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Executives

Brian Keogh

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

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

Analysts

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Tyler Hojo - Sidoti & Company, LLC

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

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

Michael Callahan - Topeka Capital Markets Inc., Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Esterline Technologies (ESL) Q1 2013 Earnings Call February 28, 2013 5:00 PM ET

Operator

Good afternoon, and welcome, ladies and gentlemen, to the Esterline Technologies First Quarter 2013 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] Also, a replay of today's call will be available for 1 week by calling this toll-free number: 1 (888) 286-8010. You'll need the following PIN: 70296032. At the request of the company, we will now open the conference -- we will open the conference up for questions and answers after the presentation. [Operator Instructions] I will now turn the conference over to Mr. Brian Keogh. Please proceed, sir.

Brian Keogh

Thank you, and good afternoon, everyone. Brad Lawrence, Esterline's Chairman, President and CEO; and Bob George, our Chief Financial Officer, are here today to discuss Esterline's first quarter 2013.

In addition to the number that Severly gave you a minute ago, you can also visit esterline.com in the Investor Relations section to access a webcast replay of this call. As always, I need to remind you that our call today contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. As you know, forward-looking statements always involve risks and uncertainty, which we detail on our public filings with the SEC. [Operator Instructions]

Thank you again for joining us today.

And now I'll turn the call over to Brad.

Richard Bradley Lawrence

Good afternoon, and thank you for joining us. First, I would like to apologize in advance for my scratchy voice and a likely occasional cough. I'm in the process of recovering from a pretty tough winter cold. That said, I'm pleased to report a solid first quarter. Operationally, we produced earnings per share of about $0.70. On top of that, we benefited about $0.11 from tax credits. Bob will get into those details in a few moments.

At this point though, I think it's fair to say, when looking at the full year, we are right about where we need to be. We continue to believe that our fiscal 2013 will follow our recent pattern, by starting the year slowly and finishing strong. Our second quarter should show some progress over Q1 and then we really begin ramping up to a very strong fourth quarter.

I'm pleased to note that our order book grew 6.5% compared with last year. Our backlog now stands at $1.3 billion and we see some good opportunities to build on that number, adding to the confidence level for the back half of the year. We have good visibility on a number of discrete growth opportunities, again, particularly in our second half. These include commercial programs, increases in a couple of key defense programs even in this constrained environment and strong positions in adjacent industrial markets like high-speed rail, nuclear power, where our technology is increasingly important.

There also continues to be potential wins outside of our forecast that could either make up for variances on our budget or if the stars line up, give us opportunity to outperform. As a result, we continue to be comfortable with our previous view of the full year, which I want to be clear, includes our best analysis of the impact of anticipated defense spending reduction.

Consistent with my comments about a slow start and a strong finish, our first quarter sales were $458 million, down about 3% versus last year. On a segment basis, as expected, Avionics & Controls performance was down compared to last year, but turned in a respectable first quarter and we're pleased with their steady performance. Although we've yet to see any significant new orders developed for our large transport category cockpit retrofit offering, we continue to be patient and well positioned. In the meantime, we're back to hitting solid singles in the turbo-prop and jet trainer category. As you might have seen today, we announced a contract awarded by KAI, that's Korea Aerospace Industries, to supply our Cockpit 4000 for 20 new turbo-prop aircraft for the Peruvian Air Force. We're encouraged by our relationship with KAI, their KT-1 basic trainer is an excellent aircraft and they see a market in South America alone for about 200 basic trainer.

To date, our integrated glass Cockpit 4000 is installed on over 250 aircraft, including turbo-prop and jet trainers, as well as light attack aircraft for customers in 8 countries. This number includes Beechcraft's ongoing contract with the U.S. Navy for the T-6B, and a recently completed contract with KAI for 40 aircraft for the Turkish Air Force.

Shifting back to segment performance. Avionics & Controls margins also benefited from lower R&D expense this quarter. Our Sensors & Systems segment matched last year's revenue performance, with a full quarter contribution from Souriau in both periods, and profitability in this segment moved up. Regarding Souriau, we're pleased with the integration progress. This business is now firmly embedded within the Esterline structure and intercompany activities are well underway.

Finally, in our Advanced Materials segment, we are feeling the pressure from slowing defense markets. Revenues in this segment were down about 7% in the quarter compared to last year and margins were impacted primarily due to reduced demand for certain Defense Technologies products and the residual effects of the F-35 inventory rebalancing we have discussed on past calls.

As anticipated, the operating contribution from the Advanced Materials segment, while still significant, was a good deal less than in the same period last year. Overall, however, we're generally satisfied with the first quarter and maintain a positive view of the full year.

I'll reserve some comments about our business environment for closing remarks and ask Bob to walk through the results in some detail now.

Robert D. George

Thanks, Brad. Good afternoon, everyone. We did enjoy a nice quarter open this year. Bottom line results were ahead of plan. We had a few unexpected tax benefits courtesy of Congress and Esterline's global tax structure and strength returned to a couple of our key platforms that lagged a little in 2012. As I said last year at this same time though, yes, we had a nice quarter but there's a lot of ground to cover and we're not going to get carried away. Besides, with the competing crosscurrents in the news these days, everyone's crystal balls are a little bit cloudy. Let's take a look at our first quarter results in more detail.

If we start with sales at the consolidated level, we were down about 3%, as Brad mentioned, from $471 million last year to $458 million this year.

Moving to the segment level, performance was about as expected. Avionics & Controls sales were down slightly as we saw some weakness in our Defense business at our Avionics and Communications platforms. This was partially offset by a strengthening result in the Controls platform.

Sensors & Systems segment sales were flat as we projected. We look at the 3 platforms there, we were soft in Advanced Sensors, consistent in Connection Technologies and strong in Power Systems. And as Brad indicated in his comments, Advanced Materials felt particular pressure from slowing defense markets. Sales in this segment were down about $8 million. We anticipated reduced sales here for 2 primary reasons: one, we had an exceptionally strong quarter last year at our Engineered Materials platform; and two, we expected pressure in our Defense Technologies platform.

As we discussed in December, we expected and budgeted for a slow start to the year, building gradually from Q1 to Q2 and finishing strong in Q3 and Q4. Our sales projections for Q1 were in the range of $450 million to $480 million, and full year sales were about $2.1 billion. We haven't changed this assessment.

Gross margin performance followed our sales growth [ph] pattern, down in line with sales from the exceptional level we achieved in the fourth quarter last year, but up 150 basis points from last year's first quarter. Similar to my comments on sales, gross margin rates were down in Avionics & Controls and Advanced Materials while they were up strong at Sensors & Systems. In Sensors, comparisons to last year benefited from last year's purchase accounting at Souriau. Fiscal '12's first quarter for Souriau was impacted by the final entries on recurring purchase inventory values. In Avionics & Controls, segment gross margin fell due to reduction in cockpit sales and communication products. Partially offsetting these effects was a rebound in our margin performances in our Control Systems platform. Advanced Materials margins faced a tough comp to last year due to very favorable product mix and higher sales in the prior year.

Selling, general and administrative expenses were $98.6 million in the quarter. This spending is right in line in the prior 4 quarters. As a percentage of sales, however, SG&A increased to 21.5% in the first quarter. It was largely driven by the relatively lower sales volume in Q1 compared to annualized sales volume.

Research and development expenses in the first quarter were down from last year's $26.4 million or 5.6% of sales to $23.1 million or 5% of sales this year. This decline was primarily seen in our Avionics & Controls segment and is a combination of the normal maturation curve of some of our projects and the beginning of the hardware delivery phase of test units to customers.

On a consolidated basis, segment earnings excluding corporate expenses were up $5 million from last year's $50 million. Last year, segment margins were 10.6% of sales, this year is $55.2 million or 12.1% of sales.

Individually, segment earnings, as you'd expect, follow the pattern of our discussion so far today. Thus, Sensors & Systems are up strong, Avionics & Controls off a little bit and Advanced Materials, down somewhat more substantially. If we look more granularly, within the Avionics & Controls segment, we offset some of the effects of lower sales with reduced R&D expense. In Sensors & Systems, the primary benefit quarter-to-quarter was the absence of purchase accounting entries this year compared to last year. And in Advanced Materials, we saw the drop-through effect of reduced sales of high-margin defense products.

Switching attention to taxes for a minute. Our income tax rate in the first quarter was 8.5% compared with 10.1% last year. As has been previously reported, Congress saw fit to extend the U.S. federal R&D tax credit, and this extension benefited us by $1.5 million. Additionally, we benefited from the settlement of uncertain tax positions related to U.S. and global tax examinations. Collectively, the overall effect of these changes at the bottom line was about $0.11 per share.

Looking forward, for each of the next 3 quarters, we're projecting an income tax rate of 21.5%. I also need to add that somewhere in the second half of the year, it's possible we could recognize approximately $4 million in discreet tax benefits resulting from settlements of tax examinations or the expiration of statutes of limitation. We'll recognize these as the discrete events become actionable.

Bottom line, first quarter of 2013, Esterline's net income was $25.1 million compared to $22.8 million last year, an increase of 10%. Fully diluted earnings per share were $0.80 compared to $0.73 last year. Our cash flow remains excellent. Cash flow from operations was $86 million compared to last year's $47 million, a tremendous cash conversion ratio. Free cash flow was $74 million compared to last year's $34 million. Capital expenditures were $12 million and depreciation and amortization were $28 million. During the quarter, we continued our aggressive de-levering and reduced our debt by nearly $40 million.

As we said in December, the year is not without challenges. Although Beechcraft has emerged from bankruptcy, the company has identified rolling furloughs on the T-6 program, and these will impact our second quarter. Commercial production is strong, but the 787 is still grounded. And although we have good visibility on our defense programs, sitting here 1 day before March 1 is an interesting position for tomorrow, quite literally, is another day.

However, returning to my opening comments and similar to last year, there's a lot of ground left to cover before the end of our fiscal year, and we are confident holding to our full year gun -- guidance. We believe we've taken an eyes-open look at our defense program. We see overall strong commercial production. Our adjacent market look good and our full year revenues continue to look solid in the $2.1 billion range. Brad, back to you.

Richard Bradley Lawrence

Thank you, Bob. I think it's important for everyone to understand a few things about the current state of the diversified markets that we operate in, that is commercial aero, defense and also our adjacent industrial markets. Certainly, we recognize that the commercial aerospace market can also face headwind, including uneven global economic growth, high fuel prices and possibly reduced availability of aircraft financing. And any discussion in commercial aircraft headwinds has to include the 787.

On that point, I'll say that Boeing's actions continuing to produce 787s at current rates indicates they believe they have a solution in sight and will resume delivery in the next couple of months. Yet strong overall demand for new passenger jets continues to propel the commercial aerospace sector, build rates for both narrow and wide-body aircraft continue to grow. The introduction of new, more fuel-efficient models, including the 737 MAX, has prompted large orders from major airlines. Here in the United States, the recent announcement of a merger between US Air and American Airlines signals continued business improvement. Internationally, we continue to see high levels of demand for new aircraft, especially in a number of key emerging economies. And even the business jet environment is getting healthier. The large cabin segment, where we have the most content, looks to be gaining some serious traction. I found it interesting to note that Gulfstream had recently reported robust flying hours across its installed base. And just last week, Bombardier reported nearly 315 new bizjet orders in 2012 compared to just about 200 the previous year.

The defense market is obviously a different story, primarily due to the uncertainty surrounding the U.S. Defense budget. While we're obviously right in front of some important defense budget decisions, we're confident that ultimately, these issues will be resolved with a continued commitment to a strong national defense. In the meantime, we'll work with our partners and customers to be as efficient as possible in maintaining readiness.

I think it's important to be clear that although roughly 40% of Esterline's total revenue is generated from global defense markets, only about 25% is related to U.S. programs. In any event, as I said at the outset, we're evaluating -- we have evaluated our business carefully at a very granular level, and we stay in close touch with our customers' program management. We believe we've reflected the risk in our planning and in our guidance for the year.

Finally, our adjacent industrial markets are increasing -- increasingly important to our overall performance. This includes the global high-speed mail -- rail market, nuclear power generation and others, including gaming equipment. In each case, we have proprietary technology and a number of significant growth opportunities. Taken together, while still small relative to other markets, this is where we have the greatest opportunity for near-term growth.

In China, the recent opening of the Beijing, Guangzhou line has high-speed rail projects back on track after more than a year of delay. In the U.K., we are building a new facility for our Darchem Engineering business in support of a plan wave of retrofit activity on nuclear energy plans. In the gaming market, we've recently completed the acquisition of Gamesman, a gaming component manufacturer which expands our global presence in this market.

In the year ahead, we expect to see our business track pretty closely with the environments I've just described, strong commercial aerospace, continued pressure on defense and growth opportunities in a diversified portion of our business. Even with the difficult-to-forecast environment for defense spending, Esterline is fundamentally a strong and well-diversified company. Our corporate-wide commitment to continuous improvement and implementation of Lean practices throughout the global enterprise is an integral part of that strength. We're constantly searching for ways to capitalize on best practices and efficiency opportunity. It's part of our DNA. As we have built Esterline over the last 20 years into an important player in the aerospace and defense industry, we carefully and intentionally diversified the business by market, by geography and by technology, avoiding dependence on any single customer, program or platform. With no single customer representing more than 10% of revenue and no single platform more than 5%, we are well positioned to perform regardless of the cyclical nature of our market. We've done it before, and as I've said, our guys know the drill.

Thank you. And operator, we're ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Brad, I believe at the end of the last quarter, you talked about $5 million of restructuring impacting the first quarter, I didn't see any mention of it in the release. Could you sort of talk about that? And then also while you target your R&D numbers, could you give us a sense of what you're trying to do with that G&A as a percentage of sales?

Richard Bradley Lawrence

Yes. Howard, firstly, I don't recall the $5 million number related to restructuring. In the first quarter, we did absorb about $1 million in restructuring costs and I expect there'll be some more of that as we proceed through the year. Our R&D expenditures, best as we can see it now for the year, should be just right around that 5% number. And we continue to work on reducing SG&A costs. And I believe as our revenues improve for the year, you'll see a likewise improvement in our SG&A percentage more back to a historical level.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And then a follow-up question on taxes, I mean, it's great to get the $0.11 or something like that. And again, maybe I'm mistaken but I think at that time, you provided the outlook it was uncertain as to the catch-up dollars and until maybe that's half of the $0.11 or thereabouts, but -- so you're sort of, I mean, I'm going to put words in your mouth, but are you sort of leaving that as an extra cushion for your outlook for the year because clearly, the full, we'll call it $0.11, I don't believe was anticipated in your initial guidance?

Richard Bradley Lawrence

Yes, that's correct, Howard. I wouldn't quite phrase it that way, however. We have an unusually broad range of guidance, which I believe is appropriate given the uncertainty of our markets and it's early in the year, we have a long way to go. And I just simply believe that we just don't have enough visibility at this point to start cutting things so finally as to make a guidance change over a $0.10 benefit.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

I get it. And I don't want you to get over your tips either in terms of finding out there's an opportunity to restructure and do something, and that would clearly allow for absorption of it.

Operator

Your next question comes from the line of Tyler Hojo with Sidoti & Company.

Tyler Hojo - Sidoti & Company, LLC

Brad, a question for you, first of all. I think 3 months ago, you were kind of indicating to us that you thought the defense portfolio would be up marginally this year. Is that still the view as you sit here today?

Richard Bradley Lawrence

It's a more difficult call. We did anticipate reductions in our -- in the U.S. Defense spending when we put our budgets together 3 months ago, and we also did not anticipate a full sequestration impact. We still don't know exactly what that means. Given the fact that it's been pretty clearly noted that obligated funds are not impacted by a sequester, which means that we can count on our backlog and it should not be affected. So the defense is a bit cloudy at the moment. We do have some positives, we do have some programs that are gaining traction both in the U.S. and offshore but to net that out as to exactly where the amount of growth for the year or whether it will be neutral is too close to call.

Tyler Hojo - Sidoti & Company, LLC

Okay, that's fair. And just as kind of a second question, you mentioned in your prepared remarks some opportunities to perhaps build on the $1.3 billion backlog. Saudi is still out there, what else are you kind of looking at the could move the needle?

Richard Bradley Lawrence

Well, we don't really have another significantly large program that we can point on, but there are a number of areas where we're seeing increasing demand. I did mention the rail markets and so there's a number of programs, as always, at this time in the year, that could turn out to be more robust than we had planned for. We feel like that our budget process and where we are right now is squarely in the center of our guidance and there's opportunity both -- on both sides of that.

Tyler Hojo - Sidoti & Company, LLC

Okay. In regard to Saudi Arabia, do you have any sort of update? I mean, do you have any sense of timing in regards to the follow-on there?

Richard Bradley Lawrence

Yes, we -- I really wish I could report something more firmly on that. All I can say that the word we get out of the Middle East is that, that program remains alive and the timing remains indefinite.

Operator

Your next question comes from the line of Michael Ciarmoli with Keybanc Capital Markets.

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

Maybe just a quick question going back to Howard's comment, I just want to -- again not put words in your mouth, but you guided at 55%, at the midpoint for the first quarter, you came in significantly higher so the back half of your guide, it looks like it's 25% lighter. I mean, I'm assuming again with kind of defense uncertainty, you're kind of just hedging and giving yourself some breathing room. Is that fair?

Richard Bradley Lawrence

Yes. Yes, it is. Michael, I couldn't have answered it much better. We're just -- just not enough information to make a change at this point.

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

Okay. Just on your comment, you talked about nuclear being strong for you and I guess, referencing the aftermarket and I've heard some of your peers talk that nuclear aftermarket might be a source of pressure this year with fewer planned outages versus last year and also some suspensions of the plant life extension process due to Fukushima. Can you just kind of walk me through what you guys are seeing on the nuclear side that gives you that confidence?

Richard Bradley Lawrence

Yes. The opportunity we have is a rather targeted opportunity in the U.K. I think you recall me mentioning that we made the acquisition of Darchem Engineering, I believe it was 2006. And at that time, Darchem was primarily an aerospace and defense play for Esterline. Turns out they had quite a strong legacy business and quite a strong history in the U.K. in the nuclear power plants there in the U.K. And those power plants are reaching end-of-life. And the U.K. has decided not to shutter them but to refurbish them and actually increase their capabilities. And so we're able to revive that market, and we're in a very strong situation there to provide our specialty and installation in that market, as well as in some specialty structural components. So it's very narrowly focused on the U.K.

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

Okay, that makes sense. And then just the last one that I've got here. The light attack support aircraft going to Sierra Nevada, I know Hawker was thinking they could get the right piece stick [ph] in there, but was that in your pipeline? How should we think about that sort of program that did impact the -- your cockpit offering?

Richard Bradley Lawrence

Let me first say it's a disappointment. Don't think it was a particularly wise decision. However, I will tell you that it was not in our base budget and it was part of that -- part of the upside opportunity for the year.

Operator

Your next question comes from the line of Sam Pearlstein with Wells Fargo.

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

Can you talk a little bit about the cash flow? And I guess it was strong from some of the accelerated deliveries at the end of last year when you -- and collected it. But I guess a couple of things, I know you're supposed to put about $27 million in the pension, so did you make any contributions in the first quarter? And then more broadly, the balance sheet looks like the debt-to-cap is now about where it was just prior to Souriau. You mentioned this Gamesman acquisition, and so can you just talk a little bit about your priorities for cash generation?

Robert D. George

Yes, Sam, this is Bob. As you correctly noted, a big part of the exceptional cash flow performance in the first quarter was collection of a lot of the receivables that were generated in the fourth quarter. But I think it's really important to note is that as also tying to what you asked, the performance in the cash flow basis from the company over the last several years has just been outstanding. And if you look at where we were last year on a debt position at the same time where we are today, I mean it's down $200 million, and correct, our balance sheet is back. If you recall when we made the acquisition of Souriau, we said we had an aggressive de-levering program in place. Based on our cash flow, we expected to be back at our historically strong balance sheet metrics within 18 months. As you pointed out, it's exactly where we're at. We are moving forward. In terms of looking at our capital priorities, obviously we always look for internal opportunities. Research and development is strong. Our capital expenditures this year, we're anticipating are going to a little bit higher than last year due to some catch-up. M&A is always high on the list. As you know the M&A market right now is quiet, but we are active in that market. And in the meantime, we continue to pay down our debt aggressively, $40 million in the first quarter.

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

Okay. And if I could just follow up with one other question. It's relatively small, but this noncontrolling interest seems to have jumped up a little bit in this quarter from where it's run for quite a while. Is that an unusual? Is this a new level? Are there some new joint ventures or something that was created this quarter?

Richard Bradley Lawrence

No, there's nothing new there. That was just an anomalous situation in the first quarter.

Operator

Your next question comes from the line of Michael Callahan with Topeka Capital Markets.

Michael Callahan - Topeka Capital Markets Inc., Research Division

So I guess, first off on the T-6B program, you had mentioned that there is going to be some, I guess, production interruptions in the second quarter. Can you add a little color to that? Are you guys anticipating not shipping any of those? Or, though it's still in the third quarter, just, I think just more to that, as you kind of begin and end.

Richard Bradley Lawrence

So Michael, this is Brad. Let me take the first shot at it. So there's been announcement from Beechcraft that they're doing rolling furloughs and they will be reducing their output of aircraft, and it will impact our second quarter. So they're continuing to produce, but at a slightly lower level than we've seen in the past year. How that's going to play out for the full year, I think, still remains to be clarified. That's all kind of brand-new activity. And obviously, to pick up the slack on some of that, we have the announcements on the KAI front, which is going to be helpful for us.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay. I guess when you go into -- and when you've look at it against the year-ago period though, I mean, the second quarter last year was when you took the biggest hit from the Hawker bankruptcy so it won't really impact that comparison, right?

Robert D. George

That's a fair point, Michael. This is Bob. That's a fair point. I mean, we're certainly not expecting any of that. I mean, right now, as Brad has indicated, it's just a reduction in the number of ships that they're anticipating in the second quarter. I might add as well that our Avionics group has a tremendous relationship with Beechcraft and they are working with Beechcraft to attempt to modify or minimize the impact in the second quarter. But as Brad said and as you've probably seen, Beechcraft does have -- has announced publicly their rolling furloughs, so they are reducing production rates.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay. And then maybe just one other question here. I thought you had said last quarter on the defense technology side of things really on your countermeasure contracts that they were locked in for all of '13 so that wouldn't -- it wasn't likely to be an issue. I guess, one, is that -- did I hear that correctly or is that actually the case? And then two, what then is causing the issues within Advanced Materials?

Richard Bradley Lawrence

Michael, you heard us exactly correct. We felt that we have and we believe we have good visibility on our defense technologies and our countermeasures. What we saw in the first quarter, we have 2 things going on. One, we have some start-up slowdowns or start-up ramp rate, if you will, in our U.K. operation for large contracts that we booked at the end of last year. If you recall the discussions last year, we said they were going to be starting up soon and so we've got that ramp going on. That was expected there. In our U.S. countermeasures operations, we had some First Pass Yield issues with respect to our production, which impacted us to some degree. Offsetting that, however, so what we saw there was we saw some weakness on the revenue side. Offsetting that, however, was some exceptional performance in our California operations in our combustibles. So similar to my prepared remarks there, we've got a variety of countervailing approaches there. The long and short of it is that we -- those first quarter anomalies that we saw in the defense have not changed our visibility at all and we are confident on the Defense Technologies going forward.

Operator

[Operator Instructions] Your next question comes from the line of J. B. Groh with D.A. Davidson.

J. B. Groh - D.A. Davidson & Co., Research Division

Bob, I just had a question on this -- you mentioned this $4 million potential discrete tax benefit and that, I guess, is roughly, what, $0.13 a share or something. Is that in that range of $5.45 to $5.80 or would that be something extra?

Robert D. George

Well, as you know, J. B., the discretes are -- well, I shouldn't presume you know. Discretes are those uncertain tax positions that companies have with respect to tax examinations and/or statute of limitation items. Those cannot be counted on until the event occurs. And that's kind of the way we're looking at this. We identify those as possibles but they would be kind of viewed as upsides, I suppose.

J. B. Groh - D.A. Davidson & Co., Research Division

So not in that range then?

Robert D. George

Yes, similar to what Brad said earlier, and I think it may deserve some mentioning. When we established the wide range last December, it was primarily because of a lot of uncertainty. And if you take the midpoint of that range, if you take a look at the tax benefits that we've talked about, I mean, and if all of them came through and nothing bad happened, okay, we'd be in -- near the upper end of that range. And I think that's probably the best way to look at it right now. There's just so much uncertainty.

J. B. Groh - D.A. Davidson & Co., Research Division

Okay. I don't know if you can answer this one, but in terms of -- when you look at commercial versus your military versus other, just in general is there differences in profitability? I mean is commercial the best military, second-best, kind of how should we think about that in terms of looking at this sequester and potential we're modeling?

Robert D. George

I think that's a great question. It's a really good question. And we have the same dynamic in all 3 -- if we used those 3 market segments, as you said, commercial, military and our other technologies, we have the same dynamic in all 3 of them and that is OEM production rates, we don't give our products away. But our OEM production rates would be at the lower end of our scale. Aftermarket, we have aftermarket capability in all 3 of those areas, and aftermarket is at the upper end of the scale, okay? Substantially higher than the OEM rate. And then in the middle, we have retrofit activities and the key thing is, and you've followed the company for a long time, a key thing is for us, in any given period of time, is the mix between those. And so it's not an easy question to answer. When we look going forward, right now, we're pretty comfortable with the mix that we see going forward. An example, as has been pointed out on our call already in Advanced Materials, last year in the first quarter, we enjoyed a nice mix of defense products, primarily related to the F-35. We didn't have that same flow coming through this quarter and we had somewhat lower revenues and lower margins. So that mix, your -- I'm trying to answer your question, but it's not a yes or no, or a high or low here and there.

J. B. Groh - D.A. Davidson & Co., Research Division

So I guess you're saying it's the OE aftermarket mix that's going to drive profitability in any given market, not the particular market?

Robert D. George

That's fairly stated, yes.

Operator

Your next question comes from the line of Michael Ciarmoli with Keybanc Capital Markets.

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

Bob or Brad, maybe just one follow-up on some of the aftermarket trends. Can you comment on what you're seeing in the commercial aerospace aftermarket, maybe if you have it what your growth was in the quarter and sort of what those trends are looking like in recent months and how you see that market going forward?

Richard Bradley Lawrence

Mike, this is Brad. I have an answer for you. I'm afraid it's not going to clear things up much, but I can tell you what we experienced in the quarter. So obviously, the -- I shouldn't say obviously, the defense aftermarket was very, very weak in the quarter. Our cockpit products aftermarket, we had a very good quarter in those businesses, saw a strong demand there. Kind of mystery to me, though, there's the engine sensor aftermarket was weak in the first quarter. And as you know, I think you know, we don't have a lot of backlog as those orders come in and are processed. There's nothing happening, however, in the market with flight hours, et cetera, that would explain that. And remembering that we have a strong presence on the CFM56 and there's been a lot of those put into service over the last couple of years. That weakness kind of defies logic, so it would be my expectation for that market to come back for the remainder of the year. And our budget premise, which I'm holding to right now, is about a 4% increase on aftermarket.

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

Okay. For the year?

Richard Bradley Lawrence

For the year, yes.

Operator

Your next question comes from the line of our Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Just 2 follow-ups. One, the gaming acquisition, about how big was that, Brad? And can give us a ballpark?

Richard Bradley Lawrence

Let me talk about that acquisition a bit, Howard. Thanks for asking that question. As you probably remember, we entered that gaming market through our technology. So we grew quite nicely and we developed an accepted state-of-the-art reledgeable button panel that was well accepted in the industry and very consistent with the trends of server-based gaming. However, we grew primarily with a single customer and we didn't have a deep knowledge of the market or relationships within that market and -- but through working in that industry, we've got, established a strong relationship with a privately held U.K. company called Gamesman. And those folks grew up in that industry and they have a nice complementary set of products. Probably even more importantly, they've got very strong knowledge and relationships. They come with a mature factory in China for the low-cost country. They have a very good market share in Asia, which is the fastest-growing portion of that fast-growing market. And so together, we represent about 12% to 15%. They doubled our market share in that user interface, in the gaming market. And so that company was really a bolt-on, though. It's a product line that we intend to fully integrate within Esterline existing facilities. So strategically, it's, I think, a great example of our reinforcing our strategy of supporting an entrepreneurial spirit amongst our business leaders and efforts to penetrate adjacent market, exploiting our existing technology. The amount of the -- the size of the acquisition, just let me say that it's a privately negotiated deal with a private company and it's not material to the company's result.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

I appreciate that. And then you talked a little bit about Souriau being flat. If I sort of take some of that and try to apply it -- I mean, let me back up for a second. In the K, at the end of last year when you did the goodwill test, you were a little above water and you weren't probably where you'd like to be, so I'm sure that sort of stimulated you to think about how to improve the business further. What have you sort of done there and is there any evidence of that in the first quarter?

Richard Bradley Lawrence

Yes, I'll start, Howard. I'm sure Bob will be able to add to this. Yes, but we have a number of joint marketing activities within the company to grow revenue growth. We're also utilizing Souriau facilities with other businesses that are helping there with absorption rates by further utilizing their existing facilities. And the market situation with Souriau remains exactly the same as I described it last. Their strength in commercial aero is offsetting the weakness in their industrial markets in Europe, and we continue to gain penetration in North America.

Robert D. George

Yes, Howard, this is Bob. Let me just maybe add a little bit more color there. First of all, I want to say you're correct with respect to the results that we identified in the K. However, I want to add that Souriau's performance is exactly in line with our expectations and so there's nothing really surprising there. In terms of looking at our overall acquisition strategy and the way that businesses grow, as you know, we don't buy businesses -- we don't buy great businesses and then rip them apart. We enable them to grow and integrate. And Souriau was being integrated into our business exactly as we planned, in fact, may be more successful than we had. One of the things that we didn't quite anticipate in the first quarter, what's interesting is what Brad said, is they're having very strong commercial aerospace, just great. The industrial side in Europe is taking them down a little bit and they enjoy some phenomenal margins in the industrial side of their business. We also had a few delays in their military operations in Europe. They have some tremendous positions with the French military across the spectrum. And they were a little bit slow on deliveries. So looking at our first quarter performance there, it's flat but we're seeing strength coming back as we go through the year.

Operator

This concludes our question-and-answer session. I would like to hand the call back over to Mr. Brian Keogh for closing remarks.

Brian Keogh

Okay. Well, again, as always, thank you for your interest in Esterline, and we look forward to speaking with you again next quarter. Good night, and have a great tomorrow.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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