<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission file number 1-6357
------
ESTERLINE TECHNOLOGIES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2595091
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
Of incorporation or organization) Identification No.)
10800 NE 8th Street, Bellevue, Washington 98004
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code 425/453-9400
------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of September 1, 1999, 17,342,374 shares of the issuer's common stock
were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of July 31, 1999 and October 31, 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
----------- -----------
ASSETS (unaudited)
- ------
<S> <C> <C>
Current Assets
Cash and equivalents $ 63,339 $ 8,897
Accounts receivable, net of allowances
of $2,154 and $2,987 for doubtful accounts 65,528 77,477
Inventories
Raw materials and purchased parts 30,104 27,239
Work in process 35,885 33,284
Finished goods 14,296 11,312
-------- --------
80,285 71,835
-------- --------
Deferred income taxes 13,429 15,693
Prepaid expenses 5,160 4,055
-------- --------
Total Current Assets 227,741 177,957
-------- --------
Property, Plant and Equipment 216,142 206,104
Accumulated depreciation 122,176 112,042
-------- --------
93,966 94,062
-------- --------
Goodwill and Intangibles, net 96,520 99,344
Other Assets 15,391 15,816
-------- --------
$433,618 $387,179
======== ========
</TABLE>
<PAGE> 2
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of July 31, 1999 and October 31, 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
- ------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 18,279 $ 23,307
Accrued liabilities 58,969 68,275
Credit facilities 9,090 9,533
Current maturities of long-term debt 6,109 6,358
Federal and foreign income taxes -- 385
-------- --------
Total Current Liabilities 92,447 107,858
-------- --------
Long-Term Liabilities
Long-term debt, net of current maturities 117,492 74,043
Deferred income taxes 11,084 8,902
Commitments and Contingencies -- --
Shareholders' Equity
Common stock, par value $.20 per share,
authorized 60,000,000 shares, issued and
outstanding 17,342,374 and 17,317,178 shares 3,468 3,463
Capital in excess of par value 46,824 46,793
Retained earnings 167,242 149,091
Cumulative translation adjustment (4,939) (2,971)
-------- --------
Total Shareholders' Equity 212,595 196,376
-------- --------
$433,618 $387,179
======== ========
</TABLE>
<PAGE> 3
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Nine Months ended July 31, 1999 and 1998
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $112,748 $110,891 $337,567 $321,172
Costs and Expenses
Cost of sales 69,323 68,840 209,061 198,265
Selling, general and
administrative 32,993 29,779 96,122 90,503
Interest income (712) (466) (2,165) (1,469)
Interest expense 2,266 776 6,704 2,373
-------- -------- -------- --------
103,870 98,929 309,722 289,672
-------- -------- -------- --------
Earnings Before Income Taxes 8,878 11,962 27,845 31,500
Income Tax Expense 2,926 4,043 9,694 10,833
-------- -------- -------- --------
Net Earnings $ 5,952 $ 7,919 $ 18,151 $ 20,667
======== ======== ======== ========
Net Earnings Per Share - Basic $ .34 $ .46 $ 1.05 $ 1.20
======== ======== ======== ========
Net Earnings Per Share - Diluted $ .34 $ .45 $ 1.03 $ 1.17
======== ======== ======== ========
</TABLE>
<PAGE> 4
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended July 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows Provided (Used) by Operating Activities
Net earnings $ 18,151 $ 20,667
Depreciation and amortization 15,652 12,999
Deferred income taxes 4,446 300
Working capital changes, net of effect of acquisitions
Accounts receivable 10,372 1,088
Inventories (9,715) (11,685)
Prepaid expenses (1,257) (109)
Accounts payable (4,528) (864)
Accrued liabilities (8,741) (770)
Federal and foreign income taxes (365) (1,315)
Other, net (302) (6,583)
-------- --------
23,713 13,728
-------- --------
Cash Flows Provided (Used) by Investing Activities
Capital expenditures (13,057) (26,605)
Capital dispositions 38 569
Acquisitions -- (20,130)
-------- --------
(13,019) (46,166)
-------- --------
Cash Flows Provided (Used) by Financing Activities
Net change in credit facilities 318 7,476
Proceeds from sale of senior notes 100,000 --
Repayment of bridge facility (50,000) --
Repayment of long-term obligations (6,299) (6,162)
-------- --------
44,019 1,314
-------- --------
Effect of Exchange Rates (271) (478)
-------- --------
Net Increase (Decrease) in Cash and Equivalents 54,442 (31,602)
Cash and Equivalents - Beginning of Period 8,897 56,045
-------- --------
Cash and Equivalents - End of Period $ 63,339 $ 24,443
======== =========
Supplemental Cash Flow Information
Cash paid during the period for
Interest expense $ 6,547 $ 3,014
Income taxes 5,604 10,962
</TABLE>
<PAGE> 5
ESTERLINE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended July 31, 1999 and 1998
1. The consolidated balance sheet as of July 31, 1999, the consolidated
statements of operations for the three and nine months ended July 31, 1999
and 1998, and the consolidated statement of cash flows for the nine months
ended July 31, 1999 and 1998 are unaudited, but in the opinion of
management all of the necessary adjustments have been made to present
fairly the financial statements referred to above. The results of
operations and cash flows for the interim periods presented are not
necessarily indicative of results for the full year.
2. The notes to the consolidated financial statements in the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1998
provide a summary of significant accounting policies and additional
financial information that should be read in conjunction with this
Form 10-Q.
3. Classifications have been changed for certain amounts in the preceding
period to conform to the current period's financial presentation.
4. The Company's comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Earnings $5,952 $7,919 $18,151 $20,667
Foreign Currency Translation Adj. 201 83 (1,968) (1,003)
------ ------ ------- -------
Comprehensive Income $6,153 $8,002 $16,183 $19,664
====== ====== ======= =======
</TABLE>
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations
-------------------------
Certain statements in the commentary contain forward-looking statements
within the meanings of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements involve risks and uncertainties regarding matters
that could significantly affect expected results, including information
about industry trends, growth, Year 2000, orders, currency fluctuations,
backlog, capital expenditures and cash requirements. The Company is
susceptible to economic cycles and financial results can vary widely based
on a number of factors, including domestic and foreign economic conditions
and developments affecting specific industries and customers.
A significant portion of the sales and profitability of some
Company businesses is derived from telecommunications, electronics,
computer, automotive, aerospace and defense markets. The products
sold by most of the Company's businesses represent capital
investment or support for capital investment by either the initial
customer or the ultimate end-user. Changes in general economic
conditions or conditions in these and other specific industries,
capital acquisition cycles and government policies, collectively or
individually, can have a significant effect on the Company's
results of operations and financial condition. Thus, actual
results may vary materially from these forward-looking statements.
The Company does not undertake any obligation to publicly release
the results of any revisions that may be made to these forward-
looking statements to reflect any future events or circumstances.
Results of Operations
- ---------------------
Quarter Ended July 31, 1999 Compared to Quarter Ended July 31, 1998
Net sales by Group for the quarter ended July 31 were as follows:
(In thousands)
<TABLE>
<CAPTION>
Incr./(Decr.)
from prior
year 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Automation (22%) $ 28,122 $ 36,009
Aerospace and Defense 29% 56,305 43,636
Instrumentation (9%) 28,321 31,246
-------- --------
Total Net Sales $112,748 $110,891
======== ========
</TABLE>
Net sales for the third quarter of 1999 increased slightly from the same
prior year period. Aerospace/Defense Group sales have increased primarily
due to revenue from Kirkhill, an acquisition completed in August 1998.
This increase was offset by declines in the Automation and Instrumentation
Groups. In the third quarter, weakness in the agricultural
<PAGE> 7
market significantly reduced demand for farm equipment and the machinery used
to produce it. Quarter-to-quarter comparisons were affected by the sale of
Tulon in September 1998. Sales in the Instrumentation Group decreased in
the third quarter due to declines in the general manufacturing markets.
Total gross margin as a percentage of net sales was 39% for the third
quarter of 1999 compared with 38% for the same period in 1998. Gross
margins in the Automation Group continue to be affected by delayed
purchasing decisions and pricing pressures. This was accentuated in the
third quarter, however, total gross margin was balanced by improvement in
other areas. Gross margins among the Groups ranged from 31% to 42%
compared with 36% to 39% during the same period in 1998.
Selling, general and administrative expenses increased to 29% of net sales
for the third quarter of 1999 compared to 27% during the same period in the
prior year. The drop in sales of equipment used to produce farm equipment
and machinery was the primary factor. Revenues declined quicker than
initially anticipated and the Company deferred a decision to implement
additional cost reduction measures in order to more fully evaluate the
impact of reduced sales. Expenses totaled $33 million in the current
quarter compared with the prior year's total for the same period of
$29.8 million.
Interest expense increased $1.5 million to $2.3 million in the third
quarter primarily due to the higher level of long-term debt outstanding.
New orders for the third quarter of 1999 were $110 million compared with
$102.8 million for the same period in 1998, primarily due to new orders
received by the Aerospace/Defense Group.
Overall, the depressed market for printed circuit board manufacturing
equipment, delayed purchasing decisions for capital goods equipment and
declines in general manufacturing have resulted in downturns in both the
Automation and Instrumentation Groups. During fiscal 1998, the Company
acquired several businesses serving aerospace markets. The new
acquisitions combined with the current businesses have balanced the
declines experienced, both in sales and gross margin.
<PAGE> 8
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
Net sales by Group for the nine months ended July 31 were as follows:
(In thousands)
<TABLE>
<CAPTION>
Incr./(Decr.)
from prior
year 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Automation (27%) $ 81,458 $111,259
Aerospace and Defense 39% 168,424 120,947
Instrumentation (1%) 87,685 88,966
-------- --------
Total Net Sales $337,567 $321,172
======== ========
</TABLE>
Net sales for the first nine months of 1999 were up 5% compared with the
same period in the prior year, primarily due to increased Aerospace/Defense
sales reflecting the addition of Kirkhill revenue. This was partially
offset by sales declines experienced by the other Groups. Automation Group
sales have been under pressure since the third quarter of 1998 due to poor
worldwide market conditions for printed circuit board manufacturing
equipment, and the Automation Group began to experience the effects of a
significant decline in sales of equipment to agriculture-related
businesses. The sale of Tulon in late 1998 has impacted Automation Group
sales as well.
Total gross margin as a percentage of net sales was 38% for the first nine
months of both 1999 and 1998. Gross margins among the Groups ranged from
31% to 41% compared with 36% to 40% during the same period in 1998.
Selling, general and administrative expenses remained at 28% of net sales
for the first nine months of 1999. Actual selling, general and
administrative expenses increased to $96.1 million compared with
$90.5 million during the same period in 1998.
Interest income increased to $2.2 million for the first nine months of 1999
due to the $54.4 million increase in available cash from October 31, 1998.
Cash has been invested in tax exempt notes and other short-term
instruments. Interest expense increased $4.3 million for the first nine
months of 1999 primarily due to the higher level of long-term debt
outstanding.
New orders for the first nine months of 1999 were $349.7 million compared
with $339.1 million for the same period in 1998. Company-wide backlog at
July 31, 1999 was $180.5 million compared with $172 million at
July 31, 1998. The increase in backlog was primarily attributable to orders
received for aerospace products. Approximately $107.7 million in backlog
is scheduled for delivery after fiscal 1999. Most orders in backlog are
subject to cancellation until delivery.
<PAGE> 9
The Company has assessed the risk from failure of internal systems and
those of vendors and suppliers from year 2000 ("Y2K") related issues as
low.
Since 1997, the Company has been monitoring Y2K issues. The management
team at each of its units has been involved in supervising efforts at that
level. The Company's risk assessment is based on the fact that its
businesses are decentralized with separate, non-integrated computer
systems. This decentralized structure minimizes reliance on single product
vendors, and the Company believes that most of its third party
relationships are replaceable. Therefore, a Y2K related failure from an
internal or external source is not expected to permeate the Company's
operations as a whole.
Based on information currently available from the Company's software
providers combined with internal evaluations, the Company believes that its
most critical systems are Y2K compliant. Compliance efforts and testing
will continue, further minimizing issues that may arise on less critical
systems. Most of the Company's businesses have identified critical areas
and have prepared manual contingency procedures in the event that a failure
does occur. These procedures are designed to enable continued operations
and include such items as printing forms (e.g., customer workorders,
invoices and inventory management), printing lists of information allowing
lookups outside of the computer system, and critical phone lists.
Few of the Company's products contain software coding. For products
identified as containing software, testing has been completed and updates
are available. The Company has sought to identify customers that require
upgrades. The Company's businesses have posted information on their
websites and on each invoice sent to customers. In the event that a
customer experiences a failure after December 31, 1999, staff and upgrade
kits will be available to resolve issues.
The Company has also focused efforts on assessing the Y2K readiness of
suppliers. Most have indicated they have materially compliant systems.
The Company has identified alternative sources for more critical materials
and is conducting site visits for sole-source suppliers. In addition,
tactical decisions regarding appropriate stockpiling are being evaluated.
Based on currently available information, the Company estimates total costs
to be expended for outside consultants, software and hardware applications
to be less than $1 million. The Company does not track internal costs such
as payroll related to Y2K projects.
<PAGE> 10
The Company has assessed the Y2K situation and believes that the worst-case
scenario would be a failure of a small area of an internal system that was
not identified in the Y2K assessments. A failure of this nature is not
expected to interrupt processing, but will require analytical techniques to
discern the error. For example, if a Y2K error occurred in an inventory
system, the inventory levels might be understated thus creating a shortage
at some point in the future. The Company is engaged in ongoing efforts to
ensure that unanticipated Y2K issues are identified as early as possible
after December 31, 1999.
The Company has made every attempt to address Y2K issues as they are
identified. However, the Company is unable to predict the ultimate impact
of Y2K non-compliance issues due to all of the uncertainties relating to
Y2K, especially with third party suppliers.
Liquidity and Capital Resources
- -------------------------------
Cash and equivalents on hand at July 31, 1999 totaled $63.3 million, an
increase of $54.4 million from October 31, 1998. Net working capital
increased to $135.3 million at July 31, 1999 from $70.1 million at
October 31, 1998. Increases in both cash and net working capital are
primarily related to a $100 million private placement of senior notes
("1999 Senior Notes") completed in November 1998. Proceeds from the
placement were used to retire the bridge facility for the Kirkhill
acquisition.
Net accounts receivable were $65.5 million at July 31, 1999, compared to
$77.5 million from October 31, 1998. The decrease is primarily related to
reduced levels of receivables in both the Automation and Aerospace/Defense
Groups. Collection of Aerospace/Defense Group receivables from strong
fourth quarter sales in 1998, together with sales declines in the
Automation Group, have resulted in a lower level of outstanding
receivables. Current liabilities decreased to $92.4 million at
July 31, 1999 from $107.9 million at October 31, 1998, primarily due to the
timing of certain obligations.
Capital expenditures, consisting of machinery, equipment and computers, are
anticipated to be approximately $21 million during fiscal 1999, compared
with $29.8 million in fiscal 1998. Capital expenditures for the nine
months ended July 31, 1999 totaled $13.1 million and were concentrated in
the Aerospace/Defense and Instrumentation Groups for machinery and
equipment, including enhancements to information technology.
Total debt increased $42.8 million from October 31, 1998 to $132.7 million
at July 31, 1999, principally due to the 1999 Senior Notes placement.
Total debt outstanding at July 31, 1999 consisted of $100 million under the
Company's 1999 Senior Notes, $17.2 million under the Company's 8.75% Senior
Notes, $1.7 million for revenue bonds and $13.8 million under various
foreign currency debt agreements, including capital lease obligations. The
8.75% Senior Notes have a scheduled annual payment of $5.7 million, which
will continue until maturity on July 30, 2002. The 1999 Senior Notes have
maturities ranging from 5 to 10 years and interest rates from 6% to 6.77%.
Management believes cash on hand and funds generated from operations will
adequately service operating cash requirements and capital expenditures
through 1999.
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
The Company has various lawsuits and claims, both offensive and defensive,
and contingent liabilities arising from the conduct of its business, none
of which, in the opinion of management, is expected to have a material
effect on the Company's financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits.
11. Schedule setting forth computation of basic and
diluted earnings per common share for the three and
nine months ended July 31, 1999 and 1998.
27. Financial Data Schedule (EDGAR Only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
for which this report is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Esterline Technologies Corporation
(Registrant)
Dated: September 10, 1999 By: /s/Robert D. George
----------------------------------
Robert D. George
Vice President,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE> 12
EXHIBIT 11
<TABLE>
<CAPTION>
ESTERLINE TECHNOLOGIES CORPORATION
Computation of Basic and Diluted Earnings Per Common Share
For the Three and Nine Months Ended July 31, 1999 and 1998
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- --------------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic
- -----
Net Earnings $ 5,952 $ 7,919 $18,151 $20,667
======= ======= ======= =======
Weighted Average Number of Common Shares Outstanding 17,342 17,289 17,336 17,287
======= ======= ======= =======
Net Earnings per Common Share - Basic $ .34 $ .46 $ 1.05 $ 1.20
======= ======= ======= =======
Diluted
- -------
Net Earnings $ 5,952 $ 7,919 $18,151 $20,667
======= ======= ======= =======
Weighted Average Number of
Common Shares Outstanding 17,342 17,289 17,336 17,287
Net Shares Assumed to be Issued for Stock Options 283 458 332 433
======= ======= ======= =======
Weighted Average Number of Common Shares and Common
Equivalent Shares Outstanding 17,625 17,747 17,668 17,720
======= ======= ======= =======
Net Earnings per Common Share - Diluted $ .34 $ .45 $ 1.03 $ .17
======= ======= ======= =======
</TABLE>
<PAGE> 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial information Extracted From the
Esterline Technologies Corporation Consolidated Balance Sheet At July 31, 1999
and the Related consolidated Statements of Operations for the Nine Months then
Ended and is Qualified in its Entirety by Reference to Such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 63,339
<SECURITIES> 0
<RECEIVABLES> 67,682
<ALLOWANCES> 2,154
<INVENTORY> 80,285
<CURRENT-ASSETS> 227,741
<PP&E> 216,142
<DEPRECIATION> 122,176
<TOTAL-ASSETS> 433,618
<CURRENT-LIABILITIES> 92,447
<BONDS> 117,492
0
0
<COMMON> 3,468
<OTHER-SE> 209,127
<TOTAL-LIABILITY-AND-EQUITY> 433,618
<SALES> 337,567
<TOTAL-REVENUES> 337,567
<CGS> 209,061
<TOTAL-COSTS> 209,061
<OTHER-EXPENSES> 96,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,539
<INCOME-PRETAX> 27,845
<INCOME-TAX> 9,694
<INCOME-CONTINUING> 18,151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,151
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.03
</TABLE>
