Esterline Technologies Corporation F1Q09 (Qtr End 01/30/09) Earnings Call Transcript

Mar. 1.09 | About: Esterline Technologies (ESL)

Esterline Technologies Corporation (NYSE:ESL)

F1Q09 (Qtr End 01/30/09) Earnings Call Transcript

February 26, 2009 5:00 pm ET

Executives

Brian Keogh – IR

Robert Cremin – Chairman, President and CEO

Robert George – VP, CFO, Secretary and Treasurer

Analysts

Troy Lahr – Stifel Nicolaus

Howard Rubel – Jefferies & Co.

Robert Spingarn – Credit Suisse

Tyler Hojo – Sidoti & Company

Eric Hugel – Stephens Inc.

J.B. Groh – D.A. Davidson

Vinit Bhatt – Snyder Capital

Alan Robinson – RBC

Operator

Good day ladies and gentlemen and welcome to Esterline Technologies first quarter earnings conference call. (Operator instructions) As a reminder, this conference is being recorded. Today is February 26, 2009. And it’s my pleasure to introduce your host, Mr. Brian Keogh. Please go ahead, sir.

Brian Keogh

Thanks Joshua. Good afternoon everybody. Bob Cremin, Esterline’s Chairman, President and CEO; and Bob George, Vice President and CFO are with me today to discuss Esterline’s fiscal 2009 first quarter performance. A replay of the call will be available at the following number, 1-866-245-6755. The pass code is 812230, or you can visit Esterline.com, in the Investor Relations section, where you’ll also find a copy of the earnings release from today.

In the release there’s a paragraph regarding forward-looking statements. This paragraph covers this call as well. Essentially it says that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 are based on management’s current expectations and are not guarantees of future performance. Of course, forward-looking statements always involve risk and uncertainty and we detail those risks in our public filings with the SEC.

As is our practice, when we get to the Q&A, we want to put a two question limit on the first round, then we’ll circle back for follow-up as time allows. I like to turn the call over to Bob Cremin. Bob.

Robert Cremin

Thanks Brian and thanks everybody for joining us today. Let us jump in. It turned out to be an interesting quarter. We knew going in that the year would start slow and then ramp up as we move forward, and we said as much in our December call. It was the anticipated aftermath of the Boeing strike and our normal extended holiday plant closures.

In addition, we also anticipated some foreign exchange issues and a slowdown in airlines spare sales for some of our operations. It was no secret that air traffic was slowing, and there was indications of airlines destocking inventories and putting of retro-fits.

One thing no one predicted was the precipitous drop in the British pound during the quarter. This resulted in a foreign currency loss related to the funding of our Racal acquisition in the UK, and Bob will cover that issue in a moment. Despite it all, we performed somewhat ahead of our internal plans for quarter one. You know, it goes without saying that Esterline is not immune to the market dynamics that everybody in this industry is currently experiencing, however, in this changed environment our strategy, capabilities and culture are working well.

The breadth of our market coverage, our growing library of proprietary engineered solutions and our dominant positions in key market niches continue to help insulate us in these uncertain times. One key element of our long-term strategy is our ability to seek out and acquire best in class complementary businesses that expand our technological competency, our market reach and substantially elevate our competitive strengths.

During the quarter, we completed two such acquisitions, and yet we kept our balance sheet healthy. NMC, Nylon Molding, expands our Advanced Materials product offering to include specialized, lightweight plastic and composite, adhesive bonded fasteners. NMC has a solid position on the 787. And Racal leverages our expertise in secure communications by adding high-technology, ruggedized, personal communications equipment and those range from lightweight noise reducing headsets to advanced battlefield secured telephone networks.

Racal is in an excellent position to benefit from expenditures to increase the effectiveness of the foot soldier. We also added a small product line during the quarter, Duraswitch, and that was bolted directly onto an operating unit.

We expect all of these additions to be profitable this year, providing a little extra lift and to help us maintain our full-year guidance of $3.70 to $3.90 per share. Supporting our outlook was our ability to improve our gross margins in the quarter, and this was particularly encouraging in the face of the slowdown in spares business. Again, this goes right to our basic strategy, reflecting the inherent value of our specialized niche businesses.

On the R&D front, you will notice that expenses continue to ratchet down from the mid-2008 peak. The surge in R&D spending that is in [ph] 2007 and 2008 allowed us to obtain tier one designations on several significant new platforms, including such important military programs as the T-6B trainer, and the Joint Strike Fighter, and over on the commercial side of things, Boeing’s innovative 787 and it’s Airbus counterpart A-350.

These wins not only raise our profile within the industry but significantly expand our business base. With our R&D investments on these programs largely expensed, we will begin to see significant benefits in the coming years as we move into production. On that point, in December we received the production order for the first 35 chipsets for the T-6B integrated cockpits. Remember there are two cockpits for planes. The first delivery is scheduled for later this year.

Our persistent focus on R&D investment also enables us to realize embedded value by leveraging the core technologies developed for aerospace and defense, and then applying them to other markets where we continue to see good growth. And these include specialized medical input technologies, high-speed rail, industrial power generation, and even the gaming industry.

So Bob, how about you jump in and go over the numbers now.

Robert George

Sure, thanks Bob. Good afternoon everyone. As I am sure you can imagine, we have had a lot of conversations regarding today’s prepared remarks, nothing unusual there, we always try to prepare extensively for these calls. However, the number of discussion points that this quarter presented is clearly unique.

Now in preparing for this meeting one of my individual practices is to review the transcripts from the prior year’s calls, as well as the transcripts from the preceding quarter’s calls. And occasionally, we are all stunned with magnitude and the speed of change and this was one of those times for me. While reviewing last year’s first quarter comments, I couldn’t help but reflect on the differences in the global economic outlook last February, and those today just a short 12 months later. And in a few months, we will be discussing some of those year-over-year comparisons with respect to Esterline’s results.

And then as my attention turned to last December’s call, I was again struck by changes. But also by the way that those changes were incorporated into our forward-looking statements. For example, and here is a quote from our December remarks, “Comparatively, we are likely going to be slower out of the gate in the first quarter for a few reasons. And then the listed those reasons. And I’m quoting again, “One, last year we benefited from an extra week in the fiscal calendar. Another is the residual effect of the Boeing strike and just getting moving again. The third is simply a result the powerful fourth-quarter results we just recorded, and as a wild card, we will have the effects of significant currency movement.”

Now, as we discussed Esterline’s first quarter results, five themes should be kept in mind. And these themes are, and Bob mentioned most of them in his remarks, foreign exchange and volatility, the aftermath of the Boeing strike, spare parts activity, the lumpy nature of Esterline’s defense shipments, and the first quarter anomalies of 2008 including having 14 weeks shipping in the quarter.

Now with this brief background, let us get into the details. Esterline sales of $309.7 million were 13% lower than the $357.3 million recorded of last year. Three prime factors influenced this comparison. One, the shorter quarter in 2009 accounts for $20 million to $25 million of the difference. Second, the fact that last year we had a large international countermeasure shipment that this year is not expected until Q2 or Q3. And third, foreign exchange rates.

We have seen a period of incredible volatility and strengthening in the US dollar as the global economic situation has spurred a flight to quality. For instance, last year the Canadian dollar was at parity with the US dollar, and today it is $0.80. The pound sterling was $2 one year ago. Today it is a $1.42. And the euro was a $1.48, and today it is $1.30.

As we look at gross margin across the segments, as Bob indicated, we demonstrated strength and we’re up to 33% from 32.2% last year. In both the Avionics & Controls, and Advanced Materials segments gross margin was up nicely, demonstrating solid strength even as the aftermarket business softened. In the Sensors & Systems segment, gross margin was down from 37.6% to 35.2%. This segment was affected more significantly by aftermarket conditions, than either avionics or materials. And a portion of this comparison is due to a tough comparison to an exceptionally strong first quarter 2008.

Segment earnings in the first quarter were $34.7 million this year compared to $43.5 million last year. And this decline was most pronounced in the Advanced Materials segment, which was down $5.5 million from last year. And again there were three primary factors influencing this result. One, the already mentioned international countermeasure shipment in 2008, which was not scheduled in the first quarter of 2009; two, a significant mark-to-market foreign exchange loss on forward contracts; and three, a decline in our metal finishing activity due to the strike at Boeing.

Esterline’s two other segments Avionics & Controls and Sensors & Systems were up as well but to a smaller degree. And both segments were affected by each of the major themes described earlier.

By segment, earnings were as follows, Avionics & Controls, $14.5 million; Sensors & Systems $10.3 million; and Advanced Materials $10 million.

Selling, general and administrative expenses were effectively even with last year at $59.7 million. Included in this number was $3 million of increased pension expense, offset by the net effects of foreign-exchange translations.

The research, development, and engineering expenses continue to come down as has been discussed previously. Quarterly R&D expense was $17.4 million this year compared with $21.6 million in 2008. And we expect this downward trend to continue, R&D expense for the full year as a percent of sales should be in the 5% to 5.5% range.

Esterline absorbed a net expense of $5 million recorded in another income and expense in the first quarter this year, and that compares to a gain of $1.9 million last year. This expense was primarily the result of the funding of UK bank accounts to facilitate the Racal acquisition during a one-week period of extreme volatility with the pound sterling, and last year’s gain resulted from the closing of an interest rate swap.

Taxes contribute another anomaly in year-over-year comparisons. Last year’s first quarter results included the benefit of a small tax credit, due largely to two discrete items recorded in the quarter. Now this year’s rate of 16% is somewhat lower than the 23% we projected, but it is still quite a bit higher and the fact that we paid no taxes in the quarter last year. And we expect our effective rate for the balance of the year to be in the 18% range.

As I wrap up my comments and prepare to hand it back to Bob Cremin, our earnings per share of $0.38 on the face of it were significantly lower than last year. However, as Bob mentioned earlier, they were ahead of our internal forecast for the quarter. And as we look to the balance of the year, we managed through our first quarter with an incredible number of moving parts; we completed three great fit acquisitions that we expect to contribute positively this year.

We ended the quarter with a larger backlog than we started. Our margins are holding, and while the global economic story continues to unfold, we think our guidance of $3.70 to $3.90 is still on the cards.

With that, Bob back to you.

Robert Cremin

Thanks Bob. Just a few wrap up comments before we open it up to questions. Regardless of the economic conditions changing around the world, I truly believe Esterline’s approach to the business even more significant in this new environment. We got a strategy that is proven; we have lots of balance in our portfolio. People are willing to pay nice prices for our capabilities, and as Bob just mentioned our backlog of business stands at $1.2 billion and that is backed with a solid balance sheet.

These are strong fundamentals that are going to carry us through this market turbulence. So with that operator how about we open up to questions now.

Question-and-Answer Session

Operator

Certainly. (Operator instructions) Your first question today come from Troy Lahr of Stifel Nicolaus. Please go ahead.

Troy Lahr – Stifel Nicolaus

Thanks. You talked about the airline destocking, how long will that continue in your opinion, and can you may be just kind of reference how much of our commercial business is discretionary versus nondiscretionary?

Robert Cremin

All of the Esterline parts in the high 20% of what we do, and very often we mix other things in and tell people that some of our stuff is used in training, but we can’t closely tie that to the parts sale. My feeling is that we are looking at two primary things that have happened. First, during the Boeing strike some businesses continued to ship, some went in a month and were still shipping. Others were shut down on day one. My guess Troy would be big expensive things like engines we shut off, but parts continued to flow. I think during the initial shutdown, just as people get sloppy during the rising times during a downturn, people tend to really ratchet down the inventory. So, I think you get an overreaction then you get to bounce of the bottom. So start with that. As for our parts business, I have used the expression in the past that Esterline is a newbie to the market. And that when you go back to the old DC – 8s, we didn’t have much content on those. We have one company, which would our sensors company, which is really our oldest company, it is a holdover from old Esterline framework. And those people would have felt more of an impact from the strike, and from cutting capacity in the single aisle CFM-56 engine markets.

My suspicion now is that we are probably in some stable environment. That we have taken the hit, we are coming off the bottom. And anyway, I will stop there in case you have more questions.

Troy Lahr – Stifel Nicolaus

Okay, but just unclear, I mean, how much of this work, I guess, can people delay versus how much of it is required to be done by the FAA.

Robert Cremin

Two quarters would be a lot. A quarter might be normal. It is not like these guys are sitting around with huge boxes of inventory. These are big companies that will manage.

Troy Lahr – Stifel Nicolaus

So, you are saying a quarter of your business, you’d say as kind of discretionary or nondiscretionary type products?

Robert Cremin

You know, we’re back to what are inventory turns in our industry 4, 5 might be normal. So I’m going to stick to the quarter.

Troy Lahr – Stifel Nicolaus

Okay, yes. I guess I will follow up with you after the call. I guess I’m trying to figure out of the products that they are putting on the aircraft, how much can they say, you know, I’m not going to do it this quarter, I will do it next quarter versus the FAA saying no, you have to do it this quarter. You have flown X amount of flight miles now. It needs to get done.

Robert Cremin

Yes. Very little is discretionary then if that is the case. You know, you have like GFI retrofit work. While there is not a hard directive out of the FAA, airlines can step up to do it now or they can wait till the directive just like a five-year window? That is not that much of that.

Troy Lahr – Stifel Nicolaus

Okay.

Robert Cremin

If the plane needs of part, you are going to have to put it on, that’s it. We are only talking about whether they have extra parts on the shelf that they could bleed off.

Troy Lahr – Stifel Nicolaus

Okay, and then my second question is, can you give me a little more detail on this $5 million you had to fund at the bank account, I guess, I’m not quite following what that was?

Robert George

Yes, Troy it is Bob George here. Essentially what happened there is as we are moving in on the close of Racal, we needed to, we had some funds sitting in the UK, and we had to move a portion of the funds from the US to the UK. During the President’s week, I believe it is, I don’t have the exact dates here, the pound declined in a very short period of time from about $1, and these numbers are around it, about $1.45 a pound to into the mid-$1.30 a pound. That happened in a two-day period and it happened to be period of time when we had dollars in transition between the US, and had not yet converted them into UK pounds. In the process of that re-evaluation, there was a net foreign currency loss there. And the net impact is what you are seeing on the income statement of $5 million.

Troy Lahr – Stifel Nicolaus

Okay, so you just kind of chart that out as kind of a one-time thing. We wouldn’t expect to see things like this in the future?

Robert George

Yes, I’m glad you asked that question. And for clarification, that absolutely it is a one-time event and it is strictly related to the fact that we had, I think it was 50 million pounds. So let us call it $75 million or so in transition between the US and the UK.

Troy Lahr – Stifel Nicolaus

Okay, thanks guys.

Robert Cremin

Good, thanks Troy.

Operator

Thank you. Our next question comes from Howard Rubel of Jefferies & Co. Please go ahead.

Howard Rubel – Jefferies & Co.

Thank you. Bob Cremin, could you help us a little bit with what you are think then revenues might very well be for the year. You know, we have had two acquisitions in a short period of time, and also maybe if you could give me a sense of how much the first NMC contributed to results in the quarter?

Robert Cremin

NMC is minor. Racal is very late.

Howard Rubel – Jefferies & Co.

Exactly. Could you quantify those, minor and late?

Robert George

Howard, this is Bob George. As you know, we don’t provide detailed breakouts of our individual business units, but in terms of looking at our overall full-year sales guidance, as we had said back in December, we were looking at a relatively modest increase in fiscal ‘09 of about 5%, taking itself – coming off of our $1.5 billion last year, taking us up $100 million or so. Based on the – what is interesting about the revenue question is that the decline in the Canadian dollar, the euro, and the pound relative to the US dollar affects the top line in a negative way in that the translation to US dollars is therefore lowered. But it affects the cost of sales in an improving way. So, while we are looking at a lower full-year revenue rate based on these exchange rates, we are not seeing a significant impact on our profitability as we have just had the dialogue.

So, we’re coming off of a year where we anticipated somewhere north of $1.5 billion in our full-year revenues, based on the current look at foreign exchange rates we are somewhere in and around $1.5 billion, and that is just as precise as I’m going to be, maybe a little bit lower. But as we said, we are maintaining our full-year guidance.

Howard Rubel – Jefferies & Co.

No, I am sympathetic with forecasting currencies, in fact, in a number of instances should, I mean you have some dollar-denominated sales that are euro or pound denominated costs, that is part of the reason why we’re going to see this improvement in profitability among other reasons. Is that correct? Or Canadian denominated costs and US denominated dollars?

Robert Cremin

You are absolutely correct.

Howard Rubel – Jefferies & Co.

And then just as a follow-up to the Troy’s question on the FX loss in translation, why wouldn’t that then capitalize as part of just the purchase price, and in fact because of this way were you in effect being able to capture a slightly lower purchase price than what you would originally expect, because of the decline in the pound?

Robert Cremin

And thank you very much for that question. I will take the second part of your question first, and you are absolutely correct. We, in our modeling, as we were evaluating the Racal acquisition, the exchange rates were such that on a dollar basis we were looking at that transaction being $175 million to $200 [ph] million. The actual valuation turned out to be $165 million. And the answer to your first part, why it couldn’t be incorporated and capitalized in the acquisition accounting. That is what commonsense would tell you, you should do. Unfortunately, US GAAP oftentimes does not follow commonsense, and the way that transaction has to be, it has to be expensed on the P&L and can’t be incorporated into the acquisition accounting for the acquisition.

Howard Rubel – Jefferies & Co.

Thank you Bob.

Operator

Thank you. Our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.

Robert Spingarn – Credit Suisse

Good afternoon.

Robert Cremin

Hi, Robert.

Robert George

Hi, Robert.

Robert Spingarn – Credit Suisse

Hi, guys. Perhaps I miss this earlier, but could you talk with respect to commercial spares, and on a percentage basis sort of the same part sales, what kind of rate of decline you have experienced in the last few months?

Robert George

Well, it is Bob George. I will start and then Cremin can add some color. What we have seen in the first quarter of this year is similar to what we experienced after 9/11. And by that I mean that each one of our business unit has been affected differently. So I can’t give you kind of a complete answer. But let me just sort of go down by segment and talk about it there. In Avionics & Controls, we have seen a decline primarily affecting us in our cockpit switches. And we have seen a decline in the aftermarket activity there. However, you don’t see it too dramatically in that segment because offsetting that to a significant degree was our cockpit controls activity in our defense work. So you don’t see the effect to dramatically in the Avionics & Controls, but the fact there for the most part was in cockpit switches.

Moving down into Sensors & Systems, as Bob mentioned in his comments and a little bit ago in response to Troy’s question, our advanced sensors platform is one of our longer standing aerospace and defense companies and they have got a great position on the CFM-56 thermocouple harnesses. Those were affected pretty dramatically, and that is why you see the impact in Sensors & Systems on a gross margin basis more dramatically than you do in the other two segments. Our power distribution and power system businesses there actually performed quite well. So, we – in looking at the – in looking at the quarter there, our advanced relays, capacitors and other power distribution devices did just fine. We were affected a little bit there by the aftermarket activity on GFI. But the other activity more than made up for it.

And moving down into Advanced Materials, particularly with our thermal engineered products and elastomers, again we saw the impact there similar to 9/11 where a lot of that products, more of that product as a percentage is through distributors, and so there is a two step gap between us and the ultimate customer, and those inventories were being brought down. Again however, you don’t see too dramatic an effect there if we broke it out because some of our defense activity, and our international activity more than made up for it, and the biggest effect there was – the effects there were really there, on a comparative basis, for the international countermeasure shipment and the effects of the Boeing strike.

Robert Cremin

Robert, I will just expand on how Roberts comments. On power distribution, where we performed quite well, we have got three distributors there. Normally, we would look at a pretty decent annual order in the first quarter. When the strike it and the market was adjusting that negotiation spills into the second quarter. The other problem that we have, and we don’t sell primarily through distribution; we do a lot of direct sales. Distributors sometimes will ship directly to OEM, and it is not the aftermarket. So, our visibility there is just a little bit less than we would like. If you go over into elastomers, we have primarily one distributor that covers the smaller accounts for us, and there too that person had sufficient inventory to wait till the end of the quarter before getting serious about talking about the next round of orders. So, he could assess the global footprint.

So, you know, we have got a lot of moving parts. We’re not trying to be difficult in giving you the exact percent, but it is hard for us to come up with an exact percent.

Robert Spingarn – Credit Suisse

Can you speak at all to the trend through the quarter; you know was it markedly different and more negative in January for example, than in December?

Robert Cremin

Yes, we saw the first two months of the quarter as being unusually slow. And then we were very pleasantly surprised by the strong spring back in the third month of the quarter.

Robert Spingarn – Credit Suisse

That is interesting, how does February look so far?

Robert Cremin

Per plan.

Robert Spingarn – Credit Suisse

Okay, and then the other thing is, on the acquisitions, just trying to get back I want to understand the sales guidance again, when we put together some of the numbers that Bob George just talked about, you have got some of the down numbers in the quarter, I think you referenced to your 5% sales growth target from last quarter’s call. And now we have the acquisitions in place, can I take another shot at what that contribution from the acquisitions is in general size. I am also interested in what kind of pricing you are seeing out there in the M&A environment these days?

Robert George

Okay Rob. I will start, Bob George here, and I will let Cremin address the pricing in the M&A market. Okay, let us go back to December when we were talking about our guidance for the year and revenues, and basically, as you know, we will be a little bit more discreet in revenues than maybe we would be otherwise. I understand it is difficult out there, and as you know, we kind of adhere to our full-year guidance really on the EPS side and not forecasting revenues. But, let us try to be a little bit more discreet here. In December we said, we were looking at 5%, modest 5% increase over 2008. Now at that point in time, and I think that there was, I don’t have my transcripts here in front of me. So I am operating on memory. I think that there was some discussion with respect to the contribution of NMC at that point in time. As you know, we closed NMC right about the same time that we were having that conference call. So, we knew what those numbers were and had incorporated those in. So that 5% included the contribution from NMC on the revenue side.

Okay, the Racal acquisition, obviously at that point in time was still in uncertain state and we were going through, obviously through the acquisition process and so we did not include any of that effect in there. I think that in looking at the announcements for Racal, and though we didn’t come specifically out. I think that given that we have got about nine months worth of activity in our fiscal year for Racal that you can assume that it is going to be somewhere, let us say, in the $40 million to $60 million range.

Robert Cremin

On the second question on deal flow, I think it has slowed. I think it is because people are looking at their prices and feeling like the market has discounted them far too much. We have looked at a couple of situations and we walked from them. In the last quarter, it is rather interesting; we haven’t seen many in what we call our sweet spot. As for Esterline, our preference is to favor liquidity of the balance sheet, and I think that – no, our priority would be to favor liquidity of the balance sheet over the attractiveness of a low price. So that is sort of our thinking right now.

Robert Spingarn – Credit Suisse

Okay, thanks very much.

Robert Cremin

Thank you Robert.

Operator

Thank you. Our next question comes from Tyler Hojo of Sidoti & Company. Please go ahead.

Tyler Hojo – Sidoti & Company

Hi, just a follow up on Rob’s question on the spares, was – were the spares up sequentially in February versus January, are they looking like they are going to be up sequentially in February?

Robert Cremin

I don’t have the visibility for February to guide you on that.

Robert George

Yes, Tyler, Bob George here, at the present time obviously, we are still in February, what Cremin has indicated before is that what we're looking at in February so far and what our weekly reports lead us to believe is that we are on track overall. We don't have the discreet visibility yet to what the breakout is. So, as Bob did say, we had a stronger January than we did in November and December, and our revenue position right now for February is looking along the lines of what we experienced in January.

Tyler Hojo – Sidoti & Company

Okay.

Robert George

I think about 98% of what to adjust to the Boeing strike is behind us.

Tyler Hojo – Sidoti & Company

Okay, all right. And – I mean you talked about FX, you talked about kind of the impact from having less weeks year-on-year, is there any way to potentially quantify what the impact of the Boeing strike was in the quarter.

Robert Cremin

We did not do that. So, if I came up with a number now, it would just be – it would be purely a swag and I don’t think that is appropriate.

Tyler Hojo – Sidoti & Company

Okay, all right.

Robert George

Whatever it is, we feel like over the 12 months that we are going to run in the fiscal year, it will be very, very minor.

Robert Cremin

It will be washed out.

Robert George

It will be washed out.

Tyler Hojo – Sidoti & Company

Okay. And then just in regards to the acquisitions, people have been asking questions a lot of different ways,, but you know, maybe just looking at the EPS guidance you held it, but you obviously have the Racal deal in there now, just from a EPS perspective what do you think it added to the guidance range?

Robert Cremin

You're right. You guys come up with that question lots of different ways, a little. I'm not going to give you a number. It is like an insurance policy for us.

Tyler Hojo – Sidoti & Company

Okay. And then just one more, Bob Cremin, you in the past have talked kind of just generally what you see, what your expectation is for the market and you know obviously, Airbus is going to be cutting production rates and you know, you previously had kind of flat production rates planned in your guidance, but maybe if you could just generally talk about what you see in commercial aerospace over the next say, 12 to 24 months, thank you.

Robert Cremin

Well, you know, the airlines were the first guys to adjust their business model, and that was driven by the price of fuel. So, you have – fuel has since come down, capacity has been adjusted. I think they are probably close to the level that they want to be at. Load factors are up. It seems like I am paying for every time I have more than 50 pounds for my bag, and if I want a cup of coffee and it's time to go to the bathroom on the plane. So, everything I am reading right now says that the airlines in ‘09 have a reasonable chance to be profitable. So, I would say that.

Second, you got quite a few years of backlog at Airbus and Boeing. I don’t see from the guys that I am talking to any significant alteration. Boeing referred to a pause – Airbus referred to a pause in single aisle production. You know, you are taking out two units for something like that. The heavies continue. I really think the bet that you guys are going to have is what happens in ’10, maybe about 18 months out. Is there financing available for the guys who want take the production slots. I think that is the bet. If I fall back in Esterline, we have got pretty good visibility for the remainder of the year. We have got $1.2 billion in backlog. Some of the major investments that we made like the T6-B startled to ship, backlog is going to stay healthy. We just put good supplements, the resets coming in place. The helicopters have got to be fixed up, and we may see a little late year impact of the 787, assuming everything stays on target.

You know, but – my last point here is when you look at Esterline, we are not a one-horse side. We have got defense, and we got a nice industrial portfolio picking up. As I mentioned before, we have got gaming, we have got rail, and we have got industrial power. We have got the medical pieces. So, I feel like we have got a model that. I like where we are. I like where we are.

Tyler Hojo – Sidoti & Company

Thanks for that.

Robert Cremin

Yes.

Robert George

Thank you.

Robert Cremin

By the way, we don't have a business jet at Esterline.

Operator

Our next question comes from Eric Hugel of Stephens Inc. Please go ahead.

Eric Hugel – Stephens Inc.

Bob, since you are talking about biz jets, maybe we should talk about that a little more. Good afternoon guys.

Robert Cremin

Hi Eric, how are you doing?

Eric Hugel – Stephens Inc.

Can you talk about biz jet exposure. I guess especially at CMC, and sort of how you see that market developing over the next, let's say year, and sort of what's going on there with, I guess at CMC?

Robert Cremin

You know, I think business jets are probably of all the categories probably take the biggest hit, because no CEO, no senior management team wants to have their pictures taken accepting delivery of a business jet these days, and the percentage of the fleet that's parked is starting to approach pretty decent levels. We are seeing that at CMC because the things like electronic flight bags are – I will put them in the discretionary category. So, whereas we start out very strong on electronic flight bags, we have seen activity moderate in that. A lot of our successes across the corporation though on business jets are recent wins. So we are hoping that we can get these things through into production and benefit from them. So, we will feel the impact, but I don't think to the extent that you read that the business jet market is falling off. One other thing Eric, while I got you on the line, on the electronic flight bag. Boeing approved two electronic flight bags for the 737 next gen, and one of them is what I call a very extensive high-priced model, and we are in a different class category, and we think we are going to do, we're going to do some business with these guys. So, I see it offset to the business jet issue.

Eric Hugel – Stephens Inc.

Great. Have you guys started the Korry move to the new facility or is that still ahead of us?

Robert Cremin

Well, Bob and I were just up there and the shell of the building is up. Within a month, it will be closed up and heat will be applied, it is lit. We are still expecting to move in the, let's say September-October timeframe.

Robert George

And Eric, I am going to tell you, I was joyed. Finally, we can move from three separate buildings in downtown Seattle spread out over multi-floors with our employees crossing traffic. We're going to finally lay this out in a lean fashion and do things proper. So on target, on budget, we like it.

Eric Hugel – Stephens Inc.

Yes, I remember when you guys took me through there it's a bit of a maze. So that sounds great.

Robert Cremin

Being fine when you say maze (inaudible).

Eric Hugel – Stephens Inc.

With regards to the sales, did you give – I don't know did you give an organic growth number?

Robert Cremin

Eric, no I didn't, largely because sales were down.

Eric Hugel – Stephens Inc.

Okay.

Robert Cremin

So, I mean – and the only acquisition sales we had in there really were NMC, which were relatively minor.

Eric Hugel – Stephens Inc.

Okay, so it's mostly, I mean, just basically in order to get the gist, we have to adjust for the extra week and make some kind of, you know, obviously, we understand sort of what's going on with Boeing and all that stuff, but –okay, fair enough and can you talk about – I guess you restated some of the segment information I guess from last year. Did you – you didn't give – you gave this year's operating income by segment but can you give last year’s also?

Robert Cremin

Oh, sure. Sure you're right, because of the discontinued operations. Last year's segment income for first-quarter 2008, Avionics & Controls 15.5, Sensors & Systems 12.4, Advanced Materials 15.6.

Eric Hugel – Stephens Inc.

Great, and can you give cash flow from ops, D&A and CapEx.

Robert Cremin

Cash flow from operations was about $4 million, depreciation and amortization $14.5 million, CapEx $8 million.

Eric Hugel – Stephens Inc.

And what are your CapEx expectations for the year?

Robert Cremin

This year we are anticipating to be somewhere in the $75 million to $100 million range.

Eric Hugel – Stephens Inc.

Great, thanks a lot guys.

Robert Cremin

Largely due to the Korry facility that you referenced, as well as the replacement Wallop facility in the UK.

Eric Hugel – Stephens Inc.

Great, thanks.

Operator

Thank you. Our next question comes from J.B. Groh of D.A. Davidson. Please go ahead.

J.B. Groh – D.A. Davidson

Good afternoon guys. Most of my questions have been answered, but I just got a couple of little housekeeping ones. Bob, you mentioned that the 18% tax rate. Is that for the full year or the next three quarters when you talk about that?

Robert Cremin

That will be for the next three quarters, each of the next three quarters.

J.B. Groh – D.A. Davidson

Okay. And your prior guidance was kind in the mid-20s.

Robert Cremin

Yes, it was 23 to 24.

J.B. Groh – D.A. Davidson

And so how do we reconcile the difference between those two numbers?

Robert Cremin

Okay. The primary reason for the decline is again this comes back to a US GAAP requirement. The foreign exchange losses that were incurred in the first quarter under FIN-48 they need to be spread out over the full year, over the remaining portions of the year. So the tax results for the first quarter only include approximately a quarter of the tax benefit from those, call it debt from those foreign exchange losses. Let us call it the tax yield. The balance of that benefit will be allocated over the second, third and the fourth quarter. So that's why we went from about 23.5% effective rate projected in December to 18% for the balance of the year.

J.B. Groh – D.A. Davidson

Okay. And then obviously the $3.70 to $3.90 that includes the discontinued ops, correct?

Robert Cremin

No. When you say includes you actually mean excludes or has been restated for the discontinued ops.

J.B. Groh – D.A. Davidson

The $3.70 to $3.90 is continuing operations EPS or –

Robert George

It is continuing operations only.

J.B. Groh – D.A. Davidson

Okay, got you. Okay that's all I had. I ran out of creative ways to ask you about the acquisition, so we will leave it at that. Thanks.

Robert Cremin

We will give you some one liners and we appreciate that. We always feel we have competitors listening. We get a little paranoid.

Operator

Thank you. Our next question comes Alan Robinson from RBC Please go ahead.

Alan Robinson – RBC

Good afternoon.

Robert Cremin

Hello Alan.

Alan Robinson – RBC

Bob George, I think I overheard you, sorry Bob Cremin, I think I overheard you mention something about resets. Could you provide a bit more color on what you’re hearing and seems if military reset spending opportunities?

Robert Cremin

Yes, I think you know, the number of hours put on planes, tanks, mobile equipment in Iraq was very extensive. It was very hard for military to pull things out of service. So, as a result there was lot of grinding up in sand and there was a lot of extra hours put on them. All this rework has to be done. To me reset means rework, rebuilding, retrofitting and I think a big area for us will be helicopters. I think, we are well positioned to contribute a lot of parts in that respect.

Alan Robinson – RBC

I mean, what are you hearing in terms of tangible opportunities. Are you being approached to sort of you know, dust of your operations and get ready or is this something that is a lot further down the line.

Robert Cremin

I think it's a lot further down the line. If you take like on the M1A1/M1A2 main battle tanks, we are already booking (inaudible) for those units. We're getting into, I think a little above what I would have expected, order rates in ammunition on artillery on mortars. The Blackhawk is going to be a very attractive program. I think we're going to be in a good position. So, you're not talking about two years out, you're talking about product flowing this year and building over probably the next 2 to 2.5 years.

Alan Robinson – RBC

If there is a migration of material from one theater of operations to the other. Is that going to accelerate the reset spending or delay it. I'm talking about the potential of moving you know, equipment received from Iraq to Afghanistan.

Robert Cremin

You know, it is my prediction okay, and my prediction is that a fair amount of older equipment will be left in Iraq to help stabilize the military there, and if that's the case there still is going to be a need for retrofit work. So, we will benefit from that. We are attached to that equipment. The newer equipment will be shipped into Afghanistan. It is going to be a very demanding high altitude type warfare, and we get our normal parts business from that. But I see a lot of that the older equipment being left behind.

Alan Robinson – RBC

Okay, fair enough, and then could you broadly discuss how you have been impacted by the general decline in commodity prices over the last few quarters particularly with respect to your cost of goods.

Robert George

Well, if you look at the price of fuel and we've got a little link there on elastomers, we benefited from it. You know we – a lot of what we deal in our common materials, we don't do much titanium. We are not too dependent on foundries. So, I don't see us getting hurt on the uprise, and I don't see us suffering much on the decline. You know.

Alan Robinson – RBC

Alright, thank you. I will step back in.

Robert Cremin

Yes.

Operator

Thank you. (Operator instructions) Our next comes from Howard Rubel of Jefferies & Co. Please go ahead.

Howard Rubel – Jefferies & Co.

Thank you. Could you again sort of talk about, you know, you’d had this relationship with Canada, where you were going to be able to get some tax benefits and now it's turning sort of a longer term loan, is there anything really more to add to that Bob or this is where it sort of stands?

Robert Cremin

Howard, I think that has been settled. We – the SADI program, CMC had been approved by the Canadian government. We knew that, that was formally announced, I believe, in early January. We had extensive discussions with all of the accounting experts and we're down – we are firmly on the point that it will have to be accounted for as liability accounting. So, essentially the balance sheet will be grossed up as we receive those funds, and then at some point and for the next five years, we have been approved for slightly over $50 million worth of assistance from Canada under that program. As we received those funds that will go on the balance sheet as a long-term liability. After five years, the program will then be assessed and the repayment mechanism will be determined at that point in time. As we begin to repay Canada, then the liability will be reduced at that point in time. If it is determined along the way at some point in time that the full amount will not be repaid, then the unpaid balance will be returned to the P&L.

Robert George

And our focus Howard is to upgrade technologies in the cockpit, you know, we've got a lot of vital components and we have some great ideas for new technological advances in those.

Howard Rubel – Jefferies & Co.

Just one follow-up and I know I'm going to push the envelope here a little bit on CMC. I mean it has not been as profitable as you would like it to be. Are we starting to see ex the R&D, the business become profitable?

Robert Cremin

To be honest with you, we can say we’ve got a lot further to go.

Howard Rubel – Jefferies & Co.

Could you help me a little bit more than that. So this is the part of the reason, why you feel comfortable with the guidance numbers Bob.

Robert George

Howard, this is Bob. I’ll jump in here in looking at CMC. One thing quite frankly that we are getting a benefit from right now is benefit at the currency. If you recall at the time of the acquisition, the Canadian-US dollar relationship was about $0.87. It is now lower than that. During the first, approximately 12 to 15 months or so of our ownership, the Canadian dollar strengthened strongly against the US dollar and last year whereas portion of last year was actually at parity or above. So, we're getting some benefit on the FX side. We clearly have communicated internally and to the organization and are working on the issue that operationally we think as Bob has earlier stated very clearly that there is a long way to go and we think there is a lot of improvements that can be made.

Howard Rubel – Jefferies & Co.

Just to complete that, so are you seeing some of that, I mean, it's hard to tell in the quarter given the fact that some of the business was down elsewhere but, I mean you know, if you – you know, as you sit and have the management review with your executives, is there a noticeable change ex the FX, excluding the FX in the profitability of this business.

Robert Cremin

In the fourth quarter of ‘08 and in the first quarter of ’09, CMC’s performance improved from where they had been before. I'm not going to get into discussion of, you know, how much of it was operational, much of it was cost driven, how much of it was price even, how much was FX, but in the fourth quarter and first quarter their performance did improve.

Howard Rubel – Jefferies & Co.

But it sounds like you're sending a message to them that you're not satisfied with where they are.

Robert George

Well, we have a standard and we have a long way to go.

Howard Rubel – Jefferies & Co.

That's good. Thank you.

Operator

Thank you. And our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.

Robert Spingarn – Credit Suisse

I wanted to just go back to margins. I'm not sure that we actually really talked about that, but Bob George you gave operating margins for the three segments and I wanted to with some of the puts and takes that are in there, could we walk through margin expectations going forward as you compare to this quarter?

Robert George

Well we, now Robert I just want to make sure I am clear, are you talking gross margins or segment margins.

Robert Spingarn – Credit Suisse

I'd rather do it on a segment basis.

Robert George

And I figured you would. Okay looking – and let's stay at a high level first and see where we go from here and just talk about what I said with each of the segments. I said the Avionics & Controls and Advanced Materials were performing reasonably well, okay when you look at their performance. The big difference in advanced materials on a year-over-year comparison was due to the fact that we had a large international order in the first quarter of ’08, and is not scheduled until the second and third quarter of ‘09, and in Sensors & Systems, we had some aftermarket impacts so that their percentage margins were down. So going forward, we are comfortable with making the adjustment, if you will for the large activity in Advanced Materials. We are comfortable that our margins in Avionics & Controls and Advanced Materials are holding and are likely going to continue in that vein.

Robert Spingarn – Credit Suisse

So Bob, let's just be specific than, in other words I hope these are right but with the restatements and so on I might be off a little bit here. You were in the 12% to 13% range last year in Avionics and about 16% in Advanced Materials?

Robert Cremin

That sounds correct. I don't have the exact numbers here in front of me, that is why I as trying to stay at a higher level.

Robert Spingarn – Credit Suisse

No, but there are a lot of moving parts, the disc ops, all these various things in here, the currency, and so I thought we just simplify it to get a sense of to what extent first quarter margin performance looks like in the next nine months.

Robert George

Okay. On that point we are – again given our guidance and given the fact that we knew we were starting slow. We are anticipating margin performance to firm as we go through the year. That's due to a couple of things, not the least of which is the fact that we worked through the aftermath of the Boeing strike. Don't forget in November and December as we have already said, November-December for us started out very, very slow and then we saw January begin to firm up. Additionally, we are going to have the benefits of those higher volumes going forward and the overhead absorption as we go forward as well.

Robert Cremin

Yes, let me go a little bit further. If you take the first quarter, Robert, parts were a little slower; parts have a higher negative gross margin. We still have LTAs, long-term agreements, that are coming up for renewal and we're able to push those little bit in terms of improving margins. In the first quarter, when you go into places like materials or finishing operation, when the volume folds up because of the Boeing strike you get hit on the burden absorption, and we have said as we go through the remainder of the year, as we approach the fourth quarter, we're going to run more volume through our plants, so we should do a little better on burden absorption. So, I'm totally with Bob. We get firming as we go.

Robert Spingarn – Credit Suisse

Okay, that's very helpful. And then just more of a housekeeping question. Bob, should we think of, you know, interest expense to kind of carry along here flattish for the remainder of the year. You don't have any debt adjustments at any point, pay down?

Robert Cremin

That is a great question Rob. At the present time, we do not have – not at the present time we have no debt requirements that we need to pay down in the year. Our capital structure is nicely laddered, we are looking at a revolving credit agreement, which we have tapped into a little bit that is prepayable at any time, but we have capacity on that. We've got cash that we are sitting on, and then we have two bonds that are not due until 2013 and 2017. So from that standpoint I would say that it is fair to look at interest expense and say that you can just flat line it through the year. We are looking at some options on our capital structure with our bank group, but that's just looking at adding flexibility to the company going forward and strengthening an already strong balance sheet.

Robert Spingarn – Credit Suisse

Okay, and then just lastly J.B. asked about this before, on the tax rate, I want to clarify. If you do 18% for the rest of the year, in other words the final three quarters with the 15.8% or 16% you just did, will come at a blended rate in the low 16s or 18% for the full year.

Robert Cremin

Good clarifying question, thank you. No, we would be looking at you know, 15.8% that we did in the first quarter and then for simplicity, just say, 18, 18, 18.

Robert Spingarn – Credit Suisse

Okay, so blended rate in the low 16s.

Robert Cremin

Yes, I haven't done the math, but that would probably be about right.

Robert Spingarn – Credit Suisse

Okay, thanks very much.

Robert Cremin

Thank you.

Operator

Thank you. Our next question comes from Vinit of Snyder Capital. Please go ahead.

Vinit Bhatt – Snyder Capital

Hello Bob. Just a question on your pension funds. I think you are under funded by about $80 million, $90 million and you had a rough time in the equity markets. Did your funding status change significantly over the past several months?

Robert George

Well, Vinit, this is Bob George, you are absolutely correct. Our funding status has changed along with virtually every other pension plan in the US. We've been affected by the overall market conditions. In looking at our plan, we've gone from an over funded position to an under funded position and –

Vinit Bhatt – Snyder Capital

Can you give us the dollar amounts please?

Robert George

I don't have those in front of me Vinit. Sorry.

Vinit Bhatt – Snyder Capital

Okay. And do you have an estimate of what's your pension expense of this year would be per share versus last year, and also the cash contribution towards the pension. I'm particularly worried about the European pension plans where you – I think you have to make immediate cash contributions if there is significant under funding.

Robert George

No, we don't have any issues with our European plans. Okay, let's take that one off the table. You don't even go there. We have no issues on the European plans. The two primary plans that we have in place we have obviously our US operations and we have Canadian operations. Canada is similarly fine. In terms of looking at our plans and assessing what our cash contributions for them are, we're currently working through that with our actuary, and we've got that factored into our cash flow forecast but I'm not going to disclose the amounts at this time because it is still preliminary. And in looking at our pension expense, as I have said, we had an incremental $3 million of pension expense in the first quarter over the last year.

Vinit Bhatt – Snyder Capital

And your guidance for the full year includes your, what would be pension expense for this year?

Robert George

Yes, it does.

Vinit Bhatt – Snyder Capital

Okay, and could you tell me what your pension expense was last year.

Robert George

Offhand, I'm going to use round numbers, because I don't have the exact number. I think it was about $2 million.

Vinit Bhatt – Snyder Capital

Okay, thank you very much.

Robert George

Thank you.

Operator

Thank you and our next question comes from Tyler Hojo – Sidoti & Company. Please go ahead.

Tyler Hojo – Sidoti & Company

Hi, just a couple of you know, kind of follow-up question here. When did the Racal acquisition close?

Robert Cremin

Let's just say Tyler for accounting purposes it closed the first day of the second quarter. Actually it closed in the middle of the last week of our fiscal first quarter. And so will be treating for accounting purposes beginning in the second quarter.

Tyler Hojo – Sidoti & Company

All right, that makes it easy, and then just – there were a couple of one-time items in the first quarter. So, you know, I'm just kind of looking at what you are looking at is being kind of the number in your $3.70 to $3.90 guidance for 1Q.

Robert Cremin

I must be tense. I'm not sure I understood your question.

Tyler Hojo – Sidoti & Company

Yes, I don't think I asked it very well. So, you had a couple of one-time items, you had kind of some FX in there, you had a little bit of a tax benefit. So I'm just – are we – should we look at 1Q as being kind of a GAAP number that is implied in the $3.70 to $3.90 guidance, are you including any of one-time items?

Robert Cremin

And thank you for asking the question. As is always the case with us, transparency is our rule and so we are using that GAAP number in our $3.70 to $3.90. We would not make any adjustments for our one-time items.

Tyler Hojo – Sidoti & Company

Very good, thank you.

Robert Cremin

Thank you.

Operator

Thank you, and our next question comes from Alan Robinson of RBC Please go ahead.

Alan Robinson – RBC

I'm not sure that – if that’s confused more or not, so just again with your $3.70 to $3.90 guidance, does it exclude or include the $0.52 from discontinued operations in the first quarter?

Robert Cremin

Okay, that's a different question than the one I thought I just answered and it excludes, $3.70 to $3.90 excludes any discontinued operation’s results. So it is $3.70 to $3.90 from continuing operations.

Alan Robinson – RBC

So effectively your GAAP guidance is $0.52 higher?

Robert Cremin

Oh, okay. I see where, you could have gotten that from Tyler. Yes, and I promise you to clarify that. Thank you for asking that question Alan.

Alan Robinson – RBC

And then just finally I get a sense that your view of R&D spending this year as a percent of revenues is up a little bit compared to what you are looking at in December. Is that correct and if so what has caused that?

Robert Cremin

No, I think that our view of our R&D spending this year is consistent with essentially the message we've been sending for, I guess probably 6 to 9 months now, where we have looked at it coming down to a more normalized level. You might be asking about the 5.5% versus the 5%.

Alan Robinson – RBC

All right.

Robert Cremin

That, you know, we're still looking at a range in and about the same level that we had in our models back in December.

Alan Robinson – RBC

Okay, that's all I have. Thank you.

Robert George

Yes, I have another thought on that. And that is, you know, we have programs that rollover, we are completed. We have new ones that come on. We had not mentioned, but we are the winner on the sensors package for the Rolls-Royce family of A-350 engines. Over the life of the program, this was going to be a $400 million, $500 million program and we are prepared to step up to the normal NRE that we have on something like that. So, you know, one program we exit, you know, we're getting the shipping, and the next one is coming through the door. But, we are really pleased with this A-350 win. This is a good program for us.

Alan Robinson – RBC

All right, sounds good. Thank you.

Robert George

Thank you.

Operator

Thank you and our next question comes from Eric Hugel – Stephens Inc. Please go ahead.

Eric Hugel – Stephens Inc.

Hi guys, can you talk about what your cash flow from operation expectation is for the year?

Robert George

Eric, that's a good question. I'm still working through it. We really don't – we have not changed really our expectations, I mean again you know contrary to a lot of the dialogue going on back and forth here, which is really comparing an extraordinary first quarter in 2008 for a whole variety of reasons to a first quarter in 2009, that is in a different day and a different time and different set of expectations. Let's not forget that we are maintaining our guidance based on what we see right now, and our performance in the first quarter was, you know, was normally better than what we had anticipated. So, I think we are looking at you know, I can't remember the exact numbers of there but we are working through those primarily to see whether or not the foreign exchange effects have impacted it, and that's what we're trying to work through with our international business units right now, and why I'm not being overly precise.

Eric Hugel – Stephens Inc.

Fair enough, and I guess for Bob Cremin, I guess, keeping your guidance flat with where you're looking for last time, but a lot has changed in the world. I mean can you address sort of if you had to sort of think about, you know, how the degree of comfort – how comfortable you are, sort of where you are today versus where you were when you gave the initial guidance, in terms of you know, where the business is versus where the market is relative to your guidance?

Robert Cremin

You know, I'm feeling about the same. All I can do is, give you my feelings based on what I see. I like our position in defense. You know, we're picking up supplementals or countermeasures, picking up sales from new products eliminated rockets now for Malaysia and UAE. We've got new products that we are introducing in defense, Marine sound signals.

We actually are selling now a super Barricade Rocket that's going to go to India, new venture on our part would be search and rescue players for the Ministry of Defense. If you go over to engineered materials, one of the real attractions of (inaudible) was their high-temperature expertise. We liked, even though the oil patch prices were down, we really like their position in the oil patch, and on engines and on what I call, IR signatures. You know, they've got real skills in fire protection, suppression of heat from exhaust systems, exhaust silencers, or even putting (inaudible) on to the F-18. So, I hope you're getting a feeling here that we should be talking more about the new products that are coming in, that from my point of view are offsets to things like business jets that are slow compared to where we made the first forecast. You know, put them all together in a hopper, and shake them. I think our visibility is okay for ’09, and that's why we think right now this guidance makes sense.

Eric Hugel – Stephens Inc.

Great, and can you just give us an update as to sort of where the process is on Wallop?

Robert Cremin

Are you referring to the new building Eric?

Eric Hugel – Stephens Inc.

Leave the new building, I guess the whole sort of timing of the introduction of the new multispectral flare and all that stuff.

Robert Cremin

Yes, I think a week ago we were still on target to have the plant up and running. Spectral flares are still looking pretty good. We're getting good test results on them. What we are finding in the case of Wallop, is shipment timing where, you know, a good chunk of what they are going to ship goes out in the last couple of quarters, and when the new plant comes on line it ships a brand-new product to us. Keep in mind, the old days where you just shipped to a dock, and invoice they are gone. Now Homeland Security is an issue in the United States. They don't want combustibles hanging around the docks, so you get into a precise timing and arrivals and, you know, if you miss the ship you miss the quarter, and very often you don't get paid until they are flown and tested. But you know, put all that together, we think we've got a very healthy year in that side of the business.

Eric Hugel – Stephens Inc.

Great, thanks a lot guys.

Robert George

Eric, let me just mention there is two. If you go on, you’re asking questions about, someone was asking questions about cash flow before, and a lot of these questions are focused within the quarter or the year. We have not mentioned but we did conclude and sign another long-term agreement where we now will be on the CFM-56 engine for the life of the program. This is a 10-year agreement. This is an attractive program to us, and you know it's a feather on the cap to our people in Europe that tie this thing up.

Eric Hugel – Stephens Inc.

Great, does that require like an upfront cash investment or is that –

Robert George

No.

Eric Hugel – Stephens Inc.

Great, thanks a lot guys.

Robert Cremin

Okay Eric.

Operator

Thank you, and our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.

Robert Spingarn – Credit Suisse

At the risk of coming back the third time I thought I'd ask another question about earnings.

Robert Cremin

Okay Rob, we're ready.

Robert Spingarn – Credit Suisse

Okay, you did $0.38 in the first quarter. That's the number you are going to use in getting to your $3.70 to $3.90 full-year. Okay, I think we figured that out. Right, you're confirming that?

Robert Cremin

I am confirming that, yes.

Robert Spingarn – Credit Suisse

And you said last time, three months ago, that the first quarter would be slow, it would be weak, but I don't think you were thinking if was going to be only 10% of earnings, and we've had a couple perhaps unexpected events where we had lower tax rate, we had the foreign currency loss of $0.06, you know, and few other things. Is that fair?

Robert George

Actually, Bob is chomping at the bits, so I'm going to let Bob answer that one.

Robert Cremin

It beat our expectations. Our budget was less than the $0.38.

Robert Spingarn – Credit Suisse

Okay is that sort of – so in other words you were planning on earning less than 10% of the year in the first-quarter?

Robert Cremin

Yes, we were. And I don't even talk about the Chinese New Year in addition to Christmas, Thanksgiving, snowfall and everything else Robert.

Robert Spingarn – Credit Suisse

Okay, I wanted to just clarify that because it would seem to me that that's, you know, even for companies that normally ramp, that's really at the low end of expectations, and where I was going to go on. I think this question was asked earlier at least someone was heading in this direction. What would a normalized number be? In other words, if we take out some of these one-timers, what would a normalized number for the quarter have been? But it sounds like you got where you wanted to get.

Robert George

We did and in yesterday's – our process internally before we release earnings is we have a detailed review with our audit committee, and in our discussion yesterday with the audit committee, we had a totally different dialogue than the one we're having today. We went through the comparative purpose, you know, purposes to last year fairly quickly and then we talked about, you know, where we are relative to what we anticipated this year and quite frankly, I mean what we had in this particular quarter was just even for us, was an incredible number of moving parts. And what we found is that in the areas where we were somewhat weaker, mostly commercial related, our defense side and some of our other activities more than picked up the slack, and we moved through very strong. The other thing too and I think and I didn't do this detailed analysis, but don't forget when you look at last year's incredible strength that we posted, the tax effect alone last year was incredibly dramatic.

I mean, with us having a slight credit in the year. That, even though we recorded a $1 share last year, that tax credit was a big part of that. This year, of course, we didn't have the benefit of that. We had a gain on the termination of a swap last year in the first quarter. This year we had a foreign exchange loss in the quarter. So, when you look at it from that perspective and if you now I am coming full circle back to the question that someone asked on normalizing, and I can’t remember who that was, but if you normalize it on the operating profit level, yes, we were down from last year but not, and this is why I said at the end of my prepared remarks, the $0.38 on the face of it looks like it is significantly different, but on a normalized level, it is not all that different than our usual first-quarter performance, and then when you factor in the aftermath of Boeing in November and December, which we think is going to be smoothed out over the balance of the year, it is probably not as dramatic for Esterline as it might otherwise look.

Robert Spingarn – Credit Suisse

Where I'm going with this, is if you thought you were going to do $0.38 or some number about that that reflects the unexpected one-time items, then why doesn't the Racal acquisition increase the guidance, unless it just moves you from just one end of the range to the other? Right, because effectively Racal, I think you said earlier in the call, Racal offsets any kind of weakness?

Robert Cremin

I think Bob used the term insurance policy, and as we have said and Bob had said a number of times, we are not immune to the effects that everyone else is feeling. We're working right now on the information that we have. We are working on the backlog position, the visibility to the orders, and the acquisitions that we have made NMC and Racal, add a nice little bit of insurance, and besides that we figured that if we increased our guidance in this environment you guys wouldn't believe it.

Robert Spingarn – Credit Suisse

And the other thing is, and I realize Racal is only around 3% of sales or so, but again if you were honing in on a number of $0.40 or $0.50, the Street was at $0.80. And we were forecasting a GAAP number, at least I was. And that was a little below that, but clearly the quarterly flow was far different than what the Street was expecting.

Robert Cremin

We never forecast by quarter.

Robert Spingarn – Credit Suisse

Apparently not.

Robert Cremin

Yes.

Robert Spingarn – Credit Suisse

And we know that you don't, but that's it – but there is a big disparity in my mind, and tough to get your arms around.

Robert Cremin

Yes, Rob, again going back to my prepared remarks, and the way I started, we did have a lot of conversations leading up to this call about whether we should try to reconcile our forecast, our budget, our expectations for the first quarter to the Consensus estimates. And we fundamentally collectively agreed that, look our position, the corporation's position is that we provide annual guidance on EPS, and we recognize our results as you guys do. You recognize the results, tend to be spiky once in a while, and we're going to talk what our results are, and what our full year guidance is.

Robert Spingarn – Credit Suisse

So, I guess, I can't ask you about the remaining $3.40 that you are going to earn, is it about equally divided between the three quarters.

Robert George

You could ask, but you are not going to get an answer.

Robert Spingarn – Credit Suisse

Okay, fair enough. Thank you.

Robert Cremin

Yes, Rob. We will be chasing our tail, you know, what happens if we have this like last year ’08, big shipment into the Middle East, and then the next quarter it is not. You know, we would rather just say, here is the year, and this is what we are going to perform to, and yes, Racal will add at the end of the year, then we're going to go through the normal acquisition accounting. It's nice to have, it is going to put steel beneath our forecast, no.

Robert George

I mean, you know, Rob, you know as much about the company as anyone as. All of the people on the call do, you guys analyze the companies, the space, and everything else. You know, that I'm not telling you anything. You don't know that Esterline’s historic pattern is we start the year slow, because of the anomalies of our fiscal calendar, and to have a pretty good second quarter. We then deal with the European holiday season in the third quarter, and as almost every publicly traded company in the world, we have a strong fourth quarter.

Robert Spingarn – Credit Suisse

It is a different pattern. Thank you.

Robert George

It is. I will certainly agree to that. It drives us crazy too Robert.

Robert Spingarn – Credit Suisse

Thanks very much.

Robert George

Thank you.

Operator

Thank you. And now gentlemen there are no further questions. So, I will hand the call back over to Robert Cremin for closing remarks.

Robert Cremin

Hi, guys. Thanks for your interest in Esterline. If you have any questions, come on back at us, and we look forward to speaking with you again next quarter. Bye-bye.

Operator

Thank you. Ladies and gentlemen, this does conclude your call for today. We thank you for your participation. You may now disconnect your lines and have a great rest of the day.

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