Aerojet Rocketdyne Holdings Inc (AJRD) 2004 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the GenCorp third-quarter 2004 earnings 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. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today Friday, October 15, 2004.

I would now like to turn the conference over to Linda Cutler. Please go ahead, ma'am.

I just want to remind everyone that during this conference call, GenCorp's management team may make forward-looking statements as defined by the Private Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions other than historical information are forward-looking statements. 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 third-quarter 2004 earnings release as well as management's discussion and analysis and elsewhere in our most recent Form 10K and other filings with the SEC.

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, Linda, and thank you for joining us on our call today. With me today I have a Yasmin Seyal, our Chief Financial Officer; and Mike Martin, who is the President of our Aerojet Operations.

For the quarter, as you will note from the press release, we announced a net loss of $47 million of discontinued operations contributing $32 million of that loss and operations, $15 million of the loss for a loss of $1.05 in earnings per share. We are in the midst of a refocusing our company on aerospace and defense in our real estate segment. Let's talk about discontinued operations first.

As a lot of you know we announced last quarter that we were discontinuing operations at GDX. We're putting that business up for sale. We closed the sale of that business at the end of August for approximately $147 million. That was the first step in our plan to refocus this Company. The second step we've announced today that AFC, our Aerojet Fine Chemicals unit will be considered as discontinued operations and hopefully we will have a sale completed for that business in the next few months.

The cost of exiting GDX shown this quarter consisted of $11 million charge to shut down a plant in France which we announced earlier in the year. And an additional $23 million in operating and disposition losses offset in part by Aerojet Fine Chemicals profits in the third-quarter. We expect to continue to see some small charges going forward as we complete the closure of the French facility. And we expect that number to be between 3 and $6 million over the next few quarters. That will be offset in part or in whole by profits from our Aerojet Fine Chemicals operation until that operation is sold.

In terms of continued operations, there we have a fairly good story. Let's talk about Aerojet first. Aerojet had revenues of $116 million for the quarter versus $83 million a year ago. Excluding pension expense which is a non-cash item for us, earnings were up to 18 million versus 10 million in the third quarter a year ago, excluding the unusual item that Aerojet took in the third quarter year ago of $2 million. The operating margin was a 15 percent.

During the quarter we also had a $16 million write-off for the Atlas V program. We wrote off obsolete inventory and expenses that were incurred when we investigated a burn issue on that motor. We also had a $17 million favorable pick up on environmental reserves to offset each other so you can see that the operating result is pretty much an $18 million profit versus a $10 million profit a year ago.

The margins for Aerojet in this quarter were driven by award fees and better performance on programs across the board. Backlog remains strong at $867 million with funded backlog over $500 million. The big event for Aerojet during the quarter was that we had the last Atlas V test firing here in Sacramento. It went well. Also during the quarter there was a successful hot fire test of the solid Throttling Divert Attitude and Control System for standard missile II program. There was also a successful burn on the Cassini satellite which is the exploring satellite -- exploring Saturn's rings. And overall the business continues to look good going forward.

In terms of our real estate segment, a year ago we had a number of transactions; we sold some property that had an office building that was leased on it. And so there you had revenue this quarter of $1 million versus 17 million a year ago. On real estate we continue the process of entitlement from both our Rio Del Oro project which is 2700 acres located in the city of Rancho Cordova and our Easton Project which is 1400 acres located on our property but in the jurisdiction of the County of Sacramento. We hope to file an application for a third project approximately 1700 acres in the city of Rancho Cordova yet this year. That will give us in total approximately 5800 acres of property under entitlement or 9 square miles.

We do they expect in the fourth quarter to have some small real estate sales reflected. We were finally will have sold some property to the light rail station that we have been talking about for the last year and a half. We continue to see progress being made on our entitlement process and are hoping to have something out of entitlement late '05 or early '06.

In terms of things we have yet to do in our transformation of this Company, obviously the next big step is the sale of AFC. Once that is done, we expect to pay down debt and to strengthen the balance sheet in order to give us the flexibility that we need going forward as an aerospace and defense company and a real estate development company.

In terms of cash flows for the fourth quarter and guidance next year, we are expecting we will have breakeven or neutral cashflow in Q4. We expect next year to be cash positive and EPS positive as we expect to have completed this restructuring of the Company. The cash flow positive should occur next year despite the fact that we will be spending about $15 million on the closeout or shutdown of the production facility in Gainesville, Virginia which is part of our Aerojet business.

And so while we are going through the period of suffering the investment necessary to restructure this Company, we expect to see the benefits shortly starting next year.

With that, I would open it up for any questions that you might have.

(OPERATOR INSTRUCTIONS) Daniel Gottbald (ph) with UBS.

I've got a question on cash flow this quarter. Since you guys don't give a cash flow statement I'm trying to back into it. When I look at the auto sale which you said early in the call was 147 million, I'm trying to figure out why your cash balance only went up 50 million sequentially from the May quarter. When I look at your debt, it was down 27 million so I'm coming up that free cash flow was -70 million in the quarter and I want to know if that is correct? If you could tell me what your net cash flow from operations and CapEx were this quarter?

When you look at it compared to May, we see a net change in our debt of about 77 million which consists of we actually received net proceeds that we received in cash from the disposition of GDX was 140 million, so we used about $63 million in cash in this quarter. About half of that was used by GDX before it actually became discontinued. The remaining portions are used attributable to corporate expense, interest expense and then also Aerojet. Aerojet was a slight user of cash in this third quarter largely attributable to our continuing investment in the Atlas program.

When I looked at your May statement I'm getting that long term debt was 567, short term debt was 16 and then it goes down to -- I'm sorry, 7 and 28 and then it goes down to 552 and 16, I'm only getting like a $37 million in debt.

Net-net, we got $140 million and our net debt changed from 544 to 467.

Thank you on that. In the fourth quarter, you said cash will breakeven now. I think before you were saying cash flow positive for the quarter. What has changed?

Number of deliveries that we're going to be able to get out the door on Atlas V is the largest change.

Okay. The second question is on the aerospace defense and Aerojet, you are saying the prospect pension were 18 versus 9 last year but if you exclude the acquisition and if you exclude this reversal for environmental, you really did a 15 percent organic decline and 1 million in operating profit I believe versus 9 a year ago, is that correct?

No, because the environmental -- you've got the environmental plus (indiscernible) minus the Atlas V -- Atlas V so it's a net of 1.

I guess I was just including Atlas as part of continuing operations and I was excluding the environmental but that's okay. And then on the Atlas V charge, how much of that is cash versus non cash?

It was all non-cash.

And then on discontinued operations, a 72 cent loss or 32 million -- how much of that is actually an operating loss and how much is just like a write-down?

11 million was the closure of the Snap On so you've got another --.

About 15 to 20 between operating losses and associated with the actual additional loss from the disposition.

What was the -- I guess what was the actual operating performance in the division? How much in operating profit in that division due to this quarter?

We don't actually break out the pieces as to what is disposition and what is operating.

And you won't disclose that?

Not the components of that.

Is it still possible this quarter?

No.

GDX was not. AFC was.

That's what I was asking about, AFC.

AFC is profitable. They made $2 million.

Okay and just in the press release to had a comment that the companies that now (indiscernible) the opportunity to strengthen balance sheet and approve its financial flexibility as we head into '05 -- and there is quote "sales in noncore businesses along with favorable capital market conditions. I didn't know if that was implying that with favorable capital markets that you intend to do a secondary or what you meant by that statement.

We're looking at the markets. Obviously we've got some issues with our converts, the issues being the maturity on converts and the new FAS, the pronunciation with contingent converts and the market right now the pricing for converts is more favorable than it was when we went to the market. We are looking at what our alternatives are.

We are looking at our overall capital structure and vis-à-vis what do we end up paying down in debt because obviously we are going to be sitting with sitting with cash proceeds from the GDX transaction and the AFC transaction too when it occurs. I think it makes sense to address the balance sheet at this point in time.

So it is actually -- you might take out one of the converts and replace it with a new covert that would be a lower rate -- is that what you are saying?

That is one of the things we're looking at. We're looking at a whole bunch of different things.

What is the highest rate on the outstanding converts that you could actually take out?

5 3/4.

What would be the expected rate given today's market?

Between 200 and 300 basis points below that.

That's all I've got. Thank you very much.

Ham Jobing (ph) with Jobing Capital Management (ph).

My question has been asked. Thanks.

Vali Ulsheen (ph) with Deutsche Bank.

Good morning. Just want to revisit this free cash flow question. I guess the GDX sale brought 140 in cash. What was the 7 million -- because I thought it was 147 million in cash?

We're looking at collecting that at a later point in time Vali (ph).

So that is coming later?

Yes.

And then you said 63 -- so 63 million was the usage, half of that by GDX then you mentioned Aerojet was -- what was the free cash flow in the Aerojet business? Or negative free cash flow I should say.

Aerojet used cash in this quarter and they used about 10 to $15 million in cash this quarter.

That is all tied up in working capital?

It's working capital. All entirely working capital.

Then you mentioned something about corporate cash costs?

Yes corporate expense, cost associated with corporate and then you've got your interest cost and you've got -- we end up paying cash cost associated with the retiring medical to each quarter.

And then you said I guess, Terry, you mentioned you expect neutral free cash flow in the fourth quarter and I'm assuming that that is after all the cash restructuring costs?

Yes.

And then you mentioned I guess you have I think the number was like 3 to 6 million left due to the French facility. Is that cash or non-cash?

That is going to be cash over a period of time.

Okay let's -- I'd like to ask about AFC in terms of where you are in the process. You write in the press with intention to offer the business, has that process begun and maybe give us in color on what the process is going to look like.

The process is well down the line, we've begun some time ago. It's just we've seen indications which lead us to believe we will sell it. And we are in discussions now.

Are you exclusive with one person -- are you that far down the road with one guy -- ?

I can't say.

I think that's it for me for now. Thank you.

Edward Davis (ph) with Staconic (ph).

Thank you. Hi, Terry, Yasmin, Michael. I really have 2 things. First of all to follow up a little bit more on the AFC. As I understand it you had operating earnings which I assume are fully taxed at 2 million in the quarter. Did I hear you correctly?

Yes.

I know that is not an official member. I guess my question is you've got net assets on the balance sheet right now for the discontinued of 82 million. Is that exclusively AFC or is there still some stuff in there relating to GDX?

There is still some stuff in there related to GDX. But it's primarily it's the snap on plant (ph), the French plant.

Would that suggest then that the net assets of AFC would be higher than that figure? I mean if that is kind of the net liability for the things other than AFC?

No, that includes AFC and it includes other assets as well. The snap on assets. (multiple speakers)

So there are other net assets -- it is not all just a liability?

Yes, there are some small amounts of other assets too.

I guess what I'm kind of driving at is you have -- if I remember in the second quarter, Fine Chemical had not a strong quarter and there was a suggestion that there was going to be sales that were going to be pushed back into the second half of the fiscal year because the plant had been running at full capacity but some of -- it was really a question of buildings rather than --

You are right on that, quite frankly it will have greater profits in the fourth quarter than it had in the third quarter.

I guess I realize you are not going to prejudice your disposition activity by talking about prospective value. We know what the net assets are and I presume you've taken a hard look at the assets and feel that this is presumably a recoverable amount. But my question really is what is a true annualized pro forma EBITDA and net operating figure after CapEx or net cash after CapEx from this business right now? I don't have a good handle on it because it seems like it jumps around.

EBITDA is around 14 -- 15 million.

That is a fair figure kind of then annualized?

Right.

Finally, switching over for a second, since Mr. Martin is there, maybe he could give us a sense for kind of just the general picture of what's going on in terms of prospective contracts and activity in light of the uncertainties of the election overall in the rocket propulsion business?

We've got a pretty encouraging year as far as our success in winning contracts that are potential future importance to us. Two examples are in the world of tactical missiles where we are on the winning Rathian (ph) team for non line of site, a new army program that would place a number of older missiles that are in the inventory. We were also on the winning Lockheed Martin team for joint common missile. I think we are pretty well positioned to take advantage of what ever new opportunities are going to come out of NASA.

In broad terms the acquisitions that we've made are performing very much as we expected them to. If you exclude the ARC acquisition, and look at Aerojet on a year-over-year basis we are regenerating organic growth in of about 5 percent, 2004 compared to 2003. And looking forward into 2005 on a combined Aerojet basis, we would anticipate top-line growth at about that same rate, maybe a 4 to 6 percent sort of range.

The growth is across all of our product lines in all of our major operating sites. Our employment at each of those sites is higher today than it was in December of last year. So our general outlook for the business is for modest but continued growth on the top-line with maintenance of margins.

We think a lot about the possible impacts of the election and we answer that question quite often to people who follow the Company. I think we are coming to the conclusion that on balance we could have some exposure in a Kerry victory if you look out 3 or 4 years down the road. The one area of particular concern would be how aggressive he is going to be in pursuing new missile defense starts and keeping the existing programs very healthfully funded versus perhaps slowing things down a little bit. Other than that frankly we don't see big differences.

We think that either Republican or a Democratic administration has to step up to the issues of NASA. The fact that the shuttle is going to be retired, we don't believe anybody is going to suggest that this country abandon space. And on the defense side given the world situation, no one is going to take imprudent actions on the defense budget or politically put themselves in a position where they can be accused of softness on national security. Kerry in fact is proposing the buildups of Army divisions and other parts of the defense budget.

One last thing, the shutdown of the plant in Virginia. Does that -- are those cash -- I got the impression those are going to be cash charges connected with that?

The way that works in our business is that you have to finance the cash outlays to do that restructuring. And then you present a proposal to the government showing that over time they are going to recoup that investment in savings on your new contracts. And they then allow for a recovery over about a five-year period of a substantial part of those investments that you've made so we are sort of acting as the bank right now.

One last thing, Terry and Yasmin. The remediation reserve, should we interpret this favorable adjustment in the reserve as an indication that you have kind of reassessed the future cost over time and determine that even before the reimbursement from the government that the actual cash outlays are now expected to be less?

No. We continue to assess the reserve always we assess it each quarter; we assess it on an annual basis. This adjustment to the reserve is primarily driven by the fact that you're adjusting the actual receivable and you're adjusting the reserve as well and net-net you end up with a favorable adjustment. The favorable part is really mostly driven by reassessing the actual recoverable amount based on the fact that the commercial and the government mix is changing a little bit.

Finally on the tax issue. As I understand it you now have some uncertainty about the applicability of operating loss or tax benefits from operating losses, if you will. I'd like just a little clarification on that but I'd also like to know is the capital NOL relating to GDX still fully valuable in terms of the ability to offset what ever taxable gain there would be on AFC?

When you look at our financial statement, the financial statements to the extent that you have had historical tax losses that require you to in essence to reserve against the use of those until you can definitely show future taxable income in the future. So what you see reflected in our financial statements is following the rules there and actually placing an evaluation on it. We did generate capital loss from the disposition of GDX and we will endeavor to use that. But obviously our financial statements reflect a reserve against that.

This is not the result of an IRS determination -- it's your own internal account?

It's our accounting rule.

Thank you.

Randy Gulke (ph) with Musinek (ph).

Going back to the 63 million use in cash is that cash from operation or is that cash from operations after working capital or capital expenditures, I mean?

That includes capital expenditures. It includes cash spent on discontinued operations and also working capital use by continuing operations.

What were the capital expenditures in the period for continuing and discontinuing operations?

The capital expenditures for continuing operations during the quarter were 7 million. And discontinued operations is reflected in the discontinued numbers.

That answers my question on that. The only other question I had was with regard to the Atlas program and the write-down of the inventory. Is there any other chance of write-downs on coming up in the future for the Atlas program, I believe there was reference to that in the last 1-Q?

At this point in time, we have taken the write-down that we believe is appropriate. We at this point in time we believe recovery of the remaining cost is probable.

Thank you.

Solomon Comolodi (ph) with B. Riley & Co. (ph).

You said you were expecting to get entitlements for Easton and Rio Del Oro in late '05, maybe early 06? Can you tell us for which of the 2 projects you expect to get entitlements first and why?

I would say the odds are that the first to be entitled will be Rio Del Oro and the reason is we're farther along on that application. We applied; we started that application a couple of years ago. It was transferred to the City of Rancho Cordova when Rancho Cordova came into existence about a year and a half ago. And where they are on that project is they are in the draft phases of the environmental review. Where they are on the Easton project is they are just starting the environmental review statement process now.

You said you believe that land is worth something like $4 billion. Can you explain to us how you get to that number and how we should think about valuing this land?

That is actually a number that the tax authorities came up with in terms of what they think they will have as taxable value. We continue to see a very hot market in the Sacramento area. We continue to expect to see values hold or rise on land. It's a scarcity factor now.

And then you said you were moving your testing facilities out of Rancho Cordova, is that right?

We will no longer do large testing here at our Sacramento facility. We are going to do at Edwards Air Force Base.

And then, in regards to Aerojet, why again did working capital increase when the sales were actually down if we exclude ARC?

I think the biggest reason is we don't collect on Atlas until we deliver the motors. We thought we would deliver 5 motors this year. We are only going to deliver 2 or 3. What it means next year however, is we expect 12 motors to be delivered. It's more of a timing issue than it is a permanent loss issue.

Finally, I think you said you've had 5 percent organic growth in that segment but you've had 116 million in sales including 45 million from ARC and then if you compare that with last year, it is only 83 million. So I'm not sure how that is considered growth.

There are always going to be timing differences between quarters in this business because it's made of a couple hundred active contracts. But if you exclude the ARC numbers from both the stub period of 2003 and from the year-to-date numbers in 2004 and look at 2004 on a full year basis apples-to-apples, the Legacy Aerojet organic business is going to generate about 5 percent topline growth.

Thanks, guys.

Jim Fong (ph) with Gabelli & Co (ph).

Could you just tell us what the capital loss was on GDX? I have an estimate of about $200 million. Is that kind of ballparkish?

Yes, it's probably going to be somewhere between 160 million to about 180 million.

And capital loss? Okay. And then can that loss be used to offset a gain in sale on AFC?

Yes.

I guess you gave us roughly the normalized EBITDA is about 15 million. Should we be looking at multiples of about 8 to 10 times on a sale like that?

Yes.

Okay. Just going back to Aerojet in terms of the margins, you've indicated, Terry, that that was I guess you had some award performance that kind of really helped boost the margin to about 15 percent. How consistent is that? How sustainable are these award performance and I guess contract completion? How should we look at the margin going forward?

I think at it Jim, for the year we're right now sitting at about a 12 percent margin. What we generally said was we expect margins to be between 10 percent and 14 percent. Not telling you we will see a 15 percent margin every quarter, we won't. But it's going to fluctuate probably between 15, 16 and 10 or 9. For an annual basis it should be well over 10 and like I said right now, we're sitting at 12.

Okay, so these awards -- it's really more of a timing issue then?

Yes.

It's a timing issue and when you close out some programs, you get the final award -- it was more than what we anticipated. Our folks at Aerojet are doing a good job, better than we planned.

One last question in terms of acquisitions, you didn't talk about that in your priority for cash -- could you just kind of give us an idea what you're seeing out there and whether you are still active?

We've always said that we were interested in building our Aerojet business more. And so it's just a question of what's available at the right price. And that depends upon the seller as much as it depends on us. Other than that there is not a whole lot I can tell you. It's the usual suspects and so far we haven't found anything that suggests that we would do a deal tomorrow. But we continue to look.

Thank you.

David Thurber (ph) with PKI Capital (ph).

My question has been answered. Thanks.

Are last question comes from the line of Daniel Gottbald, a follow up.

I just wanted to follow up on the free cash flow at Aerojet. If you looked at the reported EBIT of 18 million and you were talking about 10 to 15 million negative free cash flow. Can you give more detail on the difference and what it was again at Aerojet that caused the free cash flow to be so negative?

Daniel, again we are looking in this quarter Aerojet used cash flow again driven by our investments or expenses associated with the Atlas program. Some of it is driven by timing, the fact that deliveries are not being made and deliveries will in fact be made in the fourth quarter or early on in 2005. That is the primary driver of the use in Aerojet's cash flow.

You're guiding to breakeven cash flow for the fourth quarter. Are the 2 deliveries you expect to do in the fourth quarter enough to cause a 10 to $15 million swing?

I think swings and other aspects of working capital including the delivery are enough to take us to a projection of a breakeven cash flow for the fourth quarter.

Thank you.

I do believe we have another question. One from the line of Jerrod Stevens (ph) with Giovanni Capital Group (ph).

An I correct in understanding that Westborough was now about 300 acres larger than it was originally contemplated?

We're still try to figure out exactly what the size is. That is one of the issues that are going on. What we basically have been telling people is it can be between -- it looks like it is somewhere between 14 and 1800 acres.

Thank you.

Follow-up question from the line of Vali Ulsheen (ph) with Deutsche Bank.

Yasmin, can you give us an indication of what the cash and bank outstandings look like today relative to quarter end and if it is similar why the need to have 101 million of cash -- why not pay down the banks?

If you look at what we have in terms of our senior debt at quarter end we're looking at essentially our term loan A debt and term loan B and in total that is about 140 million. I think at this point in time as we are holding onto the cash as we assess our capital structure on our balance sheet and we have the GDX divestitures, the AFC divestiture proceeds that are expected in and then what would be the best and optimal capital structure for the Company as we go forward.

Thank you.

Jim Fong with the Gabelli & Co.

Just a couple of questions. You talked about possibly closing on the light rail deal in the fourth quarter. How much do you expect on that?

About 2.5 million.

Going forward what would be your capital expenditures and depreciation and amortization as we look into '05 and the future?

I think, Jim, when you look at '05, you are really left with Aerojet when it looks at depreciation and CapEx. Aerojet's depreciation is probably going to run somewhere between 25 to 30 million and their CapEx is typically lower than their depreciation.

I guess it could be a little too soon but what is your thinking about pension expense in '05? I mean, are you going to be incurring pension expense or possibly pension income?

We will still continue to have a non-cash pension expense in 2005. At this point we are still looking at a non-cash charge and not looking at any kind of cash contributions that are required. In 2005 as we go forward we are looking at a reduced pension expense probably somewhere in the range of $45 million roughly as we go forward into 2005 which again will be all non-cash.

Okay. How much is it this year? It's like about 60 million or something?

Yes.

Thank you.

Thank you and there are no further question at this time. Please continue.

With that I would like to thank you all and we will talk to you at the end of our fiscal year. Thanks. Good day.

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