Esterline Technologies: Third Quarter Report Boosts Confidence Into 2013

| About: Esterline Technologies (ESL)

Shares of Esterline Technologies Corporation (NYSE:ESL), the manufacturing company serving aerospace and defense customers, rose almost 13% in Friday's trading session. The company reported its third quarter results after market close on Thursday.

Third Quarter Results

Esterline Technologies reported third quarter revenues of $485.9 million, up 19% on the year. The company reported a net loss of $17.1 million, or $0.55 per diluted share. Esterline took a non-cash goodwill charge of $1.69 related to its UK Racal Acoustics defense business. Earlier in August, the company already pre-announced the goodwill write-down.

While the net loss is a disappointment, Esterline's management made upbeat comments about the business. The integration of the Souriau acquisition is proceeding well. Esterline is able to achieve significant revenue synergies and is finding new ways to develop solutions for its customers.

For the first nine months of 2012, Esterline reported new orders totaling $1.45 billion. This came in line with its reported revenues over the time period. Order intake rose 5% compared to last year, resulting in an order backlog of $1.24 billion at the moment.

CEO Brad Lawrence commented on the results:

"We expect a rebound to finish the year as discrete events that impact the third quarter are abating and improvements at our Avionics Systems, Control Systems, and Engineered Materials operations will contribute to a strong fourth quarter performance."

Segmental Information

Revenues at the Avionics & Controls division fell 6% to $195.1 million during the quarter. The division reported an operating loss of $25.6 million, as a result of the goodwill charge. The bankruptcy of Hawker Beechcraft negatively impacted the pace of the T-6B program.

Sensor & Systems revenues rose 94% to $171.6 million. Operating profits increased by 70% to $18.3 million. Improved performance is driven by the acquisition of Souriau, which continues to perform above expectations.

Revenues at Advanced Materials rose by 6% to $119.3 million. Operating profits fell 8% to $17.3 million.


For the full year, Esterline Technologies anticipates revenues between $1.95-$2.00 billion. This represents a growth of approximately 15% compared to 2011.

Fourth quarter diluted earnings per share are expected to come in between $1.60-$1.70. For the full year, non-GAAP earnings per share are expected to come in between $4.90-$5.00 per share. This excludes the goodwill charge as discussed above.

CEO Lawrence expects that the solid order backlog enables Esterline to drive growth and capture additional profitability in 2013. T-6 production rates are expected to recover, while F-35 production is expected to return to normal levels.


Esterline ended its third quarter with $218 million in cash and equivalents. The company operates with short- and long-term debt of $632 million, resulting in a net debt position of $414 million.

For the first nine months of 2012, the company reported sales of $1.46 billion. The company net earned $51 million, or $1.63 per diluted share.

After Friday's jump, the market values Esterline at $1.85 billion. This values the firm at 0.9 times annual revenues and 12 times non-GAAP earnings. The valuation compares to a revenue multiple of 2.2 times for HEICO Corporation (NYSE:HEI) and 0.9 times for Triumph Group Inc. (NYSE:TGI). These competitors trade at 23 and 10 times trailing annual earnings, respectively.

Currently, Esterline Technologies does not pay a dividend.

Investment Thesis

Year to date, shares of Esterline have traded with gains of 7%. Shares rose from $55 in January to highs of $75 in March. Shares steadily drifted downwards towards $52 in recent weeks, and have now jumped back to $60.

Over the past five years, shares advanced some 20%. Shares traded as low as $20 in the beginning of 2009 and peaked at $80 in 2011. Between 2008 and 2012, revenues rose from $1.5 billion to an expected $2.0 billion this year. Earnings per share rose from $3.72 in 2008 to expected non-GAAP earnings of $4.90-$5.00 per share for 2012.

The company is confident for 2013. It noted that its mix of programs in international markets should minimize the impact of the defense budget environment in the US. Esterline furthermore received shipping orders for early 2013 for two large and long-delayed international orders.

Valued at fair levels, long-term investors who are not afraid of the impact of budget costs, could pick up some shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Aerospace/Defense Products & Services, Earnings
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