Aerojet Rocketdyne Holdings Inc (AJRD) 2004 Q1 法說會逐字稿

. Please stand by. This is the Q1 earnings conference call for GenCorp, Inc. Please stand by . Good afternoon, again, ladies and gentlemen, you are on online for the GenCorp first quarter 2004 earnings conference call, and we are scheduled to be under way in just over three minutes, so please continue to hold the line . Ladies and gentlemen, thank you for standing by and welcome to the GenCorp first quarter 2004 earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Linda Cutler . Please go ahead.

Thank you, Paul and good afternoon, everyone. During this conference call, GenCorp's management team may make forward-looking statements as defined by the Private Securites Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions, other than historical information, are a forward-looking statement. These statements represent management's current judgment on expectations for future operations. We encourage you to review the cautionary language regarding forward-looking statements, and the factors contained in our first quarter, 2004 earnings release, as well as our management's discussion and analysis and elsewhere in our most recent form 10K and other filings with the S.E.C. These statements and factors could cause business conditions and actual results to differ materially from those expected by the company or expressed in our forward- looking statements. Now, I would like to turn the call over to Terry Hall.

Thank you. Excuse me. Thank you, Linda. Today GenCorp reported a net loss of $19 million or $0.43 a share for the first quarter of 2004. We are not particularly happy with those results. Of the loss, $0.21 was driven by pension expense that we did not have a year ago. That is noncash pension expense, and we are going to see that in each of our quarters this year. In terms of our pension fund we are overfunded somewhere in excess of $100 million, and so it's not a cash issue it is an accounting issue driven by the market performance the last three years and it is something we will have every quarter. In terms of the remaining $0.22 loss, it was driven by our Aerospace business, GDX, and primarily driven by results out of Europe, out of two plants, one in Germany, in Grefrath which does our Volkswagen work and one in France which we are in the process of closing down in Chartres, the snap on plant.

Those two plants caused almost all of the loss that we're suffering in the first quarter. The German plant, is driven by very high labor costs and lower costs in Volkswagen. The French plant is driven by the workers council and their attempts to keep us from shutting the plant or postponing the shutting of the plant. In terms of what we're going to do about GDX, we continue to look at ways in which we can reduce the cost structure, primarily in Germany. We currently have a plant which has very high costs, we can't make money there without high volumes, and so we are looking at moving platforms and production to our lower cost countries out of there, places like Czech and Spain. We will see how fast we can do that. We are dealing with workers council and labor laws in Germany, but it is our intent to push those costs down, and we will do it as expedient as we can.

In terms of the other businesses, we saw a good performance from Aerojet, their numbers were up, its sales were up 113 million compared to 61 million a year ago. That increase was driven in part by the acquisition of ARC, and we have the first full quarter with ARC being owned by us, and also by stronger business in the traditional Aerojet programs, particularly the F-22 Raptor program, where we're starting to see more volume. In terms of the performance there, the way I would measure it, and the way I look at it is, excluding the pension income or expense, which again is a noncash item and which we will just have to deal with this year, operating or segment performance was up 11 million versus 7 million in the first quarter of 2003. We continue to get awards in that business, and we're in a fairly robust marketplace for defense. We were awarded the attitude, divert attitude and control system for our KEI system which is the Kinetic Energy Intercept program for National Missile Defense.

It is the second phase of the program. We were already awarded the deferred attitude and control system on the ground base, Missile Defense program which is the first phase. The second phase will be mobile, will be installed on things like ships, planes, tanks, trucks, and so we are becomingmore and more important to national missile defense and getting additional business from them. We are also continuing to see benefits from the acquisition of ARC in terms of coming up, being requested to provide more proposals to more customers. We are also in the process and will this year spend somewhere between $15 and $20 million on restructuring ARC, primarily closing their Gainsville plant. That money will ultimately be repaid to us by the Federal government, by DOD, over the next four to five-years. So, Aerojet, everything's looking pretty good at the moment. We still have no word from NASA on what their new program is going to entail. We have not had any additional work, NASA work cancelled than we currently have, but we don't have a great deal of R&D work from NASA at the moment.

We have heard that a number of our competitors have had programs cancelled. But as NASA redirects its funding towards going back to the moon, deep space exploration and ultimately going to MARS, as President Bush outlined earlier this year. In terms of our real estate segment, not a lot occured there. In terms of sales, we had none. We continued to have rental income from property that we rent out. And the one big thing that occured is we announced and applied for rezoning of about 1400 acres of our property into a mixed use rezoning, primarily residential and commercial and some office. That application means that combined with an application that we did for the Rio Del Oro project we currently have approximately 41 to 4200 acres being requested for rezoning which will take us, we believe, between two and three-years to get the final audit.

In terms of the Fine Chemicals segment, there, they did fall short of what they did a year ago. It was driven by, primarily by a customer who had some difficulty in supplying us with material for our S and B machine. That resulted in the machine being not utilized for a period during the quarter. We expect that that business will make that performance up through the rest of the year and are looking for a strong performance from Aerojet Fine Chemicals. We are seeing at least double-digit revenue growth for that business, and operating income at or above a level that it was in 2003. In terms of the, I think the other things that I wanted to talk to you about, we did show a large expenditure of cash in the first quarter.

That cash expenditure was driven by environmental payments, was driven by defense programs, atlas 5, delta and titan, where we are currently making titan engines, which won't be delivered until later in the year, and was driven by atlas atlas engines that won't be driven -- or won't be delivered until later in the year and was driven by, a great expense, tooling expense at GDX. Which is for programs that we are starting where we will be reimbursed by the customer. So we expect cash flow obviously to get better, and we continue to strive to be positive cash flow this year. In terms of the business environment that we are seeing for our four segments, the Aerojet environment, as I said, is very good at the moment, within creases in defense spending, and we are waiting to see how NASA decides to spend the money to try to get back to the moon.

We think it's an upside opportunity for us. In Fine Chemicals, we are now about at the point where we will be at capacity this year. Again, we are seeing a lot of demand for our products and for the separation and CYTO toxic parts of our business. At GDX, we are seeing flat to declining demand. Right now, the numbers are down from what our forecast was, driven primarily by Volkswagen and a little by some of the Ford products that we have. And so that is the fourth market in terms of our four segments. In terms of real estate, the property value is still quite hot. We wish we had residential zoning available here today, but we don't.

We are in the process on, as I said, something in excess of 4,000 acres that will be available sometime in the future. With that, I would open it up for any question that anybody might have.

Ladies and gentlemen, if you wish to ask a question, please press star and then the one on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from Q&A at any time by pressing the pound key. If you're using a speaker phone, please pick up the hand set before pressing the numbers. Once again, if you have a question, please press star and then 1 at this time. And one moment, please, for the first Q&A -- question. Our first question is from the line of Michael Rustler from CG Securities.

Good afternoon. Terry I want to start by focusing on one of the sentenses in your release talking about enhancing the value of the overall business portfolio. Obviously one of your biggest competitors have decided they don't want to be in the business any more. How does that affect your thinking on GDX?

I would say it doesn't affect our thinking on GDX at all. Here is our issue with GDX. We have four places we can put our capital. Real estate, Fine Chemicals, GDX and Aerojet. Of those four, GDX is the worst return, obviously, and so we are hesitant to put a lot of capital in it. Having said that, we want to protect the value of it, and we will do what we need to protect the value. If it is more capital than we want to appropriate to, then this is obviously a business that's a candidate for leaving our portfolio. What Cooper does, I don't think, drives what the value of our business will be. And, as I said, we're going to make rational capital decisions based upon the return that we can get. So, we think that this is a business that, yeah it can be fixed. The question is really how fast can it be fixed, and what's the cost of that fix?

Well, I mean looking at the way what you see going on for this year. You have the higher cost petroleum based products, steele, looks like you have some issues with trying to close some plants. Does that change how quickly you might make that decision?

It obviously needs to be taken interest consideration.

Okay. Looking next at the defense segment. The...how would you characterize how representative the first quarter operating margins are for that business and how that might be for the rest of the year?

I think they are flat. We may do a little better the rest of the year. What we're seeing is, again, business coming in that we weren't forecasting. But it -- we're just getting a very good reception from the primes and from the government. I was in Washington a few weeks ago, and, you know, I met with NASA, I meet with DOD, I met with National Missile Defense, and they all were saying very good things about Aerojet. It's clear that Aerojet is right now warmly regarded by its customers, and is very important to them in achieving the goals that they've set forth for their...a very many number of platforms, so we are in a very good position.

And then on Fine Chemicals, I guess that's another capital allocation decision if you think you are going to be on capacity this year, how is that going to affect your thinking on that business? Would you put more money into it or I thought this would be somebody that might have been a candidate for sale earlier on?

It is, again, you know, a question of how we're going to allocate our capital and something we're currently working through. We do have time to do it. The good news is the demand demand is there and it is going up. The issue is, is where do we want to put our capital or do we want to put it at Aerojet or in real estate?

And how does you know, obviously the quarter a big use of cash, and you know maybe some of that's timing, but does your balance sheet at this point put your pressure on making decisions, you know, over the next quarter or two quarters or do you think you have time to let the market make that decision?

The balance sheet isn't forcing us to make the decision, it's really what is in the best interests of the company and how do we get the most value. You know, right now, we're looking at here is what it's going to cost us to fix the problems at GDX.

Okay. That's all I have for now. Thanks.

Thank you.

We have a question from the line Val Ulsheen of Deutsche Banc.

Good afternoon, Terry. Just in terms of sort of that topic and GDX, you know, we're sort of six-months into, you know, sort of this disappointing period. What are those decisions so far after six-months? How much will it cost in your estimation to fix it? And, you know, where are you sort of in that decision process in terms of, you know, that whole capital allocation decision that you were refering to?

Here's where we are in terms of what will it cost. We are looking at a number of options. The options are driven by where do you place business that's in a very high cost plant, and how long does it take you to do that? You can do it various ways. You can do it by moving it, for example, to our Czech plant, moving it to our Spanish plant. You could sub it out to plants in various low-cost areas. We are trying to figure out how you do that in terms of what's the best mix for us, for the customer, and what is the timing and what will it cost? So it's not a simple answer because it's just not one program and it's just not one customer, but it's something that we're down, down the road on and don't have complete answers yet. I think in terms of capital allocation, we know where we get the highest returns on our capital, and those highest returns are, quite frankly, real estate and defense. And so ignoring everything else, where are we going to put our capital? We're going to put it in defense and real estate .

Okay. You mentioned sort of the cash burn in the quarter. I think according to my calculations it was north of 60 million. You mentioned three items, environmental payments, defense programs and tooling at GDX. Can you sort of throw some figures to those various items?

I think Yasmin probably could...

When you look at the, there are probably, the bulk of it is probably driven by the programs at Aerojet and also tooling expenditures at GDX and also then if you notice our capital expenditures, we spent about 14 million on Cap Ex in the first quarter. Again, that's driven by programs and certain platforms. Which, in Cap Ex, actually, was a little bit heavier than we would like it to be in the first quarter, but it's driven by new business and new growth opportunities, and you've really got to spend that. A lot of the tooling we expect to get reimbursed in the future, so you're probably between, you are probably looking at somewhere close to about $40 million and then remember you've also got costs like legacy retiring and medical costs which are fairly high for us, and those run about $20 million a year so you've that going on in the quarter as well.

That $40 million figure that Yasmin was refering to, was that --

It was the combination of the various items, when you look at the tooling, expenditures and also the defense spending associated with certain programs.

Uh-huh. And, okay. And that's more of a working capital investment?

Yes.

Okay. Okay. Terry --

Then another factor too is we also, we settled a case with the American Space -- with the local American Space Water Company and there was a payment associated with the settlement of that case in the first quarter too.

What was that payment, Yasmin?

The actual payment associated with that was 7 million.

Okay.

Which you expect to recover as part of our government costs, but that's a timing item.

Terry, you mentioned real estate and the various applications for rezoning, I think you said 41 to 4200 acres currently in process. What -- do you have anything in the pipeline to actually sell this year? I think after the last call you mentioned that, that real estate sales would be below '03 levels, but maybe you could comment on what's on the pipeline for '04?

Yes, again, you know, our philosophy on selling real estate has been we will sell it if in face we don't take a detrament in value. You know, for example, if we're getting it zoned, we will wait until it's zoned before we do any divestitures of property. What we're looking at this year is some relatively small sales of property in terms of last year, you know, 10, 15 million max, kind of numbers. Where we are selling, for example, we expect to sell properties to the local light rail transportation authority. They are going to put in a light rail station in the front or at the north end of our property. Those type of sales we will do this year.

Okay. And finally, for me, and I will let someone else jump in the queue. In terms of the Fine Chemicals business, Terry, you mentioned sort of one customer having difficulty providing material. If you sort of look into sort of a month now into this second quarter, can you sort of give us some indications of, you know, have we seen sort of the trends turning more positively for Fine Chemicals?

Yes. I mean, what we are seeing right now is a trend where we expect them to continue it, you know, we are going to see slightly better revenue numbers and we are going to see margins, compared to the first quarter. We are going to see margins, 15% or maybe higher, out of that business in Q2.

Okay. Thanks a lot.

Sure.

We have a question from the line of Randy Gulke with Musinic.

Yes, hi, a couple of questions, one is just to get a specific number, what was the cash from operations number?

The cash from operations would be a negative 44.

Minus 44 million?

Yes.

Okay. And, can you talk a little bit about covenant levels and availability under your credit facility? Where is that?

We're in compliance with all of our covenants, and project to be in compliance with our covenants too for the rest of the year. At the end of the quarter, we had cash balances of 64 and debt, or, rather, 69, and we had debt of 606 in total. We had available liquidity under our credit facility of close off of 90 million.

Right. You can't give me, you can't give me the covenant levels?

The difference, we are going to be in compliance with our covenant levels, and we probably expect the leverage, the leverage ratio to be a little above 4.

Okay. And on the, going back to GDX for a minute on the costs, you know, is there any way you could give us, I know other analysts have tried to ask the same thing, some feel for the timing and expense of moving these platforms? I know you won't -- don't want to commit a lot of capital to GDX but...

We are trying to do it as efficiently and cheaply as we can for that obvious reason. Right now, we're sorting through a number of alternatives and variables in those alternatives, and so we are just not comfortable in saying we have the number. We don't. You know, there's a number of different things that can be done. We can try to solve the entire problem, we can fix it to where it's not bleeding, we can basically take on the workers council and say we are moving this unless you give us this in return in terms of pricing concession. So, there's a whole bunch of things going on all at the same time.

Okay. And one more. On the capital expenditures line, what is your expectation for 2004?

We are probably looking at somewhere around 50 million or so.

Okay. Thank you.

You are welcome.

We have a question from the line of Rob Delong with Grand Jean Capital Management.

Good afternoon Terry and Yasmin. How are you?

Good. How are you Rob?

Good. A couple of questions. First, any comments on the acquisition front?

No comments on the acquisition front other than we remain interested in growing our defense business, it's primary to us, and there may be opportunity.

Okay. How about on the lawsuits, other than the one settlement you mentioned earlier, is there any other update on the myriad lawsuits out there?

No, they are going their usual glacial legal speed.

And there haven't been any new ones, I presume?

Not that I am aware of.

Okay. And then, finely, with -- the drop in the backlog at both Aerojet and Fine Chemicals, what...is there any, is there any comment there?

Aerojet is basically the government playing or, you know, DOD playing around with trying to look good for Congress in terms of appropriations. They take things in and out all the time. We don't pay a whole lot of attention to the backlog number in terms of does that really mean what we're going to do going forward, because funding levels change and they program and reprogram funding. In fact, one of the good pieces of information, which isn't in our backlog yet, is the Air Force is basically set on Atlas 5, which is the Lockheed expendable launch vehicle that we did the booster on, they are going to raise the prices that they pay probably by 50% or more, which obviously helps us, because that's a program that we have been booking at no profit.

Uh-huh.

But does that show up in the backlog? No. When will that all occur? It will be driven primarily by the government's timing and Lockheed's timing.

And in Fine Chemicals?

Fine Chemicals, --

It's just a question of timing.

It's a question of timing. What they do now, to a certain extent, the practice in Fine Chemicals have changed. It used to be kind of these loose purchase orders?

Uh-huh.

Now they are negotiating, probably, because of accounting. Actually Sarbanes and 404 control issues. They're now negotiating full purchase agreements with terms and conditions and they're quite lengthy. What we're basically seeing is you will see timings, time where big chunks come in because we just signed an agreement. They are as we told you, they're practically full. I am not sure they can produce more than what they've currently booked so I am not concerned about their backlog at all.

Okay. All right. Good enough. Thank you.

You're welcome.

We have a question from Jim Tuong with Billing Company.

Hi, Terry and Yasmin.

Hi, Jim.

I guess GDX, you indicated in the third quarter conference call, you indicated that you know it wasn't a core business to you, and if you could get the value then it could be something that you could entertain in fixing that business. I guess just hearing you today, is this a change in your thinking or just more of a delay that you need to fix the operations first?

I would say it's not a change in our thinking. I think it's basically to get value, the values there. It's more of do you want to show that this is not a - a insurmountable problem, this is...is something you can deal with by moving production and reducing our capacity. We simply have to take costs out. You know the automobile business, as well as I do, which is you gotta be a low-cost producer and that's what we've to become even in Germany.

So as I look at your strategic plan, is this something that is going to take a year, two-years -- kind of thing to do?

We are not going to give it a year, two-years, Jim.

More like a six-month period?

The sooner, sooner is better Jim.

Okay, Yes. All right. And then just looking at in terms of the costs that you need to kind of move these things? How much is it going to cost you do you think in terms of going forward?

We don't know until the income is down to how much do we move and who do we move it to? And we have more than one choice. And so we're looking at it and saying okay, here's part of the puzzle. This part platform of Volkswagen we can move here, here or here. Which costs the less and gives us the most results and is there a trade-off in long-term best results or not. That's what we are going through right now. Here's Mercedes, here's BMW. You know, that's what we are going through.

And the huh, I guess on the outside cash and reported earnings, should we kind of look at the same order of magnitude for like the second quarter as what happened in the first?

I hope not, Jim.

All right. So should progressively get better?

That's our goal, either this business gets better or it won't be here in the portfolio for long.

Okay, okay. All right. That's pretty much it. Thank you.

Sure.

We have a question from the line of Tim Hascera with Kennedy Capital.

My question has been answered. Thank you.

We will go next to the line of Derek Tibichy with Ironwood Capital Management.

Hi, good afternoon.

Hi.

I figured I'd ask you a new question about GDX.

Okay.

No, just kidding. You know, given everything you guys have done over the last six-months, you know, and given this quarter's performance, do you guys expect financial performance, be it top line, bottom line, to stay the same, improve, weaken over the course of the next couple of quarters?

We expect it to improve.

Okay. To levels of last year's level? You know, what sort of benchmarks should we look for?

I think it's, you , -- you know, difference in the different businesses. You are going to see Aerojet very strong this year.

No, I am specifically focused on GDX here.

GDX, GDX you are going to see better results. Typically we have better results in Q2 and Q4 because we have higher volume.

Right.

Well, we have everything -- will we have everything fixed by Q2? No. Are we working on it? Yes.

I mean, given this thorn in your and our side, referencing to GDX here, I mean, have you guys formally hired an advisor to, you know, help you with these issues and or explore the sale of this business?

That's something I can't answer.

Okay. Thank you.

We have a question from the line of Hilel Ashim with Deutsche Banc.

Yeah, hi, just a couple of quick followups. Terry, you mentioned sort of the hope that you'd be free cash flow break even the rest of the year. I sort of just want to go through a couple of cash uses and make sure I am thinking about this correctly. Yasmin you said 50 million of Cap Ex is sort of a target for the year. I think cash interest is probably high 30s, maybe 40?

Yes.

And cash restructuring for ARC Terry says is 15 to 20. Are there any cash taxes expected for '04?

We're probably looking at paying some amount of taxes in the foreign jurisdictions, probably my guess is somewhere between 5 to 10 million.

Right. And working capital, I have always assumed it was... continue to be a usage for this year, generally you know, sort of the trend from the first quarter. Is that...do you have some indication of what, what working capital usage would be this year?

I think a lot of it, some of that depends on what happens here at GDX. But the worst of the working capital usage has occured in the first quarter.

Okay. Okay. And what was the change in cash due to working capital in the first quarter?

It's like 4 or 5 million.

Sorry?

5 million.

5 million. 5 million was the use of cash from working capital?

No. The working capital. All together, in terms of operating.

Assets.

We are looking at a use of about 44 million.

44. That's -- that's the working capital or is that the cash flow from operations number?

That's the operations number.

The cash flow from operations number?

Yes.

And in your expectations, have you included any cash restructuring yet for any of the GDX business facilities?

We have, we certainly have some in there, because we are going to have some cash that is going to be used in terms of the French restructuring of the closure of that plant that we announced at the end of last year, there's going to be cash associated with the use of that. But, again, we're hoping that that cash is -- usage is reclaimed by the benefit, U.S. tax benefit, and [inaudible] should offset. But there may be some usage associated with that. And what would that usage be associated with that plant? Hilal, it's probably going to be somewhere in the range of 3 to 10 million on that.

Thank you very much.

We have a question from the line of Randy Gulke with Musinic.

My followups have been answered. Thank you.

If there are any additional questions, please press star and then 1. We have a question foreign policy Tim Hascera with Kennedy Capital.

Yes. Do you expect any cash flow positive from operations on Aerojet in two thousand -- in this fiscal year?

Yes.

You talk about Atlas and I believe Titan as far as drain from cash flow from operations. Aren't you, you have engines delivered at the end of the year. Aren't you getting any progress payments on those contracts? I don't understand why they're...

There's a different answer to each one of those programs. Atlas is one where we get paid primarily when we deliver the motor.

Why is that? You have the ability to get progress payments on that?

It's the -- the different contract is negotiated. Every contract is negotiated differently. Some has progress payments on it. Some have payments upon delivery.

Atlas. Atlas was negotiated taking into account, it was different than every... than any other program we've been on. At the time they assumed that there would be a robust commercial market, and so it's not the normal cost plus progress payments that you get from the government. It is more of a commercial contract and now the government, one of the reasons the government is looking at raising the pricing is because the commercial market never did materialize. Things like the Aridian program on satellites, on communications, just didn't happen.

It's, it's -- the market is maybe 20 satellites a year now, not 60 like like it was projected. So that is a peculiarity of the Atlas contract. The other contract is really negative working capital. We got paid prior to delivering and doing work on that program. Ultimately that was allowed by the contract. Our prime basically discovered that they paid us in advance and asked for a renegotiation of the contract. That renegotiation took place because it was a very big prime who is very important to us. That negative working capital goes away over the next two-years because it gets paid off. And so that's the answer.

Okay. Over the last, you know, earnings last year were, you know, declined again from the prior fiscal year. Auto has been, I think, frankly, a disaster. Your bonus, I wonder if you could just help me out and understand as a shareholder, how your bonus is calculated. You did, you got a bonus.

Yes.

A very large bonus, 600,000.

Okay.

And you went into debt, earned less money. Hardly cash...did not a lot of cash from operations, I believe it was done through real estate sales. If you could help me out and understand what I missed.

Yeah I would be happy to.

Thank you.

Basically what we do in terms of our bonus program is we set goals that are driven by operating income, excluding noncash pension. And so if you take out the noncash pension from operations including real estate, which is an operation and is a segment. But you have the ability to go and sell real estate assets then to hit that number? We have the ability to do that, that's correct.

And you did it last year.

We are not do go -- going to do it where we take a loss or degradation in the pricing.

How do -- we know that?

I guess you either trust management or you don't. But having said that our operating income excluding pension was up 33%. Now cash flow was up $60 million over the prior year. So that's what the bonus was driven by. Will that occur this year? I don't think so. We again have got to hit targets which are up dramatically from what we did. And, you know, it was the first bonus that we've received in three-years at the corporate level.

It just seems odd, to be able to use the real estate sales. I mean, auto has been taking out a lot of money from this company. And obviously as you are saying here will take a lot more money out of the company. It just doesn't seem to be equitable here. But I guess we are shareholders and we vote that way. So.

Yes. Well that's the way it works, I mean, it's been cash flow and operating segment performance.

Okay. Thanks.

Sure.

A question from the line of Selm Wheel Best Time Investors.

Hi. The Fine Chemicals business, you've indicated before that that would be, that's a business ultimately you'd like to grow, and then maximize the value in some way. But, how did -- I mean, if you were at capacity, I mean, it seems like you are a -- at a point where you have to decide to either expand capacity in order to grow another couple of years.

That...

Or you have to make a strategic decision too?

That's a very good question.

So ah, what's the trade-off there and just what is the current thinking?

The trade-off again is where else can we put capital and how does it compete against defense? How does it compete against real estate? You know, I can tell you right now that we get the highest return on real estate if you assume, like we have, that there's no basis in the property. You know, the examples we have been given is it may cost us $5 million, $6 million to get 4,000 acres rezoned. The value of those acres go up from $25,000 an acre to 100 - $150,000 an acre, just because of the zoning. Once you get past that, then it's obviously a competition between Defense and Fine Chemicals. And yeah, it is a strategic decision that we're going to have to make some time this year.

And I think an important fact to note there in Fine Chemicals is, is you know, we're very happy to have this problem of having to decide what to do with this strategically. Do we invest further in it? Or does it remain in our portfolio? And there's a lot of work that has gone into that over the last couple of years and we've restructured it and you know, as you know this wasn't a business, it was one of our favorite businesses a couple of years ago, and it's nice, in a nice position now.

Three-years ago it lost 14 million. This year it made 8 million.

And that's not EBITDA, that's operating income, right?

That's operating income.

If you, if you just -- so if the decision is to create more capacity to grow another few years. I mean, what does that entail?

It entails an expense, somewhere, in the neighborhood of 20 to $40 million to get over a period of time. It wouldn't all occur in one year, and what you may, what you would get out of that is somewhere between 15 and $30 million of additional revenue at about a 15% margin .

What would you have to build or buy with that. Equipment?

Primarily equipment and the structures, quite frankly, the equipment is expensive, and the attachments, everything that makes it work like piping, electrical, is quite expensive, just because it's built to such an exacting standard to make, to meet F.D.A. approval levels.

That's something short of a new plant, right?

That's short of a new plant .

Okay, thank you.

We have a question from Derek Tibichy with Ironwood Capital Management

Yeah, yeah. Just a follow-up on your discussion about the extraordinary cash expenditure items in the first quarter. Did you say that the tooling expense at GDX and the Defense Program billed out that total is $40 million?

Yes, If you look at those various unusual or timing items.

And how much was the environmental payments in the quarter?

Environmental payments expense, actually environment will -- environmental expenditures were 7 million and then we also paid for the settlement of states 7 million in connection with that.

And then what is your expectation with other targets of Q2 for the remainder of the year?

Well, you knowk as I said, the worst of the working capital happened to us here in the first quarter. You would expect some of the tooling expenditures and then as far as the Aerojet program goes, we would expect to see a decrease, certainly a decrease in that when you look at the retiring medical payments. They will continue at about $5 million a quarter.

$5million a quarter

And then environmental and legal settlements, we see actual reimbursement or a turn around coming on that.

All right, okay, great. Thank you.

Mr. Hall, at this time there are no other questions in queue.

All right. Thank you for joining us and we will talk to you again in about three months. Thanks.

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