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Esterline Technologies (NYSE:ESL)

Q1 2014 Earnings Call

February 27, 2014 5:00 pm ET

Executives

Brian Keogh

Richard Bradley Lawrence - Executive Chairman and Chairman of Executive Committee

Curtis C. Reusser - Chief Executive Officer, President and Director

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

Analysts

Sheila Kahyaoglu - Jefferies LLC, Research Division

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

Julie Yates Stewart - Crédit Suisse AG, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Tyler Hojo - Sidoti & Company, LLC

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

Operator

Good afternoon, and welcome, ladies and gentlemen, to the Esterline Technologies First Quarter 2014 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 one week by calling this toll-free number, 1 (888) 286-8010. You'll need the following PIN, 69914396. [Operator Instructions] I will now turn the conference over to Mr. Brian Keogh. Please go ahead, sir.

Brian Keogh

Thank you, operator, and good afternoon, everyone. Curtis Reusser, Esterline's President and CEO; and Bob George, Chief Financial Officer, are here today to discuss Esterline's first quarter 2014 performance and our strategy and guidance for the balance of the year. In addition to the number the operator gave you, you can also visit esterline.com in the Investor Relations section to access a webcast replay of the call.

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

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

Now before we turn our attention to the quarter, our outgoing Chairman, Brad Lawrence, would like to say a few words. Brad?

Richard Bradley Lawrence

Thanks, Brian. As many of you know, I'll be retiring from the Esterline board next week, and I appreciate Curtis giving me a few minutes on today's call. I'd like to personally and publicly thank all of you listening today for the interest you have shown in Esterline. And for many of you, that means long and continued interest and that is very much appreciated. It's been a privilege to serve as Esterline's CEO for the past 5 years. I could truly say I've enjoyed the many new associations made during that time. It gives me great confidence that the company is in good hands under Curtis' leadership, and I'm very certain that Esterline has the right strategy, which will lead to continued growth and prosperity. Perhaps our paths will cross again in the future, maybe in the 19th hole, on the slopes or streamside. But in the meantime, all the best and farewell.

Curtis?

Curtis C. Reusser

Thanks, Brad, especially for making this leadership transition so seamless. Of course, it helps that we're able to report a solid first quarter, and although it is still early, the quarter's performance gives me confidence that we'll be able to achieve our full year objectives.

I'll start my remarks today with a few highlights from the first quarter, and then Bob will get into the financial details. First, we drove a 10% total sales increase and finished the quarter at $505 million. Each segment had growth, with Avionics & Controls leading the way even with some tough defense budget environments. While we're pleased with the top line results, I'll note that the first quarter of this year had 14 weeks versus a 13-week period last year. On a GAAP basis, which included -- which includes the cost of our accelerated integration and compliance efforts, operating profit was up 18% to $45.8 million. The controls -- Avionics & Controls segment made the strongest contribution, followed by Sensors & Systems. Combined, these 2 segments served to offset a slight decline in our Advanced Materials segment.

Our net income was up 20% to $30 million, $0.93 per diluted share. That includes about $0.12 a share restructuring expenses, and another $0.03 a share of incremental compliance cost. This compares to $0.80 per share in last year's first quarter. It's also important to remember that last year, we had some discrete tax items in the first quarter that boosted EPS by about $0.11 a share. So this year's comparison was even stronger than immediately apparent.

Looking forward to the rest of the year, we're feeling good about our opportunities. As you know, the commercial aerospace market continues to be healthy, with good build rates on a number of key platforms. I saw yesterday that Airbus once again upped its A320 build rate and Boeing 737 and 77 production rates remained strong.

On the aftermarket front, we're seeing solid improvement in our Avionics & Controls and Engineered Materials segments, though softness continues in our Sensors & Systems segment.

On the defense side of the business, it is tougher, though a more stable DOD budget environment is helping us plan more accurately. Reduced demand for countermeasures is being addressed with one of our restructuring activities. Also, we had some new production startup and timing issues in Q1, however, these will recover by Q2.

On the industrial side of things, we expect to see better macro conditions as the year progresses. At the moment, we're facing some currency headwinds in Europe but order mix is improving with strong orders in that area. With all that said, we're confident we built a reasonable plan and the first quarter has given us a good start on the year. As you know, when we recorded our year-end results, we announced an accelerated integration program. Our general goals were to consolidate certain facilities and product lines, take advantage of certain shared services and support functions, and step up our lean initiatives across the company. You'll hear me emphasizing the words enterprise excellence as we move forward.

I can report today that we're on schedule and pleased with the progress. As we said last quarter, we're expecting a total restructuring cost of about $40 million. That's $25 million to $30 million this year, with the balance in 2015. Also, we continue to expect annual savings to ramp to better than $15 million by the end of '16 -- by the start of '16.

Our segment and platform leaders are aligned and incented, with a mandate to accelerate and deepen integration within the businesses. Their detailed plans have an increased level of review built in to ensure that we hit our near-term milestones, as well as our long-term metrics. Based on those plans, we begin to reorganize certain functions to gain efficiency and reduce duplication of services. Accordingly, we've announced and launched 6 facility or product consolidation efforts that will be undertaken this year to improve our cost structure.

As we restructure some of our operations and take costs out of the business, we're also making some investments to better leverage and improve efficiency in such areas as strategic sourcing, information technologies, HR, continuous improvement and compliance. On that latter point, we're nearing a final agreement with the State Department regarding trade controls. The outcome of their review looks to be in line with what we previously expected and disclosed, so there are no surprises there. I'd also comment, we've dramatically increased the focus in this area. We've assured the government and our partners that our goal is to have no less than consistent best practice compliance performance.

Before I turn the call over to Bob for a closer look at the numbers, I'd like to note another area of strategic progress. We're pleased to have completed this past quarter the acquisition of Sunbank, a former unit of Meggitt. This connector accessory business provides important interconnect components that we had previously outsourced. While the size of this deal was modest and doesn't change our 2014 financial expectations, it is a great fit. It gives us scale, product breadth and enhances the overall business growth opportunities for our connector business. Of particular importance, Sunbank will help balance and streamline the global operating infrastructure of our Connection Technologies platform, particularly we look to leverage a sizable U.S. market opportunity in this category.

On that note, I'd like to turn the call over to Bob for a more detailed discussion of our first quarter results. Bob?

Robert D. George

Thanks, Curtis. Good afternoon, everyone. 2014 is off to a good start for us, right in line with our expectations. Sales were up nicely from last year. The extra week in the quarter and gains on sales were certainly an assist. Gross margins were solid. Expense control was tight. Foreign currency moves balanced one another. Our integration and compliance activities are tracking to plan and taxes were as expected.

Now as is usual for Esterline, we had our share of moving parts, but this was truly a steady-as-she-goes quarter. If we start with consolidated sales of $505 million, this is a solid increase of 10% from last year, with all 3 segments showing positive moves from last year's $458 million. Avionics & Controls led the way, with a nearly 15% increase. Acquired sales from Gamesman were $19 million and we saw balanced contributions from our Avionics Systems and Control and Communications platforms. Sensors & Systems also had solid results, up almost 9% from last year. Within this segment, we benefited from $4 million in sales from our most recent acquisition, Sunbank, which closed at the end of December, as Curtis identified a few minutes ago. Anecdotally, the integration process of Sunbank and Souriau is off to a great start. All 3 platforms in this segment contributed equally to a sales growth in the quarter.

Our Advanced Materials segment grew 5%. We achieved this with strong performance from engineered materials, offsetting weakness in defense technologies. Now the shortfall in defense technologies was mostly in our hands due to scheduling, operating and timing matters. We expect to recover much of these sales over the course of the year. All things considered, we're right in line with our plan, and we've not seen anything to cause us to reassess our expectations for the fiscal year.

As we move into a discussion of margins and expenses, it's a convenient time to detail our integration and compliance costs. As we indicated in the release earlier, integration costs for the quarter were $5.4 million, $4.8 million in SG&A and $600,000 in cost of sales. Further, we expended an incremental $1.8 million in compliance costs this quarter compared to last year. Of this cost, $1.5 million was SG&A-related and $300,000 was cost of sales. By segment, these expenses were $2.7 million in Avionics & Controls, $1 million in Sensors & Systems, $2.9 million in Advanced Materials and $600,000 at corporate. As Curtis mentioned, our projects in these areas have been launched, they are on track and they're proceeding well.

Consolidated gross margin was 34.5% this year after adjusting for the integration and compliance costs. This compares with 35% last year. Gross profit was $174 million this year compared with $160 million last year. Avionics & Controls' gross margin performance was consistent with last year. We saw some improvement in the Avionics Systems and Interface Technologies platforms, offset by weakness at Control and Communications. In Sensors & Systems, gross margin declined from last year's very strong results. Advanced Sensors' and Power Systems' platforms were both on par with last year, while Connection Technologies' margins were influenced by a number of factors, including the accounting entries associated with the acquisition of Sunbank. Advanced Materials' gross margin moved down by about a point as some of the defense technologies first quarter effects offset strong and improving results from engineered materials.

SG&A expenses were $94.7 million or 18.8% of sales after adjusting for integration costs of $4.8 million and incremental compliance costs of $1.5 million. These levels compare to $98.6 million or 21.5% of sales last year. Our operating leadership is laser-focused on improving these expense ratios.

Research and development expense was $26.5 million or 5.2% of sales compared to $23.1 million or 5% of sales last year. This incremental spending is primarily on projects within the Avionics & Controls segment. Segment earnings were up nicely from last year, driven by strong sales, positive sales mix and tight expense control. Consolidated segment earnings were $67.6 million or 13.4% of sales this year compared with $55.2 million or 12.1% of sales last year. Again, Avionics & Controls segment earnings led the way forward, with a robust increase of 48% to $27.4 million or 13.6% of sales. This compared to $18.6 million or 10.6% of sales last year. Avionics Systems and Interface Technologies platforms both had strong quarters.

Sensors & Systems segment earnings were up 12% to $21.3 million or 11.3% of sales from $19 million or 11% of sales last year. Advanced Materials segment earnings increased to $18.9 million or 16.1% of sales from $17.6 million or 15.8% of sales last year. As I mentioned earlier, but it bears repeating here, this year's results are net of integration and incremental compliance expenses of $2.7 million, $1 million and $2.9 million in Avionics, Sensors and Materials segments, respectively.

Esterline's tax rate in the first quarter was 19.1% this year compared to 8.5% last year. This was expected and as we discussed in December last year benefited from a number of positive tax law changes, as well as favorable discrete items that are not anticipated this year. Bottom line, first quarter of 2014, Esterline's net income was $30.1 million compared with $25.1 million last year, an increase of 19.9%. Fully diluted earnings per share were $0.93 compared with $0.80 last year. Adjusting for the integration and compliance costs incurred would increase earnings by $4.9 million or $0.15 per share, making the comparison to last year even stronger.

Cash flow remains strong. Although not up to the record level of last year's exceptional performance, the primary reason for the lower number this quarter was inventory increases. We saw several factors contributing to this increase. One is acquisition-related. $13 million from Gamesman and Sunbank; another is delayed shipments, nearly $10 million here. And there's also an effect arising from increasing min/max inventory levels at several of our large customers. Notwithstanding these effects, cash flow was robust in the quarter. Cash flow from operations was $47 million. Capital expenditures were $11 million, resulting in free cash flow of $36 million. As I mentioned, not quite at last year's level, but with free cash flow at 119% of net income, this is a strong metric and I'll take it. Depreciation and amortization were $29.6 million.

So as I said at the outset, 2014 is off to a good start. There's a lot of ground yet to cover, but with sales in line, book-to-bill steady, margins solid and integration activities on track, we remain confident in our full year guidance.

Curtis, back to you.

Curtis C. Reusser

Thanks, Bob. Before we go on to Q&A, I'd just like to mention that I've spent most of my time over the past few months out in the field, specifically in Europe, Canada and our U.S. West Coast operations, meeting with our people and our customers to get a deeper understanding of our operations. Overall, I came away energized and very much impressed with the caliber and dedication of our employees. One pronounced opportunity I saw was the need to consistently apply our best practices across the enterprise. I stress opportunity because I also saw many best-in-class operations with enthusiastic employees who can't wait to share their successes.

I was particularly impressed with our Connection Technologies facilities in France and how highly coordinated they are with their Moroccan operation. The Power Systems and Advanced Sensors businesses in Europe had great examples of innovative technology and some very strong continuous improvement practices and visual management techniques. I was also impressed with our modern facilities in Mexico. These operations serve both our Sensors & Systems segment and the Advanced Materials segment, and have thoroughly embraced lean and a culture of continuous improvement. The experiences with our people and the feedback I received have reinforced my enthusiasm for guiding Esterline forward.

We have a good deal of work ahead of us, but the team is fully on board and energetically executing on our key initiatives, and that's what it all boils down to, execution. We've put ourselves in a position to capitalize on the opportunities we see for the long run of growth and value creation for all our stakeholders, our customers, our employees and our shareholders. And we're off to a good start. A solid first quarter, good progress on accelerating integration, a great fit acquisition and maybe most importantly, continued exceptional cash flow performance.

Finally, as many of you have been asking, we've selected a date and venue for our 2014 Analyst and Investor Day. The event will be held on June 19 at the Boston Harbor Hotel. Specific details on the agenda and timing will be available shortly, and we hope to see you there.

Thank you for your attention. Operator, I think we're ready for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Please stand by for your first question. This comes from Sheila Kahyaoglu from Jefferies.

Sheila Kahyaoglu - Jefferies LLC, Research Division

You mentioned 6 areas of restructuring focus for the company to better leverage your business. I guess could you perhaps provide a breakdown of these restructuring efforts and how you're thinking about the $25 million to $35 million and where the payback is quickest and how we should see that going forward?

Curtis C. Reusser

Well, it's a good question. That's a number we've debated. Actually there are -- there's kind of a mix. We have actually 5 facility -- specific facility consolidations that we're doing. And in the sixth, I'd lump in probably a pretty long list of other things, which includes some back office relocations from one facility to another, some sales force consolidations, some changes that we're doing there, actually moving, closing some sales offices that, again, I'd lump in the sixth category. We're also doing some things, as we mentioned before, on IT, better looking at a stronger, probably more forceful corporate coordination of our IT expenditures and how we do licensing and selection, as well as some HR consolidation. We've launched a more coordinated approach on human resources, some things on continuous improvement and in compliance. So it's probably 5 specific consolidation opportunities, and then kind of a mixed bag of other things. As we've mentioned, most of those are -- have very good payback. They range, I'm looking at the list here, from kind of 30- to 100-plus percent IRRs. And the paybacks are typically right around 2 years, some less. We've obviously got to work through making sure that we're doing the moves appropriately and working with our customers to make sure that we've got the right quality systems in place. Some of them are easier, where we're already doing work in certain locations, others are probably a little more challenging. But that's kind of the scope of things that we're thinking about. As far as the costs, there's a mix of severance costs. There is some -- we've had some facilities that we've had to write down because we're no longer going to use them. We had some equipment either that we're going to move or we're going to have to try to sell it. But that's -- I think the split is probably more on the severance side, some on the investment side, but that's kind of the split.

Sheila Kahyaoglu - Jefferies LLC, Research Division

That's very helpful. And I guess, switching gears. In terms of the top line, when we're thinking about Souriau, you commented that you expect the business to accelerate or improve as we progress through the year. What gives you confidence there? And in terms of Sunbank, have you -- I know it just recently closed about 1.5 months ago but have you started to realize any revenue synergies yet?

Curtis C. Reusser

It's a good question. In general, we are -- I think for the whole group, we're not real happy with -- we haven't been happy with our organic growth. So we just had a leadership conference right out of the box where we got all of our general management and key sales folks together and said, how can we share best practices across the businesses and really start to drive some better growth? Sunbank was there already. I don't think there are sales in the shop right now, but already, a lot of activity. I will say that on the integration of Souriau and Sunbank, we, in line with kind of the theme of accelerated integration, we are approaching this acquisition, I think, much differently than we have in the past, where we have -- we had senior management and teams from Souriau in the Sunbank operation on day 1 and follow-ups right away. So we're really getting our fingers together joined at the hip to say, how can we go drive some synergies there, both on the sales side and on the operational side? The -- some of the -- so we are expecting to see some growth there. To be quite honest, there's some overdue and some backlog in Sunbank that we're laser-focused on to try to get that, and that's just -- that's easy sales if we can get our operational performance up there quickly. Some other things that are strong for us is we're starting to see a little rebound on the industrial side in Europe. And I was just over there and again, as I mentioned, really interesting business, lots of different moving parts in a lot of different end markets. And that one is particularly interesting because the margins are very good there. And so while we've had some pressure last year because the growth was kind of flat or down, the order intake there looks pretty strong.

Operator

Next question is from Sam Pearlstein, Wells Fargo.

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

In the past, when you first gave your outlook for 2014, you talked about not assuming much with regards to international defense opportunities. Can you just talk a little bit about what's happening in that bid process and where things stand and did anything come in, in the quarter?

Curtis C. Reusser

Are you leaning in a certain direction there, Sam?

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

Well, I guess I'm meaning specifically on the avionics and the CMC. But I mean, in general, if you can talk about the environment.

Curtis C. Reusser

I was up there just recently for a review. They do have a number of good opportunities in front of them on a number of fronts, but specifically on the transports, those are looking -- we're -- we have a very positive outlook, not only in the Middle East countries but some in Asia also. So there's a lot of work going on there, and that's -- that looks positive. We've got some good T-6 opportunities. Like we've said, the JSF Turkey order there, the P-8. But specifically in our avionics business, we've seen some good outlook there and that is not yet built -- the couple of C-130 opportunities are not in our outlook right now. But I guarantee you, I keep asking, can I announce it at this quarterly review? Not quite yet. But there's still a lot of work going on in that front. And as we speak right now, we're pretty optimistic that we're going to hear something this year if on 1, if not, 2 opportunities.

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

Okay. And then in the commercial aftermarket, can you just talk about what the growth was in the quarter and what you're thinking about for the year at this point?

Curtis C. Reusser

Bob, what the number is there, we had kind of a mix as we mentioned on the -- I think there's still some further upside. It's difficult because we sell a lot of our aftermarket through distributors, and we've had some pretty good volume so far with not all of those orders coming through yet. So that gives us some further optimism.

Robert D. George

Yes, Sam, in -- we kind of indicated this a little bit in our scripted comments. So if we look at our aftermarket from a couple of different perspectives, we're seeing some really nice activity in Avionics & Controls. We're up from last year, and we're up from our budgeted targets. We are also seeing some really nice activity in Advanced Materials, particularly in the clamps area and in elastomeric area. Where we're a little bit -- and in that area, we're above budget and above last year as well. Where we're a little soft, as we indicated in the call earlier, is in Sensors & Systems, in particular the thermocouple harnesses on the CFM56. We had anticipated, as we indicated in December, that we'd see a slight improvement going through this year, although certainly not at the level that we were hearing other people talking about their expected increases. So right now what we're seeing is we're seeing a lot of returns, but no fault found. And so we're continuing to deal with the situation that the products are lasting longer than we anticipated. However, with that said, as you know, the population of engines flying out there continues to increase at an ever rapid rate and we're certain that at some point in time, this timing is going to catch up and we'll be moving forward.

Operator

Our next question is from Julie Yates, Crédit Suisse.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Curtis, can you just remind us how you're thinking about capital deployment, whether share repurchases are in the mix and what we should we be thinking timing-wise about any update to the capital allocation strategies?

Curtis C. Reusser

Right. Good question. I think we talked about that on the last release, and we've chatted since then. As I've gone out to all the businesses, we still have a round of updated strategic planning that we're going to do. And I am going to sit with the board and update them in the second quarter and part of that is going to be the various options that we want to consider for capital allocation. So we have been doing some work for that. I would think that this year, we'll come out with something that talks about what the options are there. Again, feel -- probably one of my pleasant surprises is just how strong the cash flow here is at the company and the outlook for that continues to look very -- I'm very bullish about that. So that's something we're going have to address and believe me, the board is very interested in kind of what our thoughts are and what the different options are. So we'll be updating that later in the year.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And then after you're -- you've had a chance to dig in and visit several facilities, any updated thoughts on portfolio pruning or the strategic focus of the business, particularly divestitures?

Curtis C. Reusser

Nothing I'm prepared to talk about at this point, but definitely getting out there and seeing them is very helpful. And again, that's something that we'll be reviewing with the board in the second quarter. But both pluses gap -- filling gaps is just as much as potentially looking at divestitures. But we're working on that. That's -- a lot of questions from the board on that also.

Operator

Next is from David Strauss.

David E. Strauss - UBS Investment Bank, Research Division

You guys talked about SG&A as a percent of sales coming down a little bit in the quarter but, Curtis, can you maybe talk about where you ultimately see SG&A as a percent of sales going as this restructuring plan takes hold? Obviously, it's still relatively high compared to most of the companies that we comp you up against.

Curtis C. Reusser

Yes, well, that's probably -- we -- maybe long answer on that. We had a -- I got a couple of off-sights at the management team. That's something that Esterline obviously had a focus on prior to me coming on board. Again, the decentralized structure that we had and service very well in a size that we were for a number of years worked well. But it's something that we're really going to focus on. We have -- we've come up with kind of 5 areas of focus and we'll talk about those more at the Investor Day. But a number of those are really to try to get right at SG&A as a percentage of sale. And part of it is it isn't just that the businesses haven't focused on it, but just the way we're structured and the requirement to do a lot of these functions independently, especially in some of the smaller units just is a barrier for that. So it's -- I think it's high by a number of percentage points is all I'll say at this point. And that's going to be an area of focus in -- both in the way that we're structured and just in a lot of the initiatives on IT and sourcing, on HR, compliance, CI. That's going to be something that we're going to look at every -- by every business and by every segment and look for opportunities to combine functions where we can. So it's an area that's ripe for opportunities. It's been too high, and we're going to drive it lower.

David E. Strauss - UBS Investment Bank, Research Division

Okay. Bob, free cash flow obviously very strong last year, strong this quarter. Can you just give us a sense -- I know you talked about it coming in, in line or better than net income this year, but can you give us a sense kind of the big moving pieces, working capital, cash taxes, kind of how those look for the -- what you're thinking about for the full year?

Robert D. George

Yes, that's a great question, David. I will say that one area of focus that we are looking at intensely right now is inventory. That's one of the reasons why I mentioned it in my comments. And we see some good opportunities there, along with working capital in total. And we continue to focus on maintaining our historic strong metrics in free cash flow and increasing them dramatically. But our receivables capabilities are strong. We continue to have good payment patterns there. Inventory is an area that we need to focus on. Payables is an area we're looking at in conjunction with our strategic sourcing activities. And we think we've got opportunities in each of those areas.

Curtis C. Reusser

I'll add one -- let me just add one comment there. As I went around, the cash flow in this business is very strong, so there's been probably more focus on margins, costs. But we are going to focus on improving our cash flow performance. I guess, harnessing it, because it is very good. But one other thing I've noted is that we've had some delinquencies with customers in our -- well, we have some great operational performance. Souriau just got I think, what, the seventh in a row Best Supplier at Airbus for on-time delivery performance, but we've got some others that we've impacted customers. And very clear, my message out to them was, we will not impact our customers, we have to be best-in-class. And so I think some of this inventory build might have been a little buffering to make sure that we're meeting our delivery commitments, but we are definitely going to be using operational excellence to drive that back down, to get our terms -- get our turns to improve, because I don't -- they're not where they need to be at all in my mind.

David E. Strauss - UBS Investment Bank, Research Division

Last one. A400M, can you just talk about where you are in the program? I think you have a lot of -- you have a pretty high ship set content [ph] on that program, just where you stand on that.

Curtis C. Reusser

We are -- that's -- as we indicated in December, David, that's an important program for us this year. We are maintaining touch with Airbus, and we are producing along with their schedule. I forget the exact number we're looking at this year, but if I remember correctly, it was somewhere in the 10 to 13 that we were anticipating this year and ramping towards the end of the year.

Operator

Our next question is from Tyler Hojo with Deutsche.

Tyler Hojo - Sidoti & Company, LLC

I guess my first question is along the lines of the restructuring initiatives. And I guess, Curtis, now that you've had a chance to kind of get out there and kick the tires, I'm just curious if you see perhaps additional opportunities beyond the 5 or 6 facility consolidations that you've already announced. Or is that pretty much the extent of it for now?

Curtis C. Reusser

I'll use that for now. Esterline hasn't -- has basically been very successful at buying businesses and leaving them in place and letting them run and be very nimble. And I think what we're trying to introduce is a balance of keep the decentralization nimbleness, closeness of the customer, but also take out some of the redundant costs. And as we go through this, that's going to be, again, part of our update to the board to say, what are the next steps? Are there more opportunities? I definitely think there are more opportunities, although we've announced our projects, they haven't really had -- it's a lot of change. They haven't done this before and we want to execute on these. And so it'll probably be -- for the near term, that's our list, and that's what we're going to go focus on. And that's probably a 2 year -- most of these get done, there's a little -- most of them are 95% complete within 2 years, I think.

Tyler Hojo - Sidoti & Company, LLC

Okay. So for the time being, kind of the plate's full but perhaps longer term, there's some other opportunities?

Curtis C. Reusser

Sure. And again, as I've been on to the businesses, my expectation is we're just -- we're going to continue to look at things and lean out our facilities and processes and raise the bar every year. So -- but for right now, there's a lot of stuff that the teams have -- they've looked at a lot of these projects. They're not brand new. They've been thinking about them and instead of kind of bleeding them out one quarter at a time, we said, let's -- and that's a challenge but let's list them, let's get them all announced and then let's go execute on them and get them behind us. So that's our strategy right now.

Tyler Hojo - Sidoti & Company, LLC

Okay, great. And maybe just shifting gears to the defense side. Last quarter, you indicated that a couple of delays, and I think more on the international side kind of impacted Q4. Just curious if those shipped in Q1 or the delays are kind of ongoing there.

Curtis C. Reusser

No, I -- we had a specific -- we had -- there's probably a mixed bag there, but we had a specific product formulation issue that we had to resolve, and we've already resolved it, but it did -- it was in our countermeasures business. We also, to be quite honest, we've been probably ultrasensitive on trade compliance as we needed to be. And so we've -- when in doubt, we've said, let's make sure we hold -- we do a ring fence type of operation where we have a double check going on. And that also impacted sales, Bob, I think a couple -- at least a couple of million this quarter of delinquencies.

Robert D. George

Maybe more than just a couple million.

Curtis C. Reusser

Yes. Again, we're embedding -- we're getting our arms around that, we're embedding it in. So I wouldn't say that it's -- we had a little bit of a lag here, but a different set of issues. And we would expect that to clear up going forward. And again, we're going to embed those processes in our basic operating procedures so it doesn't become a one-off kind of event.

Operator

[Operator Instructions] Please stand by for your next question. This is from Mike Ciarmoli, KeyBanc.

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

So I can't let you off the hook on this one. I know you talked about Advanced Materials. You've had real strong margin performance. Even after the adjustment, it dips down to 16.1%. Seasonality, I mean, what drove that sharp sequential decline, and can you get that back up to that 20% plus level for the full year?

Curtis C. Reusser

Yes, Mike, I'll take that one since I'm kind of the one who put us on the hook there. I can tell you that we are absolutely committed to those numbers and there is -- I tried to explain it softly in my comments, but I'll be a little bit more direct here. As you're aware, we have 2 primary platforms in that segment. We have Defense Technologies, which is our combustible ordinance countermeasures business, and we have our Engineered Materials. Engineered Materials performance is continuing to increase as we have indicated and in fact, was exceptionally strong in the quarter, led by the aftermarket activity that I mentioned when I think Sam asked his question, as well as a number of our other business units. What impacted us dramatically in the quarter was Defense Technologies. And in yesterday's audit committee meeting, telephonic committee meeting before our release, the exact quote I gave to the audit committee was it was a quarter where anything that could go wrong did go wrong. And we had some issues in each of our major product areas there from our combustible ordinance, which very rarely happens to our U.S. countermeasures, to our international countermeasures. The good news there is, as I said in my comments, we anticipate being able to recover all of those sales. But that is the reason that we had that sequential decline in our margins in that segment.

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

Okay. So full year, I mean, obviously, you're thinking it can recover. It's not obviously enough to think about guidance. I mean, if you kind of had those margins holding at that level, we shouldn't be thinking about it in that regard? I mean, if you can pick up -- make up the sales, you can make up the margin?

Robert D. George

That is correct.

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

Okay, fair enough. And then can you give us a sense maybe -- I guess, on Sunbank, I guess, it looks like maybe $40 million in revenue or so coming in to this year. Did they contribute meaningfully to the backlog at all?

Robert D. George

First of all, we expect sales in the $40 million to $45 million range. Second, as Curtis mentioned in an earlier call, we did have some -- we do have some delayed and past-due shipments that we acquired in that business. So that's going to help us on an ongoing basis. But in terms of a backlog basis, not materially impacting the backlog for the quarter.

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

Okay, that's perfect. And then just to sneak one more in. I mean, have you guys changed? You commented a little bit about aftermarket growth. Can you give us some color on growth regarding maybe commercial OE, and then the industrial end markets and maybe even defense? Just kind of performance in the quarter.

Robert D. George

So across the board there. I'll start with the industrial because I think that was a question that was asked earlier in a different way with respect to Souriau, and seeing Souriau accelerate through the year, one of the reasons why we thought and we continue to believe that Souriau will improve through the year is the order position for Souriau, the mix is improving. I think Curtis had mentioned that earlier, the mix is improving towards the industrial side, which conveys somewhat higher margins that's beneficial. On the defense side, as we indicated there, we're still a little bit struggling there. In particular referencing back to another question that was asked, one of the programs that was delayed that we referenced earlier was in our communications business, in particular, SIGINT. Those orders have continued to slide out to the right. They were slower than we thought in the first quarter. However, we are seeing positive signs in a lot of other fronts as we mentioned and -- go ahead, Curtis.

Curtis C. Reusser

Yes. I was going to say, 2 areas that I wasn't as familiar with, but when I was in Germany and in the U.K., I visited our medical device business, they've had good growth, some good orders from some of the big guys in that side of the business. And also, gaming. I went to my first gaming exposition, which looked like a Farnborough air show with slot machines instead. And they -- we had some very strong performance at Gamesman and those guys are really doing a solid job and have a lot stronger orders than we thought coming into the year. They continue -- it comes in lumps and they're very nimble and quick and can do prototyping. They get it out to the big gaming vendors. And then if that machine becomes successful, they turn on the spigot and say, how quickly can you get me 3,000 of these things or 5,000 of these units? So some good -- I think there is a nice bridge there to help that kind of buoy up our organic growth.

Operator

Ladies and gentlemen, at this time, I would like to turn the call over to Mr. Brian Keogh for closing remarks.

Brian Keogh

Okay. Well, again, thank you, all, for your interest in Esterline. We do appreciate it. And do please keep an eye out for more information on our Analyst and Investor Day and hopefully, we'll see you in Boston on June 19. Have a good evening.

Operator

Thank you for joining today's conference. This concludes the presentation You may now disconnect. Have a good day.

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