Executives
Brian Keogh - Director, Corporate Communications
Robert Cremin - Chairman, President and Chief Executive Officer
Robert George - Vice President and Chief Financial Officer
Analysts
Howard Rubel - Jefferies
Tyler Hojo - Sidoti & Co
Troy Lahr - Stifel Nicolaus
Eric Hugel - Stephens Inc
Alan Robinson - RBC
Bill Dezellem - Titan Capital Management
J.B. Groh - D.A. Davidson
Esterline Technologies Corporation (ESL) F1Q08 Earnings Call May 29, 2008 5:00 PM ET
Operator
Welcome to the Esterline Technologies second quarter earnings conference call. (Operator Instructions) It’s now my pleasure to introduce your host, Brian Keogh.
Brian Keogh
Bob Cremin, Esterline's Chairman, President and CEO and Bob George, Vice President and CFO are with me today to discuss Esterline's fiscal 2008 second quarter performance.
A replay of the call will be available at this toll-free number, 1-866-245-6755. The access code is 647648, or you can visit esterline.com in the Investor Relations section of our website. You'll also find a copy of this quarter’s earnings release there. In the release there is a paragraph regarding forward-looking statements; this paragraph covers this call as well.
Essentially, it says the 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. Forward-looking statements always involve risk and uncertainty and we detail those risks in our public filings with the SEC.
As is our practice we are going to keep our prepared remarks short today, so we can get to the Q-and-A. We’d like to wrap up the call about 2:45 here on the West Coast, so when we get to the Q-and-A we are going to put a two question limit on the first round and we will circle back and follow-up as time allows. Now, I would like to turn the call over to Bob Cremin. Bob.
Bob Cremin
Yes, thanks Brian and welcome everybody. Okay let’s go right to this. I think there are 27% earnings improvement on 15% organic sales growth, qualifies as another solid quarter. The performance not only reflects solid industry fundamentals and Esterline’s balanced approach to addressing these fundamentals, but more importantly how our global customer base is recognizing the real value that Esterline brings to the table.
As I noted in the release today, three of our operations recently received “Supplier of the Year” awards from two very important customers. Two came from Gulfstream and our third award from Rockwell Collins and our fourth operation was recently named “Company of the Year” for all of North East England. I believe that these awards and the performances that won them are clear indicators that our strategy is working. That strategy is embodied in what we call the Esterline performance system and that system permeates everything we do.
Let me give you some background; over the last decade we have completed 30 acquisitions, the latest of which was CMC electronics. The relative rapidity of the acquisition pace reflected our need to get the critical mass in our selected mix of businesses. What this mass now affords us is PhD level efforts in R&D that gives us a long-term competitive advantage, purchasing power derived from consolidating volumes from standalone manufacturers and the ability to expand geographically in an increasingly global marketplace. The cost of building this critical mass is largely played out.
Over the years we have felt the impact of acquisition accounting expense. We have paid relative severance costs and we’ve absorbed costs associated with closing plans moving and consolidating operations. Now I don’t want to imply that we are out of the acquisitions business, we are not, but it is interesting to note what's possible as seen in this quarter's performance, when the focus swings heavily to operating improvements. One key factor is, when it comes to guiding operating improvement efforts we've kept the number of monetarists to a minimum.
We stress lean. We define this as the elimination of waste and focusing on production velocity improvements. We do this by engaging the minds of over 10,000 employees and in increasing our training budgets we stress value pricing. Following nine eleven it was a struggle to just maintain prices, so long-term agreements were signed that didn’t reward us for the value we were providing as these LTA’s expire and often they run three to five years, some longer. We are pricing for the value and the applications engineering expertise we provide.
We are also holding down additions of bricks and water. No, we won't walk away from extra volumes, but until we fully lean our processes we've been resistant to plant expansions. You all know that the compounded annual growth rate of sales which is over 20% for the last 10 years is much steeper than the capital expenditures to support these sales. What I'm talking about here is not flavor of the month management; it's our fundamental strategy; the strategy we've been working on for years.
It’s all there in the fabric of everything Esterline does and not only is it reflected in today’s performance, it set the foundation on which we are building for the long-term. So Robert how about jumping into the numbers for us now?
Robert George
Sure, thanks Bob. Good afternoon everyone. As Bob has just now highlighted and as we advised in today’s press release, Esterline’s second quarter results were a nice complement to the great first quarter we posted; revenues, gross margin, operating margins, earnings per share and free cash flow all paying a nice tread line.
Esterline's second quarter sales of $374 million were 20% ahead of last year’s $312.3 million and as Bob said 15% of the increase was organic. Again all three of our segment showed nice growth led by Avionics Controls with 33.5%, Sensors and Systems at 18% and advanced materials 7%.
In Avionics Controls $20 million of the sales growth was acquired by virtue of the timing of last year’s acquisition of CMC; however, organic growth was a very healthy 20%. Sensors and Systems 18% growth was all organic and our power distribution businesses are leading the way in this segment.
The relatively tame 7% growth in advanced materials is primarily the result of some really tough comparables. Both the defense group and the engineered materials group had significant ramp ups last year and this year’s 5% growth for each business is right where they expect it to be for the quarter.
On a year-to-date basis at the half way point, sales were up 31% compared to last years 20% organic growth. By segment for the first six months Avionics and Controls is up nearly 56%, Sensors and Systems 23% and advanced materials just over 16%.
Gross margin is continuing to move smartly. In the second quarter, gross margin this year was 33.9%; this compares to 31.7% last year. This 33.9% improved upon the 32.2 recorded in the first quarter and for the first half of the year gross margin results were 33% this year, compared to 30.5% last year and we like this improvement.
Segment earnings excluding corporate expenses were up over $8 million in the second quarter from $41 million last year to $49.5 million this year; an increase of nearly 21%. Year-to-date segment earnings totaled $94.5 million compared with the $69.3 million in the first half of '07, an increase of 36%.
By segment, operating earnings were the following: Avionics and Controls $16.4 million for the second quarter, $31.2 million for the first half; sensors & Systems $13.1 million and $27.8 million for the quarter and six months and advanced materials $19.9 million for the quarter, $35.6 million for the first half.
The 21% increase in segment earnings for the quarter and 36% year-to-date; this is strong. We are benefiting from robust aftermarket sales, particularly in Avionics and Sensors additionally our investment in new programs is paying dividends as we expand market share and high speed real applications and various retrofit programs.
Selling, general administrative expenses this year were $60 million in the quarter; 16% of sales. This performance compares favorably to the $50 million or 16.1% of sales we recorded last year. The principal driver of the dollar increase in SG&A was the acquisition of CMC.
Research development and engineering expenses are up this year compared to last year in both dollars and percent of sales. This quarter's $26.2 million was 7% of sales compared to $19.1 million or 6.1% in last year’s second quarter; for the first six months similar comparatives of $48.9 million or 6.6% this year and $32.6 million or 5.7% of sales in '07. Now, this increase in spending is primarily the result of two forces, both of which we identified in today's press release.
The first is the time and effort we are investing in a number of large Tier 1 programs. The T6B military trainer program is a perfect example. CMC is the cockpit integrator on this program and the program is proceeding well. Other examples include the A400M military transport for Airbus and Boeings 787. Of course the well publicized delays in these later two programs result in our incurring costs on an ongoing basis, we otherwise would not have to do.
Now, the second factor influencing our net spending comes in the form of various R&D support initiatives from national and regional governments around the world. As with all things in politics, timing is sometimes interesting. As an example, the Canadian government is currently implementing a new development support program. Negotiations with the Canadian government are being scheduled for later in the year to evaluate investment proposals for funding consideration on some exciting new technologies we are developing.
Looking to the tax rate, Esterline’s effective tax rate in the second quarter was 25.4%. Now this is somewhat higher than the 22% effective rate we had forecast previously. The primary reason for this increase was an adjustment in the finalization to our FIN 48 tax liabilities related to CMC and the secondary factor influencing the rate is our increased full-year income expectation and this is consistent with our increased full-year EPS guidance as noted in the press release.
For the second half of the year, we are projecting an effective rate of 23%. Bottom-line, earnings per share for the quarter on a fully diluted basis were $0.84, compared to $0.76 last year. For the first six months this year, we recorded earnings per share of $1.88 compared to $1.25 last year.
Esterline’s balance sheet and cash flow continued to be solid. Cash flow from operations for the first six months was a healthy $59.2 million. Capital expenditures in the same period were $21.3 million; depreciation and amortization $32.4 million. Inventories were up for the first six months, primarily reflecting backlog strength in raw materials and work-in-process.
As we noted in the press release, Esterline’s backlog has passed the $1 billion mark for the first time and we are still climbing. Bob back to you.
Robert Cremin
Good and thanks Bob. As I’m sure you noted in today’s release, we bumped our EPS guidance range again. This time to $3.45 to $3.55 and that’s from our previous range of $3.35 to $3.50. This business is seldom smooth but I really like how the year is shaping up. So, operator we will open to questions now, can you set that up for us?
Question-and-Answer Session
Operator
(Operator Instructions) Our first question today is going to come from Howard Rubel of Jefferies. Please go ahead.
Howard Rubel - Jefferies
Thank you very much. I have one ops question and one balance sheet question. On the ops question Bob, could you put a little bit more meat on the buns in terms of a couple of examples of where you put some performance systems initiatives to work, I mean obviously we see some of it in the bottom line, but maybe you could talk about a couple of business units that are really standout or the one of those awards you’ve referred to?
Robert Cremin
If you look at what we’ve done in China, we’ve had relationships there for 10 plus years, we are well situated on regional jet. While we have been able to open doors for our recent acquisition, Darchem, we are able to purchase supply through China at pretty advantages prices compared to what they had before, another thing that we are doing, our Leach operations or relay operations have a rather large operation down in Mexico and we are making it easier for one of our elastomer companies and our sensor companies to expand that. Basically, the way we do that is Esterline goes, arranges the building, and arranges for the people, we put in all the equipment and we basically rent space to these people and they take it from them. We try to make business easier for them. It works both ways, our U.S. based elastomer companies are also finding it easier to sell more into Europe thanks to the U.K. based operation Darchem. I can give you a lot’s of examples like that, we setup an operation into loops and I called a rental a desk operation, any -- Esterline owns the operation and you can basically put your applications, engineers there and we’ll walk you right into Airbus and make things easier for you. So, we are advancing things on lower cost, we are trying to push the revenues up by making it easier for people to sell, as part of the Esterline Performance System. I can give you a lot more of examples on…
Howard Rubel - Jefferies
No, I want go crazy, I understand and then the follow-up is on the balance sheet, you have for short-term investments. It looks like you’ve generated what I’ll call discretionary cash of around $15 or $16 million in the quarter. Could you, I mean at this rate it looks like you’re going to, you going to have fairly healthy free cash flow for the year. I mean two parts of this, one is, the short-term investments is just taking advantage of rates and is there anything else that you might want to talk to in terms of on what’s you are seeing in terms of improving working capital terms?
Bob George
Yes the short-term investments are just taking advantage of rates. I know that’s been a sensitive topic with a number of companies over the last few months, absolutely no liquidity concerns there or so that’s just advantages there. With respect to cash flow yes, we right now are enjoying very robust cash flow, we talked about that in our Board meeting in the first quarter and the Board and Bob Cremin are very comfortable with the balance sheet position we’ve established right now. We would like to see inventory growth slowdown a little bit and in terms of looking at overall working capital I won’t deny that, but on the other hand as we said in the press release and in my comments, the business units are looking at very, very strong growth prospects. Order rates are high, backlog is at an all time high for the company and they are really investing for the future and looking at their capacity. Again the customer base is very, very focused on assurity of supply and delivery confidence and the last thing in the world we want to do right now is disappoint our customer on that front. Bob, any comments.
Robert Cremin
Yes, Howard next time you are in L.A. and this is true for any analyst, we’d love to show you an operation that we call world class lien and these are the guys that got the award for the best lien job for Rockwell Collins and you got to see it, its essentially world class and next point Howard, and that is on acquisitions, we see the funnel starting to fill up a little bit. It was good to have a breather while the private equity guys stepped to the side and nobody knew what credit was going to be. So, we are still in the acquisitions gain, but it was just great to have long run and focusing on operations.
Operator
Thank you. Your next question will come from Tyler Hojo of Sidoti & Co. Please go ahead.
Tyler Hojo - Sidoti & Co
Quick question, just in terms of organic growth I mean obviously 14%, 15% pretty solid, but I go back and kind of remember what you guys where indicating on the last conference call, maybe a little bit closer to the 20% range. I guess what I am wondering is, in light of some of the uncertainties out there has that maybe moderated a little bit or do you still have expectations to get back a little bit closer to that 20% range in the back half of your fiscal year?
Robert Cremin
It’s going to be lumpy? The figures that we’ve used for over a business cycle, we expected to be in the high single digit. You could see a 20% in the quarter; you could see a 15% in the quarter. It’s really hard to nail it in advance.
Robert George
I was kind of in the midst of that conversation that you recall from our last conference call when we were talking about those growth rates. If you take a look at Avionics and Controls and Sensors and Systems we are absolutely sport on those numbers. We did 20% Avionics Controls, we did 18% in Sensors and Systems and those two segments are looking -- are very, very strong. In Advanced Materials we’ve got a variety of business units in that segment and as it’s our most complex segment in terms of the number of businesses. As I pointed out in my prepared comments the Defense Group and the Engineered Materials Group had very, very strong ramp ups last year. When they projected this year they are exactly where they thought they were going to be for this quarter and that was essentially in and around the 5% or 7% organic growth rate. In the Defense Group the U.S. airborne countermeasures segment of their business last year benefited from supplemental pricing and orders above the contract rate. That was part of the issue and then the engineered materials they just had a very, very strong run. The other business in that segment are proceeding and generating organic growth above that rate. So I think what you’re going to see as we look forward is using Bobs terms, which I agree with is lumpy and advanced material is probably our most lumpy segment, because of the nature of their order process. We’ll move around a bit, but I think that mid to upper teens of 15% to 20% rate is absolutely still where we are at with Avionics Controls and Sensors and Systems and then advanced material, it’s going to depend on the order pattern. Hopefully that helps that a little bit more.
Tyler Hojo - Sidoti & Co
Okay and I guess my second question is the backlog was obviously up nicely. Just in terms of that order pattern was that a mortars order that you’ve got in the quarter or what was that?
Robert Cremin
Actually it was not a defense product order. Those are what I call long term orders were sometimes we will get a Five Year Award. If I look at the trend in backlog, it actually is down in the Defense Group and it's because the long-term award for Artillery we are expecting to receive that in the middle of the summer sometime. So, the backlog build is coming from things other than defense.
Tyler Hojo - Sidoti & Co
Okay thanks.
Robert Cremin
Let me give you just another example because, we’re going to get a lot for the money that we’re putting into R&D, but we had a very attractive order for -- from [Inaudible] these would be the rail system, providing relays to those. We received a very attractive order on power distribution assemblies for the Sukhoi regional jet. Over on the Avionics side, CMC was selected by Airbus to do flight management systems for five f there Beluga Transports that’s the A300, it was selected by the Singapore Air Force to do flight management systems for their fleet of military trainers. They were also selected by the Chilean Air Force to do cockpit upgrades on the C-130s and the same thing was true on the South African Air Force where they are going to do an upgrade on naval and flight management systems. That last point, I don’t mean to overkill on this, but on the RAF, on the British Air Force we are doing work on their tanker and it’s another computer-based system to control refueling and that’s pretty complicated, but it's the type of niche business that we like to build, whether these things star surging at the end of this fiscal year or still into the next. I don’t have that specific data, but as I have said I like the outlook.
Operator
Thank you, and your next question is going to come from Troy Lahr of Stifel Nicolaus. Please go ahead.
Troy Lahr - Stifel Nicolaus
I don’t know if I missed it, but did you guys talk about the profitability at CMC and maybe how the foreign currency is impacting that business, I think the last quarter is breakeven.
Robert Cremin
No, Troy we did not talk about the profitability of CMC. We’re starting to -- with CMC now moving into the business units. The consolidated results after the acquisition time period. We are transitioning to the point of time where we tend not to talk about our business unit on an unconsolidated basis. However, in this particular case we will make an exception. As you know the and as we’ve talked about in the past, I mean the Canadian dollars is still strong against the U.S. dollar. CMC has a significant exposure to the U.S. dollar most so than our other business units and there they’re continuing to suffer from that strength in the Canadian dollars vis-à-vis the U.S. dollar. In addition they are spending a significant amount of money in research and development on a number of the programs that we identified earlier most notably the T6B program, which is as I mention, is proceeding well. The results for the quarter was somewhat disappointing again, actually it was a negative this quarter on the operating profit line however, their contributions to the net income line cannot be minimize because of the contributions that they get from research and development efforts and some of the structures that we put in place. So, while the operating profit line, again similar to the point we talked about last year when we made the acquisition there maybe a depressing effect there, they are contributing significant cash and profits on the bottom line.
Troy Lahr - Stifel Nicolaus
Okay. That’s helpful and then how should we think about the commercial business this quarter versus the Defense business. I mean are those both growing about the same or is one really outpacing the other here?
Robert Cremin
Well, the commercial market to us is a quite attractive. Remember a big piece of – an attractive part of our business are the engines that are up there, the CFM-56, best figure that I saw there were over 17,000 of them ship and flying and they are pilling on the hours so our parts businesses are pretty good. By the same token I see no let up in what is required by the military people in terms of replacement and upgrade this famous reset. We are getting a long work out of the Bradley program things are coming back from Iraq and Afghanistan that are really ground up by sand where we receive an attractive order for tank plenums. These are big seals on the air inlet for the M1A2 tank so, we don’t see it lending up. The things that we make typically wear out and that isn’t going to go away.
Troy Lahr - Stifel Nicolaus
So, I mean do you break it down, or I mean is there a certain growth percentage that you can out therefore there is two businesses, those product lines, or do you not break it down right now?
Robert Cremin
We don’t break it out that way and the reason is we are over so many hundreds of different programs; I would need a cast of character to pull all that data together
Troy Lahr - Stifel Nicolaus
And just last question. One of the U.S. carriers are starting to talk about capacity, pulling capacity out of the system in the back part of the year. I mean are you starting to see any of that impact or do you have concerns that could impact some of your growth plans, if they really start meaningful pulling out capacity, really reducing demand for some aftermarket work?
Robert Cremin
I’m not expecting to see any impact and the reason is the plans that they pulling, many of them will launch before Esterline began its program of putting together a lot of suppliers by a plan consolidator. I would love for them to take out the old D.C. nines contents minimal, if you look at a 737 one of the old ones and this is before we began our program. Our total avionics content was like $17,000. So, we’ve rather pull that old stuff out, because we don’t get much fro it.
Operator
Thank you. The next question will come from Eric Hugel, of Stephens Inc. Please go ahead.
Eric Hugel - Stephens Inc
Can you talk about, if I did my math correctly your advanced materials margin is around 17.5%. I know those things bounce around a lot, but was there anything unusually strong in the quarter there, that might not be sort of we might not see going forward.
Robert Cremin
Well, I’ll start Eric. First you have a mix change, the work that we were doing in the defense group. It was a very different mix, the year before it was enhanced by supplementals that came through. If I look that composite operating margins, last year same quarter, they were just under 20%, 17.5%, but I see attractive growth in our recent acquisition Darchem, they more than exceeded literally every metric that we have in our plans for them as an acquisition. I don’t see any trend there that I’m wondered about.
Eric Hugel - Stephens Inc
Can you talk about R&D 7%, higher than expected, I mean, I understand the reasons you guys see a lot of investment opportunity and at CMC and the delays. Would you expect, where would you expect that as a percentage of sales to sort of be over the rest of the year? Should we be thinking about staying up at these levels or coming down as we've about previously?
Robert George
Eric, Bob George here. In the queue we are going to, the discussion of R&D. we’ll indicate that we anticipate the full-year rate to be about 6.1%. So, we are expecting in the second half of the year, the R&D expense to gradually comedown. We are also as we’ve indicated were negotiating on various fronts with R&D contribution programs. We are expecting to see those kick in, so those factors are playing in our forecast and we do have those in our forecast when we look at the 6% rate. With that being said as we indicated in our prepared remarks, some of the reason why we are spending at a higher rate right now is that we are continuing to carry costs to support programs that have been delayed. Now as Bob Cremin, has pointed out in the past in these discussions we have the opportunity to be reimbursed for those cost because they are beyond what we agreed to, but that’s negotiated item and would come down the road. So, right now we are incurring those cost to support those programs, and as really supporting those program is really just a function of engineers being engineers, and since those programs are stretching out the primes and OEMs engineers are asking our guy’s questions and we have to respond to those. So, we are carrying those engineers on those programs. Our products and our programs are performing just fine and have been moved through the process, but we do incur those current period costs and then negotiations will take place once the programs move forward.
Operator
Your next question will come from Alan Robinson of RBC. Please go ahead.
Alan Robinson - RBC
Hi, could you give us a brief updates on what we could expect from the new Wallop facility. It’s seems to have being ongoing for sometime now, how close are we to getting about the new facility back online?
Robert Cremin
Alan, actually it’s a very timely question. We are going to be discussing that with the Board in this next Board meeting and we are submitting for planning consent for the new building and if the timelines stays on track we will have the new building up in running sometime late next year. Some of the background on that, and that is our current timeline we are working towards. Some of the background on that, The U.K’s Health and Safety Executive is still continues to evaluate the incident. We believe that the Health Safety Executive will not come out with their final report, until the Coroner's Inquest is completed; now that’s standard practice in the U.K. and there is noting that can be done to move that forward. We are confident that no major findings or no significant findings of negligence or anything will be fit found against the company or our management team. I think one thing that has been beneficial from that unfortunate incident is that the Wallop team has been forced to evaluate their operations on the north site plan. If you recall from the discussions we’ve had on that over the past couple of years. The Wallop plan is essentially split into tow half, the south site and the north site. The south side is where the action occurred. The north site, they have more than double the capability of the production out put on that facility over the last few years and they are continuing to support the MOD as a strategic partner and the MOD continues to view in that way. So we feel pretty comfortable about the prospects going forward on that. Bob
Robert George
Yes, Alan we are very closely link with the U.K Ministry of Defense. The projections that we’ve made in terms of the demand are supported by input that we’re getting from the Ministry of Defense and they are nudging us along, they want to get this program done.
Alan Robinson - RBC
Okay. Do I get the impression that there is significant sense of demand in terms of what you could provide them from the new south site when you get online?
Robert Cremin
Well the answer is yes. Mainly, because of the flares that will be coming out of a higher order of capability by far. They work a lot for the protection of assets helicopters, things like that.
Alan Robinson - RBC
And then finally, you mentioned that your acquisition pipeline is fairly. Should we expect to deal this calendar year or and also what kind of size of acquisitions that you are looking at, are you looking at a combinations of something similar or something similar to the CMC acquisition?
Robert Cremin
Well, it’s always hard to predict. When you do acquisition you literally have the kiss 8 to 10 frogs to find on Prince and all I can say it’s an ongoing process. We have a tradition of not betting the farm and we are trying to be very selective to complement the things that we know, keeping the technology boundaries that we are comfortable with and as you can see from the balance sheet that exists right now, we are in a position to keep doing we’ve being doing.
Operator
And your next question will come from Bill Dezellem of Titan Capital Management, please go ahead.
Bill Dezellem - Titan Capital Management
Thank you. Relative to Wallop given that the north site facility has been expanding as aggressively as it has. Depending on how things progressed with the Coroner's Inquest in terms of the amount of time it takes. Could you put the new capabilities with the new flares into the North facility refer their expansion there?
Robert Cremin
If the answer is realistically is not. We are building for a higher level of capability.
Bill Dezellem - Titan Capital Management
And then raw materials have been an issue for a number of companies, for a several quarters now and you all actually use a lot of raw materials, but have never to our recollection brought up that as been a concerned. How is it that you have negotiated successfully around the raw material price increases that we have been seeing?
Robert Cremin
Well, the phase that we use is, we are trying to price for value and that means is a lot of what we sell you can’t get out of the catalog. It a lot of custom, it’s a lot of sales source, and very often we’re trying to sell that plus the applications engineer and there is a minimum floor amount margin that we expect for the types of quality products that we are putting out. So, if see something starting to move we’ll just go right back to the customer and say, hay look you got to work with us on this because we are possibility going to get hurt on it. With the industry being healthy and things are improving our customers have had an open ear.
Operator
Our next question will come from J.B. Groh of D.A. Davidson. Please go ahead.
J.B. Groh - D.A. Davidson
Most of my questions have been answered but I just wanted to maybe get your thoughts on the balance sheet. Obviously the cash flow has been good, do you have opportunities to pay down debt faster and kind of what’s your interest budget for the year that’s imputed in your forecast?
Robert George
J.B., Bob George here. When you take a look at the balance sheet essentially right now we have got two long-term pieces of paper on the balance sheet. One due to 2013, one 2017 we are pretty comfortable with essentially maintaining those pieces in place and we don’t have any plans to take them out. The 2017 piece in fact was issued that a very favorable point in the market and would be difficult to even think about taking that out from a return standpoint. Looking at the only other debt instrument that we have, that we could pay down early without a make whole provision would be a U.K. denominated term loan. We’ve elected right now, we are looking at a couple of options with respect to debt in the U.K. but right now we’ll give the strength of the pound, we have elected to maintain that on there and in terms of what’s implosive in our forecast with respect to our interest expense is essentially what we have on Board right now because we more or less pay down the debt, the pre-payable debt late last year and so we have right now in terms of interest expenses will continue for the balance of the year.
J.B. Groh - D.A. Davidson
So is that $29 and million, $29.5 million something like that or a little more?
Robert George
Yes, I don’t have the exact number here in front of me, but it essentially what we are more or less what we are running right now on a monthly and quarterly basis.
J.B. Groh - D.A. Davidson
Okay and then I read an article you guys are moving out of downtown Seattle for obvious reasons, can you update us how that’s going and when that impact, the cost of that move would show up?
Robert Cremin
Yes, we struck a deal. We are going to have to move the plans out of the city of Seattle up to Snohomish County it's about 18 miles away. We would expect to be moving into the that building in, let's say the middle to late '09, which gives us plenty of time toward the transfer of various departments because the leases is in the buildings that we have expire about ten. We can extend them but we go to high market rates and then what we are finding is, what a lot of other manufacturers are finding and that is manufacturers in vibrant cities expand horizontally and its pretty hard competing with developers who can sale the same square foot eight, ten times depending on the height of the building. So, the one big advantage though by moving of our existing building is that we can finally lay out of our Avionics plant in a lean fashion. We are spread out over three buildings we have to close city streets we are working around a support columns they do a great job I don’t have to do it in that facility so, it's timely and their aggressive plans underway right now to make it all happen.
J.B. Groh - D.A. Davidson
That was my next question, that place has always struck me as sort of a catacomb type of environment. I’m sure it will make a nice condo, but it's interesting that you will be able to maybe to even lean up further in that operation with the new layout. Thanks for your time I am appreciate it, congratulation on the quarter.
Operator
And next up, we have a follow-up question from Mr. Eric Hugel of Stephens Inc. please go ahead.
Eric Hugel - Stephens Inc
Bob did you mention how much cash flow from operations that you did in the quarter?
Robert George
Yes, I did Eric, but I can give it again. Let me just find it, it was a nice number. I just can't remember what it was offhand. I will jump in while I am flipping through my remarks here so, if do you have another question or is there…
Eric Hugel - Stephens Inc
Yes, I mean I guess that the follow-up to that is where would you expect to be for the year from that and cash flow from ops as well as in CapEx?
Robert George
Capital expenditures right now were a little over $20 million for the first six months and we expect to see that trend continue. In terms of cash from operations prior to CapEx, we have $59.2 million for the first six months. So, in terms of looking at a free cash flow basis, cash flow from operations minus capital expenditures was about $38 million, $39 million plus or minus. Right now as I mentioned we are generating cash and in response to Howard’s question opening up the call, we are generating lot of cash right now and I expect to see that trend continue going forward. I don’t see anything really that’s going to impact it. We continue to, as Bob mentioned in his comments we continue to take a hard line with respect to requests to add breaks and mortar to the company. We think that our lean efforts and our lean enterprise efforts are never ending, you can always take a look at that and free up capacity we found that to be case. We are investing in our Mexican facilities again as Bob mentioned, so that this some investment there, but cash flow is right now, is very, very strong. EBITDA I think for the first six month again I don’t have the exact number here, but I think we are running on an EBITDA basis have a little over $100 million for the first six months. That’s right inline we projected earlier this year, when we are looking at a cash flow. So, we are doing just fine on the balance sheet and cash flow front.
Robert Cremin
Yes and Eric, its fair to characterize, its rare to see a third shift anywhere in Esterline, where we have second shifts they usually skeleton and on first shift with the Esterline performance and we continue focus on velocity through the plan with freezer capacity. So, we are set for this year and we are looking pretty good for next year as well.
Eric Hugel - Stephens Inc
Bob and one last question, if we look at let see the around 40% of your business that’s commercial aerospace. Sort of how much of that should we think about being sort of aftermarket exposed and I guess what is the relative. I’m assuming it’s significantly more profitable than sort of an OEM exposure. So, if you wanted go -- I guess another way to think about the question is how much of your overall business is related to commercial after market on the top-line and then think about how much of your overall EBIT is related to commercial after market?
Robert George
Eric this is Bob George, great question. I’m not sure how precise I want to be in my answers, but I’m not sure how precise I could be in my answers because again it’s very similar to the question that was asked earlier with respect to growth and where that growth is occurring. I mean we are spread out over so many programs, it’s difficult, but let me take a shot. I would say that with respect to our commercial aerospace exposure probably and I say probably because we’ve never actually looked at it this way, but probably about half of our business is from aftermarket in commercial, so 50% of that 40% is probably from commercial. You are correct; the aftermarket business generate significantly higher margins than the OEM business. Notice, I didn’t say significantly more profitable, I said significantly higher margins. There is obviously a significant price to pay to get to that aftermarket content and I know you know that, but I mean it’s just an important point, so on an ongoing basis that 50% is significantly higher than the OEM or the present content. Now where I’m probably going to draw line is I’m probably not going to make an estimate in terms of how much of our EBIT is due to the aftermarket and the reason is because I’m not sure that that’s a -- I’m not sure that intellectually we can make that argument because of all of the support functions that go into getting to that aftermarket, if you understand what I mean, but I’m comfortable with 50% of our commercial business being aftermarket and with the comment that it generates significantly higher gross margins than OEM in part.
Eric Hugel - Stephens Inc
Would that be straight aftermarket as well as retrofit?
Robert George
Now there is an interesting question that the retrofit market is -- and this is where when we are going out for a road show or an offering where the attorneys get a little bit dicey here because retrofits in our various businesses are handled in different ways and by that I mean sometimes our retrofits come through in some of our business units and they appear to be as if they’re new business and so, it’s hard for us to specifically identify those. Other ones come through as if they’re after market; in all cases however though the margins for the retrofit business fit neatly between the OEM business and the after market. So…
Eric Hugel - Stephens Inc
That’s very helpful and just one follow on, just one more question. With regards to I guess last quarter we had the issue of number of days being different year-over-year; with this quarter the same number of days year-over-year?
Robert George
No and I’m glad you asked that clarifying comment. Effectively because of our fiscal year, every fourth or fifth year we’ll get that additional week and that additional week will always be in the first quarter only. The rest of the quarters are exactly the same.
Robert Cremin
And Eric the other part of why it’s difficult sometimes to nail the after market percent, we also ship through distributors and very often our visibility there, one often assumes that lot of those go to the after market, but sometimes they also bleed over to the OEM market so, we got a piece of our business that’s great. We’re shipping new ground fault interrupter products. I would call that new products to OEM but, a lot of people look at it and say it’s really retrofit, either way we love having it.
Operator
Thank you. And there are no further questions at this time. Please continue.
Robert Cremin
Okay, well in the absence of any other questions, I’d like to thank you again for you interest in Esterline. Please feel free to contact us if you have any questions and we look forward to speaking with you again next quarter. Thanks a lot.
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