Aerojet Rocketdyne Holdings Inc (AJRD) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GenCorp 2007 second-quarter 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, June 27, 2007.

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

Good morning, everyone, and welcome to GenCorp's second-quarter 2007 conference call. Before we start, I would like to remind you that during the 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 the second-quarter earnings release, as well as in management's discussion and analysis and elsewhere in our most recent Form 10-K 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.

With that, I would like to turn the call over to Terry Hall.

Thank you, Linda, and good morning, everybody. Today we reported our second-quarter earnings. We think we had a good quarter. We had $192 million in revenue and $12.5 million in income.

When we started the year, we told you that our objective was to see double-digit revenue growth, double-digit margins and to see improving cash flows, and all from our Aerojet subsidiary. With this results, we think we're well on the way of achieving those objectives, and what we're seeing is continuing strength in demand for Aerojet's products.

I'm going to let Yasmin take you through the numbers, and then I'll come back and give you some more commentary on the quarter and what we see for the rest of the year, and some glimpse of what we hope to see next year.

Thank you, Terry, and good morning to everyone. I would like to start off by saying that the Company had a good quarter in terms of financial performance, with the major metrics of sales, segment performance, net income and earnings per share improving significantly year over year. We also generated cash during the quarter and lowered our net debt position. My remarks will touch on each of these areas, in that order.

Starting with the top line, sales were $192 million, an increase of $25 million or 15% over the second quarter of last year. This increase reflects activity on our tightened closeout work and growth in the Aerojet business, with solid wins in Orion and a variety of defense programs over the last year paving the way.

Aerojet's funded backlog stands at $713 million at May 31, up $148 million from $565 million at the start of our fiscal year. This amount includes only those contracts for which money has been directly authorized by the government, or where we have a firm purchase order from a commercial customer. Aerojet's contract backlog, which include both funded and unfunded contract awards, stands at $973 million, up $255 million from $718 million at the start of the year. Contract backlog has increased at a greater level than the funded backlog, because of roughly approximately $100 million award for multi-year liquid engine technology demonstration programs that we announced earlier this year.

Following sales, quarter segment performance also improved year over year. Aerojet's segment performance for the second quarter, excluding environmental remediation provision adjustments, retirement benefit plan expense and unusual items, was income of $29.4 million, representing a 15.4% return on sales. This compares to $17.2 million and a 10.4% for the same period in 2006.

The year-over-year increase reflects higher sales volume and net favorable contract performance. With respect to the higher-margin percentage, a key driver in this quarter was the performance on the Titan closeout activity. As most of you are aware, the last launch under our Titan program occurred in 2005. We are now in the decommissioning and decontamination phase of this contract, where we are tearing down test facilities that supported the Titan program over the last 50 years.

This teardown activity is proceeding favorably at a quicker pace and fewer issues needing addressing. This work is being performed under a fixed-price incentive fee arrangement, where we were able to share in cost savings with our customer. There may be some additional opportunities remaining on this program for the rest of the year, but the effort is really winding down, with most of the profit opportunity having been realized through the second quarter of this year. Consequently, we expect Aerojet's aggregate margins to be lower over the remainder of the year. But as we have expressed previously, our goal for Aerojet is to achieve double-digit returns, and we think we will achieve our objective in fiscal 2007.

With regard to our real estate segment, second-quarter performance included sales of $1.6 million and income of approximately $0.5 million, compared to sales of $1.7 million and income of $0.8 million in the second quarter of 2006. Both years' sales reflect our normal ongoing lease activities and don't include any real estate transactions in either period.

Lastly, on the income statement side, net income for the quarter was $12.5 million or $0.20 per diluted share, compared to a net loss of $7.3 million or $0.13 per share in the second quarter of 2006. Both periods include unusual charges for the unrecoverable portions of settlements and reserves associated with various legal matters. The amount was $8.5 million in 2006 and $2.6 million in 2007.

Both periods also include income tax benefits related to tax refund claims or carrybacks of net operating losses. These amounts were $4 million in 2006 and $3.6 million in 2007.

At the risk of being repetitive, both periods included retirement benefit plan expense, which is mostly non-cash. The amount in the second quarter of 2007 was $5.3 million, compared to $10.8 million for the same period in 2006. As I've noted on previous calls, most of this expense is related to deferred recognition of the underperformance of the pension plan assets in prior years and decreases in the discount rate used to determine benefit obligations.

Turning next to our debt and cash flow position, net debt, which is total debt less cash, as of May 31, 2007 was $362 million, compared to $371 million as of February 2007, representing net cash generation of $9 million during the second quarter. This reflects cash generation by Aerojet, partially offset by cash usage associated with our real estate entitlement processes, as well as costs related to corporate interest, retiree medical and legacy matters.

Aerojet continues to make progress in its ability to deliver cash while addressing legacy constraints, which we've talked about before, such as the payback of the Titan advances and also the burden of environmental costs. Based on its current performance, we expect the Company overall to be in a cash-neutral to slightly cash-positive position over the remainder of the year, and will continue our efforts to strengthen our cash flow generation. As of May 31, 2007, we had cash balances of $82.9 million and an undrawn revolver of $80 million.

Lastly, I'd like to comment to say that we did close on a new senior credit facility last week that will provide the Company with more flexibility, extend maturities and lower our ongoing interest as we go forward. This facility provides for a five-year $80 million revolver, a six-year $75 million term loan and a six-year $125 million letter of credit facility.

With that, I would like to turn the call back to Terry.

Thank you, Yasmin. I guess what I want to talk to you about is what is really driving the growth in terms of market dynamics for Aerojet. Then I'll have some comments about what we're seeing in real estate.

In Aerojet's this quarter, and it looks like it's going to continue, you see growth coming from our defense programs, both missile defense and tactical. Then we're starting to see, particularly in the second quarter, revenue coming from NASA's Orion program, which is, as all of you know, a relatively long-term development program for the next four or five years, depending upon Congress' funding of the program.

At the same time, we're looking out to see what it looks like for next year. For next year, there's still some uncertainty driven by the fact that the appropriation progress in Congress is still going on. We think that there is some opportunity for us to have some growth next year, but it will depend upon how much funding NASA receives for Orion. It will also depend on what the continuing funding is going to be for the military, in terms of our tactical missile programs.

During the quarter, we did have a couple of significant events. Probably the most significant, for those of you who have followed us for a long period of time, has been the signing of the Atlas V contract. It was signed with the United Launch, the Boeing/Lockheed Consortium, and it's for two years of deliveries. We are projecting that we will have a margin, and it's our goal to get that margin to double-digit ranges also. As most of you recall, we have been working on that program for years, and have not really shown much of a profit. So that's going to help our margins in 2008.

In terms of the real estate, right now we are waiting for the city of Rancho Cordova to issue the response to the comments on the draft EIR on Rio Del Oro. That's a 2,700-acre project. They should come out some time in the next few weeks, and then we will have public hearings. We're still hopeful that they will meet the deadline that they told us of November for entitlement of that project.

The second project that's close to entitlement is the Glenborough project there. It's the County of Sacramento that is the zoning authority. The County is telling us they will issue their draft EIR/EIS at the end of this year, late this year, with approval in the latter half of 2008, next year.

I think we should spend a little time talking about what we're seeing in the Sacramento real estate market. It's still searching, we believe, for the bottom. Pricing is down about 40%, or back to levels of 2004. There seems to be, still, a fair amount of price discounting that is going on by the large builders to move inventory. We have not seen any forecasts by the experts which suggest that the real estate value is going to turn around anytime in the next 12 months. The latest forecasts I've seen have said 2009 or 2010.

We continue, though, to believe that we have an asset that's going to have a lot of value, and if we look at the timing, and if we meet the entitlement timing set out by both the County and the City, it would appear that by the time we put in infrastructure, we would have product by the time infrastructure is put in. Whether we put it in or our partner puts it in, we would have product in late 2009 and certainly by 2010.

Having said all that, only time will tell. As all of you know, the real estate market has always been cyclical and it will continue to be cyclical. Hopefully, we will start seeing the ride back up to the surface.

With that, I'm going to open it up for any questions that any of you might have.

(OPERATOR INSTRUCTIONS). Joe Nadol, JPMorgan.

It's actually Seth here for Joe. Joe couldn't be here today. Can you disclose the contribution that Titan made to EBIT this quarter?

I think the best I can tell you is our other businesses or our other programs were basically getting us above the 10% kind of margin. What you're seeing above that is driven primarily by Titan -- not completely, but Titan is the big reason that we got those kind of margins. They are not sustainable in our business. We get these occasionally when we close out a program, but we're not going to average 14% or 15% margins.

The growth has been very solid thus far this year in Aerojet, about 16% you're to date. You are well on track to reach your target of double-digit growth for the year. Should we be looking for something more in that 15% range for the remainder of 2007?

I think we're going to see it continue at the place that it's on.

So growth in 2007?

The rest of the year looks pretty good, to be honest.

Looking out further than that, I know you touched on it a little bit. If you could expand on it a little bit more, the backlog is up very nicely. As we look to 2008, is there a possibility that we could look to something like $800 million in Aerojet sales for 2008?

We don't see that right now. I can tell you that there are things that we don't know whether to put them in the forecast or not. The biggest, obviously, is COTS. That depends on whether they get funding. Absent increase in spending by Congress, we're thinking it's going to be closer to flat or slightly up.

Flat or slightly up, Aerojet revenue in 2008?

Yes. But it will depend on things we can't forecast right now, how well it does. We don't think there's a lot of risk of it going down significantly.

So most of the ramp-up that comes from Orion will happen offer what time period?

It will flow through the rest of 2007, and you'll see that probably in the increase in revenues. But then you don't get that increase again in 2008. In fact, when you think about it, in 2008 we will be replacing the Titan revenues just to stay flat.

Just turning to the cash flow quickly, I know that -- I just want to check that Yasmin had said that cash flow should be neutral to slightly free cash flow positive for the rest of the year. Do you expect any reversal next quarter? Do you expect cash flow to dip below zero in either of the two remaining quarters this year?

We hope to be generating cash flow in the next two quarters, too, Seth.

I assume generating cash flow next year as well?

Yes.

There was some news last week about some trouble with an Atlas V upper-staged launch on June 15th. Any potential that that could lead to delays for you guys or affect your results going forward?

We don't think so. Obviously, we deliver the boosters sometime before the launch, and I don't see any problem with that schedule, at least right at the moment.

When you gave news of the new credit facility, talked about added flexibility that that gave you. Any plans or what you are going to do with that extra flexibility?

I think that's preserving options as we go forward. We increased the letter of credit facility pretty substantially, to address options with real estate as we go forward; the collateral package is slightly different, too, and we've extended the maturities on it.

Thanks very much and good quarter.

Well, if there are no further questions, I guess we will thank you for getting on the call and we will talk to you next quarter. Good day.

You can go ahead and terminate the call.

Jim Foung, Gabelli & Company.

Good quarter. I guess the operator fell asleep there on the switch.

It was slow. But what can we do for you?

Let me just back up a little bit. On the Titan program, how much sales did you generate from Titan from this quarter, and what was it for the first half of this year?

I don't know the exact numbers. The way the program worked is there was an estimated cost to close it out. To the extent we are below that estimated cost, we get 30% of the savings. So that's what we're getting. As I said before, that's probably -- that's driving the difference between what we say is our normal margin and what we saw this quarter.

Between the 10% and the 14%, then, right? Okay. But you indicated that in 2008 that the Aerojet revenues would be flat to slightly up, primarily because you would be replacing the Titan revenues?

Yes, and I think those revenues have historically been in the $30 million to $40 million range. I don't know what they were this year.

So that's what you will be replacing in 2008, and so that's why you come up with kind of a flat to modest --

Yes, and like I said, a lot of it is going to depend on whether COTS gets its funding and what NASA gets in terms of funding. They are already asking for more than what was put in the President's budget, and it will also depend on, particularly, missile defense.

Let's just shift a little bit to the NASA. Apparently, you booked some revenues for the Orion program this quarter. Was that kind of pushed forward? Because I wasn't expecting that until the third quarter.

No, we're starting to see it. But the schedule is going to be hard to forecast, because it's going to be driven by NASA and NASA funding. They are still spending sometimes saying here's what they want. So they haven't spec'd out the development program in great detail. Like I said, how that's going to unfold will depend primarily on what gets appropriated by Congress.

Are we still looking at roughly about, from NASA, about $25 million of sales this year? That's kind of what I have been --

Yes, it could be that or slightly more.

Do you know how much you did in the second quarter?

No. We haven't broken out the pieces of the NASA business.

Then, when this gets ramped up, the Orion program, that's like a $40 million, $50 million (multiple speakers)?

Ultimately, it's going to depend on how many launches they are doing a year. Right now it's still, obviously, a development program, which means it's engineering time. It depends, like I said, on when are they starting launches and how many are they going to do a year. We don't have a good answer for you because it's not clear to us what the timing is going to be on that, or exactly what our content is going to be, and we don't have a contract on production.

Then, on the tax rate, it looks like you used NOLs to offset any kind of tax liabilities, so you had a tax credit in the quarter.

The benefit that has been booked has been for the benefit of net operating loss carrybacks. On a go-forward basis, we still have net operating losses that are available to offset any taxable income that we might have.

How much do you have left?

We've still got over $200 million of net operating losses.

So you will be using this on a quarterly basis, so you have a tax benefit. Do you expect a tax benefit for the rest of this year and then in 2008?

2008 we don't expect to see any more net operating carrybacks. This is from carrybacks of losses.

So this year I shouldn't assume any tax liability, then, [you think]?

No. We won't have a liability.

So you have tax credit? Okay. It would be kind of same run rate as the second quarter?

I don't think we'll see the same run rate as the second quarter.

On the Atlas V, so you signed a contract for $111 million for a two-year period, 2008 and 2009. What can we expect in terms of how should we see the progression of that?

I think, when you look at the progression of it, some of it will depend on exactly the orders placed and what periods that they are placed in. We probably won't have disability on that until later on in the year or next year.

But I guess it will be some sort of a ramp-up, then, essentially?

That's going to depend on their success at selling launches.

Then the options for 2010, I guess -- the exercise of those options will just depend on how successful the launches are in 2008 and 2009, right?

Exactly. Right now, they couldn't tell you how many they need.

When you talk about margins in this reaching double digits, do you start at double digits right away, or just start at high single digits and ultimately get (multiple speakers)?

What we have is we have a contract which has a fixed fee and basically a performance fee, so we have to perform in order to get the double-digit margins.

All right, terrific quarter, guys.

(OPERATOR INSTRUCTIONS). At this time we do not have any further questions in the queue. Please continue.

Thank you all for listening to the call. We are glad to always share of terrific quarter, and we hope we can share another one in a few months. So good day.

Ladies and gentlemen, this conference will be available for replay after today, June 27, 2007, through July 11, 2007. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 3751285. International participants, dial 320-365-3844. (OPERATOR INSTRUCTIONS). That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconferencing. You may now disconnect.