the Termination Payment, then, notwithstanding any provision of this Third Amendment to the contrary, (i) the term of the Amended Lease shall expire on the Early Termination Date; (ii) except for the Termination Payment and the Base Rent and additional rent accruing pursuant to the Amended Lease through such Early Termination Date, no additional consideration shall be payable by Tenant to Landlord for such early termination of the term of the Amended Lease; and (iii) upon the Early Termination Date, Tenant shall surrender the Premises to Landlord in compliance with all terms of the Lease with respect to the condition of the Premises as of the expiration date and the terms of surrender thereof. Without limiting the provisions of this Paragraph 2 requiring Tenants timely payment of each portion of the Termination Payment to exercise the Termination Option, the Termination Option shall be
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deemed to be an Option only for purposes of Paragraph 39.4 of the Original Lease. The Termination Option granted under this Paragraph 2 is solely for the benefit of Mason Electric Co., a Delaware corporation, and any Tenant Affiliate, and shall not be transferable to any assignee or subtenant other than a Tenant Affiliate. For avoidance of doubt, if and so long as the Termination Option is not exercised by Tenant, then Tenant shall continue to have the right to extend the term of the Amended Lease for the First Option Period and, if applicable, the Second Option Period, in accordance with the provisions of Paragraph 39.5 and Paragraph 39.6 of the Original Lease, respectively.
3. Extension Term Base Rent . Notwithstanding any provision of the Lease to the contrary, the Base Rent payable during the Extension Term is as set forth in the following table, subject to the provisions of Paragraph 4 below concerning the Rent Credit (as hereinafter defined):
Period |
Monthly Base
Rent |
Annual Base Rent |
Monthly Base Rent Per
Square Foot |
||||||||||||||
January 1, 2013 - December 31, 2014 |
$ | 59,475.15 | $ | 713,701.80 | $ | 0.63 | |||||||||||
January 1, 2015 - December 31,2016 |
$ | 63,043.66 | $ | 756,523.92 | $ | 0.67 | |||||||||||
January 1, 2017 - December 31, 2018 |
$ | 66,826.28 | $ | 801,915.36 | $ | 0.71 | |||||||||||
January 1, 2019 - December 31, 2020 |
$ | 70,835.86 | $ | 850,030.32 | $ | 0.75 | |||||||||||
January 1, 2021 - December 31, 2022 |
$ | 75,086.01 | $ | 901,032.12 | $ | 0.80 |
To the extent that Tenant has paid to Landlord, prior to the Execution Date, monthly installments of Base Rent pursuant to the Lease which are in an aggregate amount in excess of the amounts payable under the provisions of this Paragraph 3 above (any such aggregate excess, the Pre Execution Date Overpayment ), Landlord shall determine the amount of any such Pre Execution Date Overpayment and notify Tenant thereof. Following receipt of any such notice from Landlord, Tenant may apply the amount of the Pre Execution Date Overpayment against the installment of Base Rent next due and payable pursuant to the Amended Lease.
4. Rent Credit . Except as hereinafter set forth, Tenant shall be entitled to a credit against the Base Rent payable under the Amended Lease, which credit shall be in the aggregate amount of Three Hundred Fifty-Six Thousand Eight Hundred Fifty and 96/100 Dollars ($356,850.96) (the Rent Credit ). Subject to the provisions of this Paragraph 4, equal portions of the Rent Credit, each in an amount equal to Twenty-Nine Thousand Seven Hundred Thirty Seven and 58/100 Dollars ($29,737.58), shall be applied on the first day of each month beginning on January 1, 2013 and continuing until December 1, 2013, inclusive, against Tenants obligation to pay monthly installments of Base Rent accruing hereunder from and after the Effective Date. The Rent Credit granted under this Paragraph 4 is solely for the benefit of Mason Electric Co., a Delaware corporation, and any Tenant Affiliate, and shall not be transferable to any assignee or subtenant other than a Tenant Affiliate. Tenant acknowledges that (a) the Rent Credit is being provided as an inducement to Tenant to extend the term of the Lease pursuant to this Third Amendment and (b) in the absence of such extension, Tenant would have paid substantially higher Base Rent under the terms of the Lease for the period from the Effective Date through the Original Term Expiration Date. Accordingly, Tenant agrees that (i) if Tenant commits a default of any of its obligations under the Amended Lease which is not cured within any applicable cure period set forth in Paragraph 13.1 of the Original Lease ( Breach ) prior to December 1, 2013, then, unless such Breach is cured prior to the time, if any, that Landlord terminates the Amended Lease pursuant to Paragraph 13.2 of the Original Lease, Tenant shall have no right to apply any portion of the Rent Credit against Tenants obligation to pay Base Rent accruing after such default becomes a Breach; and (ii) if Landlord terminates the Amended Lease pursuant to Paragraph 13.2 of the Original Lease as a result of a Breach occurring on or before the Original Term Expiration Date, then the damages recoverable by Landlord shall include that portion of the Rent Credit credited hereunder against Tenants obligation to pay Base Rent prior to such termination.
- 2 -
5. Design Plans for Renewal Improvements . Landlord consents to Tenants performance of all or a portion of the alterations, improvements, additions and/or Utility Installations in the Premises to reconfigure that portion of the Premises depicted in, and in a manner consistent with, the design plans attached hereto as Exhibit A (collectively, Renewal Improvements ); provided, however, that the foregoing consent shall not be construed to obligate Tenant to perform such Renewal Improvements. To the extent Tenant elects to perform the Renewal Improvements, they shall be made by Tenant at Tenants sole cost and expense and in accordance with the provisions of Paragraph 7.3 of the Original Lease. For purposes of such Paragraph 7.3, the Renewal Improvements shall be deemed to be alterations, improvements, additions or Utility Installations requiring Landlords prior written consent. Accordingly, and without limiting the foregoing, (a) Tenants final plans for the Renewal Improvements ( Final Plans ) shall be subject to Landlords prior written approval as set forth in Paragraphs 7.3(a) and 7.3(d)(ii) of the Original Lease and (b) prior to commencement of construction of the Renewal improvements, Tenant shall deliver to Landlord any required building permit and/or other governmental authorization covering the Renewal Improvements. Tenant shall give Landlord at least ten (10) days notice prior to commencing any portion of the Renewal Improvements to allow Landlord time to post a Notice of Non-Responsibility at the Premises. Subject to Landlords right to require their removal as hereinafter provided in this Paragraph 5, and notwithstanding any provision of Paragraph 7.3(f) of the Original Lease to the contrary, all Renewal Improvements shall become the property of Landlord, and shall be surrendered with the Premises, upon the expiration or earlier termination of the term of the Amended Lease. Except as may be otherwise indicated in writing by Landlord in connection with, and as a condition of, Landlords approval of the Final Plans for the Renewal Improvements, Tenant shall have no obligation to remove any portion of the Renewal Improvements upon the expiration or earlier termination of the term of the Amended Lease.
6. As-Is Condition . Tenant accepts the Premises in their present As Is condition, and acknowledges that (a) neither Landlord nor any of its employees or agents has made any representations regarding the Premises or the condition thereof except as may be otherwise set forth in the Lease; and (ii) Landlord has no obligation to perform any work, supply any materials, incur any expense or make any alterations or improvements to prepare the Premises for Tenants continued occupancy during the Extension Term.
7. Brokerage . Landlord and Tenant each represent to the other that they have dealt with no real estate brokers, finders, agents or salesmen in connection with this transaction, except Delphi Business Properties, Inc. ( Landlords Broker ) and Cushman & Wakefield, Inc. ( Tenants Broker ). Each party agrees to hold the other party harmless from and against all claims for brokerage commissions, finders fees, or other compensation made by any other agent, broker, salesman or finder as a consequence of said partys actions or dealings with such agent, broker, salesman, or finder. Landlord agrees to pay a fee or commission to Landlords Broker and Tenants Broker respecting this Third Amendment pursuant to a separate agreement by and between Landlord and Landlords Broker dated December 18, 2012.
8. Conflict . In the event of any conflict between this Third Amendment and the Lease, the terms of this Third Amendment shall control.
9. Governing Law . This Third Amendment shall be governed by and construed in accordance with the laws of the State of California. If any provision of the Amended Lease, or its application to any person or entity or circumstance, shall ever be held to be invalid or unenforceable, then in each such event the remainder of the Amended Lease or the application of such provision to any other person or entity or any other circumstance (other than those as to which it shall be invalid or unenforceable) shall not be thereby affected, and each provision of the Amended Lease shall remain valid and enforceable to the fullest extent permitted by law.
10. Increase in Security Deposit . Landlord presently holds a security deposit pursuant to the Lease in the amount of Fifty Thousand Four Hundred Twelve and 27/100 ($50,412.27). Within two (2) business days following the Execution Date, Tenant shall deposit with Landlord an additional Nine Thousand Sixty Two and 88/100 Dollars ($9,062.88). When Tenant has made such additional deposit, Landlord will hold, in accordance with the terms of Paragraph 5 of the Original Lease, a security deposit respecting the Amended Lease in the aggregate amount of Fifty-Nine Thousand Four Hundred Seventy Five and 15/100 Dollars ($59,475.15).
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11. Counterparts . This Third Amendment may be executed in one or more counterparts and delivered via facsimile or other means of electronic image transmission which, together, shall constitute one and the same instrument and be deemed an original for all purposes. Although each party covenants to provide to the other a signed wet signature original counterpart of this Third Amendment, any failure to deliver such wet signature original shall not affect the enforceability of fully-executed counterparts of this Third Amendment delivered via facsimile or other means of electronic image transmission.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.]
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Third Amendment as of the corresponding date set forth beneath each partys signature below.
EXHIBIT A
Design Plans for Renewal Improvements
A-1
A-2
EXHIBIT 11
ESTERLINE TECHNOLOGIES CORPORATION
Computation of Basic and Diluted Earnings Per Common Share
For the Three and Nine Month Periods Ended July 26, 2013 and July 27, 2012
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
July 26,
2013 |
July 27,
2012 |
July 26,
2013 |
July 27,
2012 |
|||||||||||||
Net Sales |
$ | 478,068 | $ | 485,949 | $ | 1,435,592 | $ | 1,461,662 | ||||||||
Gross Margin |
178,902 | 172,096 | 520,623 | 514,700 | ||||||||||||
Net Earnings (Loss) from Continuing |
||||||||||||||||
Operations Attributable to Esterline |
$ | 39,213 | $ | (17,104 | ) | $ | 99,846 | $ | 50,875 | |||||||
Loss from Discontinued Operations |
||||||||||||||||
Attributable to Esterline, Net of Tax |
(975 | ) | 0 | (975 | ) | 0 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Earnings (Loss) Attributable to Esterline |
$ | 38,238 | $ | (17,104 | ) | $ | 98,871 | $ | 50,875 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Basic |
||||||||||||||||
Weighted Average Number of
|
31,297 | 30,835 | 31,100 | 30,712 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (Loss) Per Share Attributable to Esterline Basic: |
||||||||||||||||
Continuing Operations |
$ | 1.25 | $ | (.55 | ) | $ | 3.21 | $ | 1.66 | |||||||
Discontinued Operations |
(.03 | ) | .00 | (.03 | ) | .00 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (Loss) Per Share Attributable
|
$ | 1.22 | $ | (.55 | ) | $ | 3.18 | $ | 1.66 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
||||||||||||||||
Weighted Average Number of
|
31,297 | 30,835 | 31,100 | 30,712 | ||||||||||||
Net Shares Assumed to be Issued
|
573 | 0 | 563 | 554 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted Average Number of Shares
|
||||||||||||||||
Outstanding Diluted |
31,870 | 30,835 | 31,663 | 31,266 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (Loss) Per Share Attributable to Esterline Diluted: |
||||||||||||||||
Continuing Operations |
$ | 1.23 | $ | (.55 | ) | $ | 3.15 | $ | 1.63 | |||||||
Discontinued Operations |
(.03 | ) | .00 | (.03 | ) | .00 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (Loss) Per Share Attributable
|
$ | 1.20 | $ | (.55 | ) | $ | 3.12 | $ | 1.63 | |||||||
|
|
|
|
|
|
|
|
EXHIBIT 31.1
CERTIFICATIONS
I, R. Bradley Lawrence, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Esterline Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: August 30, 2013 | By: |
/s/ R. Bradley Lawrence |
||
R. Bradley Lawrence | ||||
Chairman, President and Chief Executive Officer | ||||
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATIONS
I, Robert D. George, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Esterline Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: August 30, 2013 | By: |
/s/ Robert D. George |
||
Robert D. George | ||||
Chief Financial Officer, Vice President, and | ||||
Corporate Development | ||||
(Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Esterline Technologies Corporation (the Company ) on Form 10-Q for the period ended July 26, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Form 10-Q ), I, R. Bradley Lawrence, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 30, 2013 | By: |
/s/ R. Bradley Lawrence |
||
R. Bradley Lawrence | ||||
Chairman, President and Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Esterline Technologies Corporation (the Company ) on Form 10-Q for the period ended July 26, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Form 10-Q ), I, Robert D. George, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 30, 2013 | By: |
/s/ Robert D. George |
||
Robert D. George | ||||
Chief Financial Officer, Vice President, and | ||||
Corporate Development |