| • QUARTERLY REPORT ON FORM 10-Q • FISCAL YEAR 2012 ANNUAL INCENTIVE COMPENSATION PLAN • LONG-TERM INCENTIVE PLAN • OFFER MEMO TO ALAIN DURAND DATED JUNE 14, 2011 • COMPUTATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE • SECTION 302 CEO CERTIFICATION • SECTION 302 CFO CERTIFICATION • SECTION 906 CEO CERTIFICATION • SECTION 906 CFO CERTIFICATION • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
OR
For the transition period from to Commission file number 1-6357 ESTERLINE TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter)
500 108th Avenue N.E., 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 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X As of February 28, 2012, 30,651,841 shares of the issuer’s common stock were outstanding.
PART I – FINANCIAL INFORMATION
ESTERLINE TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEET As of January 27, 2012 and October 28, 2011 (In thousands, except share amounts)
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ESTERLINE TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEET As of January 27, 2012 and October 28, 2011 (In thousands, except share amounts)
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ESTERLINE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS For the Three Month Periods Ended January 27, 2012 and January 28, 2011 (Unaudited) (In thousands, except per share amounts)
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ESTERLINE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Month Periods Ended January 27, 2012 and January 28, 2011 (Unaudited) (In thousands)
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ESTERLINE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Month Periods Ended January 27, 2012 and January 28, 2011 (Unaudited) (In thousands)
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ESTERLINE TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Month Periods Ended January 27, 2012 and January 28, 2011
In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment is effective for the Company in the second quarter of fiscal year 2012, with early adoption prohibited. The adoption of this amendment guidance is not expected to have a material impact on the Company’s financial statements.
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The Company’s accumulated other comprehensive loss is comprised of the following:
The following summarizes the allocation of the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price is preliminary. Differences between the preliminary and final purchase price allocation could be material. We have not completed our analysis estimating the fair value of property, plant and equipment, intangible assets, income tax liabilities and certain contingent liabilities. The estimated fair value adjustment for inventory is $41.7 million, which has been recognized as cost of goods sold over 4.5 months, the estimated inventory turnover. The purchase price includes the value of future development of existing technologies, the introduction of new technologies, and the addition of new customers. These factors resulted in recording goodwill of $355.7 million. The amount allocated to goodwill is not deductible for income tax purposes.
Pro Forma Financial Information The following pro forma financial information shows the results of continuing operations for the three month period ended January 28, 2011, as though the acquisition of Souriau had occurred at the beginning of the fiscal year. The pro forma financial information includes, where applicable, adjustments for: (i) the amortization of acquired intangible assets, (ii) additional interest expense on acquisition related borrowings and (iii) the income tax effect on the pro forma adjustments. The pro forma adjustments related to the acquisition of Souriau are based on a preliminary purchase price allocation. Differences between the preliminary and final purchase price
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allocation could have an impact on the pro forma financial information presented and such impact could be material. The pro forma financial information below is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated above or the results that may be obtained in the future. Pro forma results are presented below for the three month period ended:
On December 30, 2010, the Company acquired Eclipse Electronic Systems, Inc. (Eclipse) for $123.8 million. The purchase price includes cash of $14.0 million in contingent consideration which was deposited in an escrow account and will be paid to the seller if certain performance objectives are met over the three-year period. The estimated fair value of the contingent consideration is $13.4 million. On February 2, 2012, the Company paid the initial $5.0 million of three installments totaling $14.0 million of contingent consideration. Eclipse is a designer and manufacturer of embedded communication intercept receivers for signal intelligence applications. Eclipse is included in the Avionics & Controls segment. The following summarizes the allocation of the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The purchase price includes the value of future development of existing technologies, the introduction of new technologies, and the addition of new customers. These factors resulted in recording goodwill of $67.9 million. The amount allocated to goodwill is not deductible for income tax purposes.
It is reasonably possible that within the next twelve months approximately $0.8 million of tax benefits associated with research and development tax credits, capital and operating losses that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of a statute of limitations.
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Employee Stock Purchase Plan The ESPP is a “safe-harbor” designed plan whereby shares are purchased by participants at a discount of 5% of the market value on the purchase date and, therefore, compensation cost is not recorded under the ESPP. Equity Incentive Plan Under the equity incentive plan, option exercise prices are equal to the fair market value of the Company’s common stock on the date of grant. The Company granted 311,400 options and 218,500 options in the three month periods ended January 27, 2012, and January 28, 2011, respectively. The weighted-average grant date fair value of options granted during the three month periods ended January 27, 2012, and January 28, 2011, was $23.74 per share and $31.10 per share, respectively. The fair value of each option granted by the Company was estimated using a Black-Scholes pricing model which uses the assumptions noted in the following table. The Company uses historical data to estimate volatility of the Company’s common stock, option exercise, and employee termination assumptions. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the time of the grant.
Employee Sharesave Scheme Under the employee sharesave scheme for U.K. employees, participants are allowed the option to purchase shares at a discount of 5% of the market price of the stock as of the beginning of the offering period. The term of these options is three years. The sharesave scheme is not a “safe-harbor” design, and therefore, compensation cost is recognized on this plan. Under the sharesave scheme, option exercise prices are equal to the fair market value of the Company’s common stock on the date of grant. No options were granted during the first fiscal quarter of 2012 or 2011.
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In July 2011, the Company amended the secured credit facility to provide for a new €125.0 million term loan (Euro Term Loan) to Esterline Technologies Europe Limited. The interest rate spread on the Euro Term Loan will range from Euro LIBOR plus 1.5% to Euro LIBOR plus 2.25% depending on the leverage ratios at the time the funds are drawn. At January 27, 2012, the Company had €113.4 million outstanding or $150.0 million under the Euro Term Loan at an interest rate of Euro LIBOR plus 2.0% or 3.02%. The loan amortizes at 1.25% of the outstanding balance quarterly through March 2016, with the remaining balance due in July 2016.
Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets and liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, a valuation of these instruments does not require a significant degree of judgment. Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
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Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment. The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy at January 27, 2012, and October 28, 2011:
The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency. The fair value is determined by calculating the difference between quoted exchange rates at the time the contract was entered into and the period- end exchange rate. These contracts are categorized as Level 2 in the fair value hierarchy. The Company’s derivative contracts consist of foreign currency exchange contracts and interest rate swap agreements. These derivative contracts are over the counter and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy. The Company’s contingent purchase obligation consists of up to $14.0 million of additional consideration in connection with the acquisition of Eclipse. The contingent consideration will be paid to the seller if certain performance objectives are met over the three-year period. The value recorded on the balance sheet was derived from the estimated probability that the performance objective will be met by the end of the three-year period. The contingent purchase obligation is categorized as Level 3 in the fair value hierarchy.
All derivative financial instruments are recorded at fair value in the Consolidated Balance Sheet. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing
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asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Balance Sheet in Accumulated Other Comprehensive Income (AOCI) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. The Company does not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of January 27, 2012. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows. Foreign Currency Forward Exchange Contracts The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of January 27, 2012, and October 28, 2011, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $363.3 million and $431.2 million, respectively. These notional values consist primarily of contracts for the European euro, British pound sterling and Canadian dollar, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. Interest Rate Swaps The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. In November 2010, the Company entered into an interest rate swap agreement for $100.0 million on the $175.0 million Senior Notes due in 2017. The swap agreement exchanged the fixed interest rate of 6.625% for a variable interest rate on the $100.0 million of the principal amount outstanding. The variable interest rate is based upon LIBOR plus 4.865% and was 5.416% at January 27, 2012. The fair value of the Company’s interest rate swap was a $1.8 million asset at January 27, 2012, and was estimated by discounting expected cash flows using market interest rates. The Company records interest receivable and interest payable on interest rate swaps on a net basis. In December 2010, the Company entered into an interest rate swap agreement for $75.0 million on the $175.0 million Senior Notes due in 2017. The swap agreement exchanged the fixed interest rate of 6.625% for a variable interest rate on the $75.0 million of the principal amount outstanding. The variable interest rate is based upon LIBOR plus 4.47% and was 5.021% at January 27, 2012. The fair value of the Company’s interest rate swap was a $2.2 million asset at January 27, 2012, and was estimated by discounting expected cash flows using market interest rates. The Company recognized a net interest receivable of $1.0 million at January 27, 2012. Embedded Derivative Instruments The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency. Net Investment Hedge In July 2011, the Company entered into a Euro Term Loan for €125.0 million under the secured credit facility. The Company designated the Euro Term Loan a hedge of the investment in a certain French business unit. The foreign currency gain or loss that is effective as a hedge is reported as a component of other comprehensive income in shareholders’ equity. To the extent that this hedge is ineffective, the foreign currency gain or loss is recorded in earnings. There was no ineffectiveness.
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Fair Value of Derivative Instruments Fair values of derivative instruments in the Consolidated Balance Sheet at January 27, 2012, and October 28, 2011, consisted of:
In each of the first fiscal quarters of 2012 and 2011, the Company recorded a loss of $3.3 million and a gain of $0.1 million on foreign currency forward exchange contracts that have not been designated as an accounting hedge, respectively. These foreign currency exchange gains are included in selling, general and administrative expense. There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the first fiscal quarter of 2012 and 2011. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the first fiscal quarter of 2012. Amounts included in AOCI are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $0.8 million of net loss into earnings over the next 12 months. The maximum duration of the Company’s foreign currency cash flow hedge contracts at January 27, 2012, is 24 months.
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Business segment information for continuing operations includes the segments of Avionics & Controls, Sensors & Systems and Advanced Materials.
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Condensed Consolidating Balance Sheet as of January 27, 2012.
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(In thousands)
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Condensed Consolidating Statement of Operations for the three month period ended January 27, 2012. (In thousands)
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Condensed Consolidating Statement of Cash Flows for the three month period ended January 27, 2012. (In thousands)
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(In thousands)
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Condensed Consolidating Balance Sheet as of October 28, 2011.
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Condensed Consolidating Statement of Operations for the three month period ended January 28, 2011. (In thousands)
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Condensed Consolidating Statement of Cash Flows for the three month period ended January 28, 2011. (In thousands)
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(In thousands)
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Results of Operations Overview We operate our businesses in three segments: Avionics & Controls, Sensors & Systems and Advanced Materials. Our segments are structured around our technical capabilities. The Avionics & Controls segment includes avionics systems, control systems, interface technologies and communication systems capabilities. Avionics systems designs and develops cockpit systems integration and avionics solutions for commercial and military applications. Control systems designs and manufactures technology interface systems for military and commercial aircraft and land- and sea-based military vehicles. Interface technologies manufactures and develops custom control panels, input systems for medical, industrial, military and casino gaming industries. Communication systems designs and manufactures military audio and data products for severe battlefield environments, embedded communication intercept receivers for signal intelligence applications, as well as communication control systems to enhance security and aural clarity in military applications. The Sensors & Systems segment includes power systems, connection technologies and advanced sensors capabilities. Power systems develops and manufactures electrical power switching and other related systems, principally for aerospace and defense customers. Connection technologies develops and manufactures highly engineered connectors for harsh environments and serves the aerospace, defense & space, power generation, rail and industrial equipment markets. Advanced sensors develops and manufactures high precision temperature and pressure sensors for aerospace and defense customers. The Advanced Materials segment includes engineered materials and defense technologies capabilities. Engineered materials develops and manufactures thermally engineered components and high-performance elastomer products used in a wide range of commercial aerospace and military applications. Defense technologies develops and manufactures combustible ordnance components and warfare countermeasure devices for military customers. Sales in all segments include domestic, international, defense and commercial customers. Our current business and strategic plan focuses on the continued development of our products principally for aerospace and defense markets. We are concentrating our efforts to expand our capabilities in these markets and anticipate the global needs of our customers and respond to such needs with comprehensive solutions. These efforts focus on continuous research and new product development, acquisitions and strategic realignments of operations to expand our capabilities as a more comprehensive supplier to our customers across our entire product offering. On July 26, 2011, the Company acquired the Souriau Group (Souriau). Souriau is a leading global supplier of highly engineered connection technologies for harsh environments. Souriau is included in our Sensors & Systems segment. On December 30, 2010, the Company acquired Eclipse Electronic Systems, Inc. (Eclipse). Eclipse is a designer and manufacturer of embedded communication intercept receivers for signal intelligence applications. Eclipse is included in our Avionics & Controls segment. Net income was $22.8 million, or $0.73 per diluted share, compared with $30.0 million, or $0.97 per diluted share, in the prior-year period. Total sales increased 27% over the prior-year period to $470.9 million, principally reflecting incremental sales from the Souriau and Eclipse acquisitions. Gross margin declined to 33.6% from 35.6% in the prior-year period due to the purchase accounting requirement to recognize the fair value of the Souriau acquired inventory as expense over the first inventory turn. Research, development and engineering spending increased $6.8 million over the prior-year period to 5.6% of sales. The increase reflected increased spending for avionics systems, incremental spending due to the Souriau acquisition and higher spending for power systems developments. Selling, general and administrative expenses increased $28.6 million over the prior-year period to 20.1% of sales. The increase in selling, general and administrative expenses principally reflected incremental expenses due to the Souriau and Eclipse acquisitions. Net income benefited from a decrease in the income tax rate to 10.1% from 20.3% in the prior-year period, reflecting tax benefits from a change in French tax laws associated with our holding company structure and the financing of the Souriau acquisition.
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Operating results for Avionics & Controls and Sensors & Systems segments declined while Advanced Materials improved compared to the prior-year period. The decrease in Avionics & Controls reflected lower sales of avionics systems and higher research, development and engineering expense. The decrease in Sensors & Systems reflected an operating loss at Souriau of $6.0 million principally due to the purchase accounting requirement to recognize the fair value of acquired inventory as expense over the first inventory turn. Advanced Materials earnings benefited from strong sales and earnings from elastomer and insulation materials. Results of Operations Three Month Period Ended January 27, 2012, Compared with Three Month Period Ended January 28, 2011 Sales for the first fiscal quarter increased 27.0% when compared with the prior-year period. Sales by segment were as follows: (In thousands)
The 6.7% decrease in sales of Avionics & Controls reflected decreased sales volumes of avionics systems of $15 million and communication systems of $2 million, partially offset by increased sales volumes of control systems. The decrease in avionics systems was principally due to lower cockpit integration sales volumes. The decrease in communication systems principally reflected reduced sales of hearing protection headset devices of $8 million, offset by incremental sales from the acquisition of Eclipse on December 30, 2010. The 122.8% increase in sales of Sensors & Systems principally reflected incremental sales from the Souriau acquisition of $83 million and increased sales volume of advanced sensors of $4 million and power systems of $8 million. The increase in advanced sensors sales mainly reflected higher OEM sales of pressure sensors and strong aftermarket demand. The increase in power systems reflected higher demand for commercial aviation products. The 18.1% increase in sales of Advanced Materials principally reflected increased sales volumes of engineered materials of $17 million. The increase in engineered materials primarily reflected strong demand for elastomer and insulation materials for commercial aviation products. Overall, gross margin was 33.6% and 35.6% for the first fiscal quarter of 2012 and 2011, respectively. Gross profit was $158.1 million and $132.1 million for the first fiscal quarter of 2012 and 2011, respectively. Gross profit in the first fiscal quarter of 2012 was impacted by the purchase accounting requirement to recognize the fair value of the Souriau acquired inventory as expense over its first inventory turn. Avionics & Controls segment gross margin was 38.8% for both the first fiscal quarter of 2012 and 2011. Segment gross profit was $69.7 million compared to $74.6 million in the prior-year period. The decrease in segment gross profit was principally due to lower sales volume on avionics systems reflecting decreased sales volumes of cockpit integrations for military aircraft. The decrease in segment gross profit also reflected lower sales of hearing protection headset devices offset by gross profit from incremental sales from the Eclipse acquisition. Sensors & Systems segment gross margin was 28.5% and 35.5% for the first fiscal quarter of 2012 and 2011, respectively. Segment gross profit was $48.8 million compared to $27.4 million in the prior-year period. The increase in gross profit mainly reflected incremental gross profit from the Souriau acquisition of $17.2 million,
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partially offset by a $12.0 million charge due to recording Souriau’s acquired inventory at its fair value. Additionally, the increased segment gross profit reflected strong demand for power systems for commercial aviation applications. Advanced Materials segment gross margin was 33.0% compared to 29.7% for the prior-year period. Segment gross profit was $39.5 million compared to $30.1 million in the prior-year period. The increase in segment gross profit was principally due to higher sales volumes of elastomer materials and insulation materials primarily for commercial aviation applications. Selling, general and administrative expenses (which include corporate expenses) totaled $94.7 million, or 20.1% of sales, and $66.1 million, or 17.8% of sales, for the first fiscal quarter of 2012 and 2011, respectively. The increase in selling, general and administrative expense principally reflected an increase of $2.1 million of corporate expense, a $2.5 million increase at our Avionics & Controls segment, a $21.4 million increase at our Sensors & Systems segment and a $2.6 million increase in our Advanced Materials segment. The increase in corporate expense mainly reflected foreign currency exchange losses on intercompany financing of the Souriau acquisition. The increase in selling, general and administrative expense at our Avionics & Controls segment principally reflected expenses from the Eclipse acquisition. The increase at Sensors & Systems was largely due to expenses from the Souriau acquisition. Additionally, Souriau’s selling, general and administrative expenses are higher as a percentage of sales than our other operating units. The increase at Advanced Materials was mainly due to the effects of foreign currency exchange losses on forward contracts and certain monetary assets. Research, development and engineering spending was $26.4 million, or 5.6% of sales, for the first fiscal quarter of 2012 compared with $19.6 million, or 5.3% of sales, for the first fiscal quarter of 2011. The increase in research, development and engineering spending principally reflects higher spending on avionics systems and power systems of $3 million, and incremental spending as a result of the Souriau acquisition of $3 million. Fiscal 2012 research, development and engineering spending is expected to be approximately 5.5% of sales. Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first fiscal quarter of 2012 totaled $50.0 million, or 10.6% of sales, compared with $57.2 million, or 15.4% of sales, for the first fiscal quarter in 2011. Avionics & Controls segment earnings were $20.1 million, or 11.2% of sales, in the first fiscal quarter of 2012 and $31.0 million, or 16.1% of sales, in the first fiscal quarter of 2011, mainly reflecting an $8 million decrease in avionics systems and a $3 million decrease in communication systems. Avionics systems earnings were impacted by decreased gross profit and higher spending on research, development and engineering. Communication systems earnings were mainly impacted by decreased gross profit on lower sales of hearing protection devices, partially offset by incremental earnings from the Eclipse acquisition. Sensors & Systems segment earnings were $6.8 million, or 4.0% of sales, for the first fiscal quarter of 2012 compared with $11.0 million, or 14.2% of sales, for the first fiscal quarter of 2011, principally reflecting a $6 million loss at Souriau due to the inventory fair value adjustment discussed above. Sensors & Systems also benefited by strong earnings from increased sales of power systems. Advanced Materials segment earnings were $23.1 million, or 19.3% of sales, for the first fiscal quarter of 2012 compared with $15.3 million, or 15.1% of sales, for the first fiscal quarter of 2011, primarily reflecting increased gross profit on higher sales of elastomer and insulation materials. Interest expense for the first fiscal quarter of 2012 was $11.5 million compared with $9.1 million for the first fiscal quarter of 2011, reflecting higher borrowings. The income tax rate was 10.1% compared with 20.3% for the first fiscal quarter of 2012 and 2011, respectively. In the first fiscal quarter of 2012 we recognized $2.3 million of discrete tax benefits due to a change in French tax laws associated with the holding company structure and the financing of the Souriau acquisition. In the first fiscal quarter of 2011, we recognized $1.4 million of discrete tax benefits due to the retroactive extension of the U.S. federal research and experimentation tax credit. The income tax rate differed from the statutory rate in the first fiscal quarter of 2012 and 2011, as both years benefited from various tax credits and certain foreign interest expense deductions.
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It is reasonably possible that within the next twelve months approximately $0.8 million of tax benefits associated with research and development tax credits, capital and operating losses that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of a statute of limitations. To the extent that sales are transacted in a currency other than the functional currency of the operating unit, we are subject to foreign currency fluctuation risk. We use forward contracts to hedge our foreign currency exchange risk. To the extent that these hedges qualify under U.S. GAAP, the amount of gain or loss is deferred in Accumulated Other Comprehensive Income (AOCI) until the related sale occurs. Also, we are subject to foreign currency gains or losses from embedded derivatives on backlog denominated in a currency other than the functional currency of our operating companies or its customers. Gains and losses on forward contracts, embedded derivatives, and revaluation of assets and liabilities denominated in a currency other than the functional currency of the Company for the first fiscal quarter of 2012 and 2011 are as follows: (In thousands)
New orders for the first fiscal quarter of 2012 were $467.8 million compared with $399.3 million for the same period in 2011. Backlog was $1.2 billion at January 27, 2012, compared to $1.1 billion at January 28, 2011, and $1.3 billion at the end of fiscal 2011.
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Liquidity and Capital Resources Cash and cash equivalents at January 27, 2012, totaled $193.3 million, an increase of $8.3 million from October 28, 2011. Net working capital decreased to $618.0 million at January 27, 2012, from $621.0 million at October 28, 2011. Sources and uses of cash flows from operating activities principally consisted of cash received from the sale of products and cash payments for material, labor and operating expenses. Cash flows provided by operating activities were $46.6 million and $49.6 million in the first fiscal quarter of 2012 and 2011, respectively. The decrease principally reflected lower cash receipts and higher payments for interest, partially offset by lower payments for inventory and income taxes. Cash flows used by investing activities were $12.5 million and $131.8 million in the first fiscal quarter of 2012 and 2011, respectively. Cash flows used by investing activities in the first fiscal quarter of 2012 mainly reflected cash paid for capital expenditures. Cash flows used by investing activities in the first fiscal quarter of 2011 primarily reflected cash paid for acquisitions of $103.5 million and capital expenditures of $14.6 million. Cash flows used by financing activities were $22.1 million in the first fiscal quarter of 2012 and mainly reflected $28.3 million repayment of long-term debt and government assistance payments of $7.9 million. Cash flows provided by financing activities were $11.4 million in the first fiscal quarter of 2011 and primarily reflected cash receipts for issuance of stock of $6.9 million and government assistance payments of $5.3 million. Capital expenditures, consisting of machinery, equipment and computers, are anticipated to be approximately $65.0 million during fiscal 2012, compared with $49.5 million expended in fiscal 2011. Total debt at January 27, 2012, was $1.0 billion and consisted of $250.0 million of Senior Notes due in 2020, $179.0 million of Senior Notes due in 2017, $150.0 million (€113.4 million) of the Euro Term Loan, $335 million in borrowings under our secured credit facility, $45.1 million under capital lease obligations, and $45.7 million under our various foreign currency debt agreements and other debt agreements. We believe cash on hand and funds generated from operations are adequate to service operating cash requirements and capital expenditures through the next twelve months. Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risk factors set forth in “Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 28, 2011, that may cause our or the industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.
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There have been no significant changes in our exposure to market risk during the first three months of fiscal 2012. A discussion of our exposure to market risk is provided in the Company’s Annual Report on Form 10-K for the fiscal year ended October 28, 2011.
Our principal executive and financial officers evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 27, 2012. Based upon that evaluation, they concluded as of January 27, 2012, that our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. In addition, our principal executive and financial officers concluded as of January 27, 2012, that our disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the time period covered by this report, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe that adequate reserves for these liabilities have been made and that there is no litigation pending that could have a material adverse effect on our results of operations and financial condition.
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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.
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