Aerojet Rocketdyne Holdings Inc (AJRD) 2008 Q2 法說會逐字稿

Welcome to the GenCorp 2008 second quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, June 30, 2008. I'd now like to turn the conference over to Ms. Linda Cutler. Please go ahead.

Thank you, Nicole, and good afternoon everyone and welcome to GenCorp's second quarter 2008 conference call. Before we start, I'd like to remind you 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 the earnings release just issued today as well as 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. Now I'd like to turn the call over to Scott Neish.

Thank you, Linda, and let me also say good afternoon, everyone. Also joining me today to discuss GenCorp's second quarter results is our Chief Financial Officer, Yasmin Seyal. Let me start out by first commenting on the recent board changes during the quarter. As most of you are aware, Tim Wicks, Dr. Sheila Widnall and Todd Snyder resigned from the board in May. I'd like to thank them for their years of service and contributions to the company as members of the board of directors and wish them well in their future endeavors. Jim Henderson, who joined the board in March, was elected to replace Tim Wicks as the non-executive chairman of the board, and Jim Perry who brings both finance and aerospace and defense expertise was appointed to the board in May. A new board and management are working closely together to evaluate how to best enhance shareholder value and have begun the process of looking at various options and scenarios which, at this point, we cannot comment further upon but we do expect to be in a position to do so is in the late summer timeframe. Next, let me say the company is pleased with its overall operating performance for the quarter. In my prepared remarks this morning I will briefly address how Aerojet is doing and some key successes it has had in the last three months since we last talked. I will also give you an update of where we are with regards to our real estate projects, but first I'd like to turn the call over to Yasmin to review with you our financial results. Yasmin.

Thanks, Scott, and good afternoon to everyone. My comments this afternoon will focus on the financial results of our two continuing operations, Aerojet and real estate. I will comment on the company's second quarter sales, income, cash flow, and net debt results and also discuss the 401(k) shares matter and recision offer that we talked about in the release that we just issued a little while ago. Today, the company reported net income of 6.9 million or $0.12 diluted earnings per share for the second quarter 2008 compared to net income of 12.5 million or $0.21 diluted earnings per share in the second quarter of 2007. As you may have noticed in the release, the second quarter of 2008 does include a 12.7 million charge associated with the restated shareholder agreement the company entered into with Steel Partners in March of this year. I will touch upon that charge in my comments later on.

Commenting on sales first, which for the second quarter of 2008 were 195 million compared to 192 million in 2007. Sales for the first half of 2008 were 371 million in 2008 compared to 343 million in 2007. With regard to Aerojet, second quarter sales were down 8 million; however, year-to-date sales are up 18 million. We saw growth on Standard Missile, [toe] and the Orion programs which was partially offset by a decrease in the Titan program which, as many of you know, we completed the closeout activities for in 2007. Also as I've noted in my prior two calls, our goal from a sales perspective for Aerojet is to replace the Titan business which accounted for approximately 30 million of sales in 2007, and it is our objective to replace those sales with the missile defense program and the continued development of our Orion-related effort. We remain focused on achieving this goal and Scott and his comments will comment upon some of the successes that Aerojet has experienced that points to this. With respect to our real estate segment, both the second quarter and year-to-date totals include proceeds from sale of the 400 acres of the Rio Del Oro property to Elliott Homes for $10 million in cash.

Commenting next on segment performance, which is a non-GAAP financial measure and is defined in the operating segment information table included in the release that we issued a little while ago. Aerojet, its segment performance for the second quarter, excluding environmental remediation provision adjustments, retirement benefit plan expense, and unusual items was 23.5 million, representing a 12.8% return on its sales. This compares to 29.4 million and a 15.4% return on sales for the same period in 2007. As many of you know, and as we noted in our release today, margins in 2007 were helped very favorably by our Titan closeout activities; however, we are fairly pleased with the 2008 performance as well for Aerojet. We did see good performance on the Atlas contract in this quarter; however, as in the first quarter, we did see some negative performance or some performance on programs that we experienced in the second quarter but, again, we believe that that performance is behind us and was offset by the good performance on the Atlas contract.

On the year-to-date basis, looking at the same measurements for Aerojet, Aerojet's segment performance in the first half of 2008 was 38.4 million, representing a 10.7% return on sales compared to 43.7 million and a 12.9% in the first half of 2007, again 2007 margins were helped by the Titan closeout activities. 2008 margins on an overall basis for the first half of the year are holding up to our expectations.

Turning next to the real estate segment and segment performance for the real estate group, segment performance was 7.1 million for the second quarter compared to 0.6 million in 2007, both periods reflect our normal ongoing lease activities but 2008 does include the one-time 6.8 million gain on the 400 acre land sale.

Next, I'd like to comment on some of the other components of continuing operations. Our combined interest expense and interest income was relatively unchanged at 5.9 million in the second quarter of 2008 compared to 5.7 million in 2007. Second quarter 2008 corporate and other expenses were 1.7 million compared to 5.3 million in 2007. This decrease is primarily caused by the reversal of previously recognized stock-based compensation expense due to the lower fair value of the stock appreciation rights as of the end of the second quarter and also lower management incentive expenses. 2008 retirement benefit plan expense, which is mostly non-cash, is 2 million for the second quarter compared to 5.3 million in 2007. As I have noted on previous calls, the decrease reflects the impact of higher discount rate assumptions and favorable market performance on our pension assets. We still project the 2000 and full year expense to be in the 7 million range with no cash contributions required to our major plans in 2008.

Now, turning to our debt position. Net debt, which is total debt less cash as of May 31, 2008, was 382 million, a $28 million increase from 354 million as of November 30, 2007. The increase reflects the 35 million funding of the [Bontour] trust, net cash usage over the first half of the year related to corporate interest, retiring medical and legacy matters partially offset by the proceeds from the sale of the 400 acres to Elliott Homes, and notably cash generation by Aerojet. Our liquidity position at quarter end remains good with a cash balance of 59 million and an undrawn revolver of 80 million.

I had mentioned earlier that I would comment on the 12.7 million unusual charge, and I'm also going to comment on the 35 million of the funding of the guarantor trust. As we talked about at the March call, we entered an amended and restated agreement with Steel Partners on March 5, 2008, with respect to the election of directors for the 2008 annual meeting and certain other matters. As a result of this agreement and accordance with the terms of the company's benefits restoration plans and existing executive severance agreement, at that time when we talked about the shareholder agreement, we were estimating that the company would incur a charge in the range of 11 to 15 million in the second quarter. The charge that has been recorded is in fact 12.7 million and this charge does include the costs for severance costs for Terry Hall, our former CEO and President, increases in the pension benefits primarily for the company's officers, and accelerated vesting of the outstanding stock-based performance award. Also, the result of this agreement the company did fund the 35 million into the guarantor trust on March 12 and this funding covers the liabilities associated with the benefits restoration plan which covers retired employees and current employees and represented some liabilities that were on our balance sheet and then also potential liabilities associated with executive severance agreement.

My final comments today are on the 401(k) shares, registration, and intended recision offer discussed in the release that we issued a little while ago. The company inadvertently failed to register with the Securities and Exchange Commission the issuance of certain shares in its defined contribution 401(k) employee benefit plan. As a result, participants who purchased these shares pursuant to this plan in the last year may have the right to rescind certain of their purchases for an amount equal to the purchase price paid for the securities or if these shares were in fact sold to receive damages with respect to any loss incurred plus interest from the date of the purchase. The company intends to make a registered recision offer to eligible plan participants later on in this quarter. We have also begun the process to seek approvals required on our senior credit facility to purchase -- to facilitate such purchase of the shares and the recession offer. We recorded a charge of 900,000 which is reflected in unusual items in connection with this matter in the second quarter of 2008 and currently estimate a cash usage in the range of $6 to $12 million for the purchase of these shares upon the completion of the recession offer. Those conclude my comments for the second quarter earnings release and, with that, I'd like to turn the call back to Scott.

Okay, thank you, Yasmin. Looking at our Aerojet segment, as Yasmin noted, sales and margin performance for the quarter were good, especially given the changes that we're experiencing this year in our overall book of business given the close out of the Titan program. Second quarter was marked by a number of positives, including most notably the exciting success of the Phoenix Mars Lander. This mission was enabled by performance of Aerojet engines in every phase of the flight from launch to cruise to guided descent and touchdown on the northern polar reeming on of the planet. We're very proud of our role in this success. At the same time, our propulsion system achieved 100% emission success for shuttle Endeavor and Discovery flights in March and May respectively.

Looking at our ongoing Atlas business, as Yasmin told you, we had another strong quarter during which we met all the key program milestones. The highlight this quarter was the successful launch of the ICOG1 spacecraft, the heaviest pay load ever launched by an Atlas launch vehicle. We also finalized the 2008-2009 contract option for solid rocket booster propulsion. The favorable performance on the Atlas program shows our intensive efforts over the last two and a half years have put initial development and production issues behind us. Atlas should now deliver long-term stability and financial benefits for us as we go forward. Our work on Nasa's Orion crew and service modules also scored significant developmental milestones. The program passed a large number of engine tests successfully which, in succession, have retired many performance risks associated with Nasa's space shuttle replacement system. We entered into a new contract with Bigelow Aerospace to provide propulsion for their new Sundancer manned spacecraft which gives us our first visible presence in the emerging entrepreneurial emerging space market. We expect this effort to lead to more opportunities as space exploration opens to the full profit market.

On the defense side of our business, strengthening revenues in the Patriot, [toe], and MLRS programs paint a similar positive picture and our ongoing solid rocket motor development production contract performance continue to give us additional opportunities, particularly through a number of key follow-on awards including Tomahawk program, PAC-3 and the guided MLRS program. These programs are less visible and rarely cause the enthusiasm of the space program among the general public but, as you know, they are a key part of our business and critical to the nations defense and ongoing transformational objectives.

I want to close my Aerojet remarks by pointing out our outstanding employee safety record at Aerojet which has brought us recognition, a good working environment and has become a key driver on our efforts to deliver 100% mission success to our customers. Our Camden, Arkansas facility reached 2 million man hours without a lost time accident, an achievement few companies can claim. For that milestone, they earned a prestigious National Safety Council National Safety Achievement Award. We're also proud that our Redmond, Washington, facility has just passed 1 million man hours without a lost time or in fact even a recordable accident at that facility, and our Gainsville facility also very recently just reached 1 million man hours without a lost time incident.

Turning to the real estate front, we continue to make meaningful advances in major projects. Looking first at our Glenborough at Easton and Easton Place project, Sacramento County has released the public review draft environmental impact review report and planning commission hearings have begun providing forum for public comment. First county planning commission hearing was conducted on June 10 and a second on June 24, a final meeting is expected on July 8. The first two hearings went well with support voiced by the commissioners and no public opposition testimony. The planning commission closed the public comment on the EIR formally on June 24 and could possibly act on a recommendation for approval to the board and supervisors at the July 8 hearing. We still anticipate receiving final entitlement from the county toward the end of the year.

On our Rio Del Oro project the city of Rancho Cordova and the U.S. Army Corps of Engineers have released for recirculation and public review the revised section on biological impacts and water of the EIR/EIS. Public comment period closes July 7. We announced on April 25 that Sacramento County terminated our remediated water agreement which both parties had the right to do with an appropriate water supply delivery project had not been approved a certain date in which the county did in fact exercise. With respect to Rio Del Oro the revised environmental impact report took into account this water agreement with Sacramento County may be modified or are replaced with a new agreement. We continue to negotiate with the county and other water providers on replacement agreements which we anticipate could be in place later this year. Renegotiation of this water agreement does not affect the Glenborough at Easton or Easton Place projects where we have a separate water supply agreement with the City of Fulson. We continue to work on entitlement of the Westborough project, given the time requirements of the lengthy process we do not anticipate entitlement for another 18 to 24 months. Thank you for listening. Now, Yasmin and I would like to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Our first question is from the line of Joe Nadol with JP Morgan. Please go ahead.

Hi, good afternoon.

Good afternoon.

Hi. A couple questions. To start out with just on the Aerojet performance, could you quantify the Atlas (inaudible) adjustment and then the offsetting, offsets I guess from Redmond is my understanding?

Joe, if I look at those, I think they're both kind of net out big picture to performance improvements and the issues that we had on a couple of the contracts and as you may recall we had some issues in the first quarter too and there I had said that they're less than the fingers on one hand and pretty much the same is true of the second quarter too, and they've been on different contracts and the Aerojet team has certainly worked very, very hard to put those behind us. Certainly we expect those issues to be behind us at this point in time, and Aerojet performance on Atlas program, as Scott has said too, has been good, and we're looking forward to better performance, too.

The Redmond operations performance slightly exceeded our expectations for the second quarter so we feel like they're getting that operation back on track.

Okay. On the Atlas contract, can you just remind us of where we are because there was -- we went to zero margin on that before and is this sort of the reversal of some of that previous reserve and is there more opportunity in the upside?

The Atlas contract, this new Atlas contract that we have is the negotiated 2007 and 2008 performance and we took a charge, as you may recall, back when we terminated or finished off the old contract and then negotiated this new buy. This new buy was negotiated at margins that we definitely like and it's been a fixed price contract and the performance from that has been good. We're currently have the next buy of the Atlas contract, too, which will take us into 2009 and 2010, and these are more of the production buys on the Atlas contract now.

Okay. On the 401(k) issue, just a couple of follow-ups. How far back does the situation go in terms of when the shares were purchased? Does this go back years and years or just the last couple of years?

This issue goes back, the actual issue goes back a number of years to where the actual purchase of the shares that have to be done stems back one year so that the recision offer that the company intends to make will go back one year.

One year, okay. And what exactly is going to be the impact to earnings ? You've taken

At this point, Joe, we've recorded a charge, as I've mentioned of 900,000, which is our best estimate of the impact on earnings at this point due to the recision offer and the cash flow impact that comes will be a cash flow impact that I've talked about in the range of $6 to $12 million, and the bulk of that cash flow impact will go through the treasury stock and the equity section of the balance sheet and not go through the P&L.

Does this answer your question, sir? Okay, our next question is from the line of Bin Laurence with Suttonbrook Capital. Please go ahead.

Hi, good afternoon. Yasmin, could you tell me what's included in the SG&A line? Why is it a negative number this quarter?

If you look at the SG&A line number, a lot of that, if you look in the P&L there it's essentially the corporate overhead, corporate costs that you see in the segment performance line that goes through the P&L.

Okay, is there any sort of unusual things included there?

No, I think the one that I've commented on there is the reversal of the stock compensation expense.

Right, okay.

That's the unusual item that is going through, if you would like to call it an unusual item, but quite a bit is coming through there.

Right, okay. Also, maybe Scott, could you comment or elaborate a little bit more on a strategic alternative side?

Well, I really can't at this time because we haven't completed that analysis, so it won't be until some time later in the year, probably late summer, before we'll be able to make any comments on that.

Okay, thanks.

Yes.

Thank you. (OPERATOR INSTRUCTIONS). It appears that we have no further questions. Please continue with any closing remarks.

I have no further closing remarks. Thank you all for attending today. We appreciate your attendance. Thanks.

Ladies and gentlemen, this concludes today's GenCorp 2008 second quarter earnings conference. We thank you for your participation and you may now disconnect.