Aerojet Rocketdyne Holdings Inc (AJRD) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GenCorp 2008 third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded today, Friday, September 26, 2008.

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

Thank you, Nicole, and good morning, everyone, and welcome to GenCorp's third 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 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 defer materially from those expected by the Company or as expressed in our forward-looking statements.

With that, and now I'd like to turn to call over to Scott Neish.

Thank you, Linda, and good morning. Also joining me this morning to discuss our third quarter results is our Chief Financial Officer, Yasmin Seyal.

As most of you probably know, this is a very sad time for us. Last week, an employee in our Camden facility was fatally injured in a fire that resulted from the unplanned ignition of a rocket motor. We have formed a team to investigate the accident. We are also forming an independent review team of highly respected senior government and industry officials to evaluate the work of the internal investigation team. We're very early in this process and have no conclusions to provide at this time.

I started out in our last call by indicating that the new Board and management were working closely together to evaluate how best to enhance shareholder value, and that we had begun the process of looking at various options and scenarios. The current status is that this evaluation has not yet been completed. It is still in process, and given the current market disruptions, may take some time longer. Therefore the Company is not yet in a position to share with you any further information.

Now I'm going to turn the call over to Yasmin to review our financial results for the quarter. Following her remarks, I will then briefly address how Aerojet is doing operationally and some key successes we have had, since we last talked with you. I will also give you an update on where we are with regards to our real estate projects. But first, Yasmin?

Thanks, Scott, and good morning to everyone. My comments this morning will focus on the financial results of our continuing operations, Aerojet and real estate. The Company today reported a net loss of $2.7 million or $0.05 diluted loss per share for the third quarter 2008 compared to net income of $15.6 million or $0.26 diluted earnings per share in the third quarter of 2007.

The third quarter 2008 number includes approximately $7 million of charges associated with adjustments to our environmental reserves and $1 million of unusual items associated with unrecoverable portion of legal settlements. The third quarter 2007 number includes a net benefit of $1 million associated with adjustments to environmental reserves, $5 million of unusual items, and it is also included a $12 million income tax benefit related to certain tax settlements and statute expirations.

Commenting next on sales for the Corporation, which for the third quarter of 2008, were $173 million compared to $199 million in 2007. Sales for the first nine months of 2008 were $544 million compared to $542 million in 2007. With regard to Aerojet, compared to 2007, sales were down for the third quarter and $8 million on a year-to-date basis as compared to 2007.

I think as many of you -- we've talked to you in prior calls, and as many of you well understand, the major driver here is really the completion of our Titan program in 2007, which had about $31 million in sales in '07. We have been working hard in 2008 and we continue our effort to replace this Titan business with NASA and defense programs, the results of which we hope you will see as we go forward.

With respect to real estate, the year-to-date totals include proceeds from the sale of 400 acres of the Sacramento land to Elliott Homes for $10 million in cash, which occurred earlier on in the year.

Talking next on segment performance, which you know is a non-GAAP financial measure and is defined in the operating segment information table included in our release that we issued earlier today. Aerojet's segment performance for the third quarter, excluding environmental remediation provision adjustments, retirement benefit plan expense, and unusual items, was $16.3 million, representing a 9.5% return on its sales. This compares to $22 million and an 11.2% return on sales for the same period in 2007.

Margins in 2007 were helped by our favorable Titan contract. On a year-to-date basis, Aerojet's segment performance in the first nine months of 2008 was $54.7 million, representing a 10.3% return on sales, compared to $65.7 million and 12.2% in the first nine months of 2007. Again, 2007 margins were helped by our favorable Titan contract. 2008 margins on an overall basis for the first nine months of the year are holding up to our expectations.

Looking at our real estate segment and segment performance, it was $1 million for the third quarter compared to $1.4 million in 2007. Both periods reflect only our normal ongoing lease activities.

Commenting briefly on the other comments of continuing operations, are combined interest expense and interest income are slightly lower at $5.8 million in the third quarter of 2008 compared to $6.3 million in 2007. Third quarter 2008 corporate and other expenses were $7.9 million compared to $6.2 million in 2007. This increase is primarily related to higher legacy environmental provisions. $4.6 million in the third quarter of 2008 compared to $1.6 million in the third quarter of 2007. Partially offsetting this increase were some lower Workers' Compensation expenses as compared to 2007.

Turning next to our debt and cash flow positions, net debt -- which is total debt less cash -- as of August 31, 2008 was $383 million, which represents a $29 million increase from $354 million as of November 30 of 2007. The increase reflects the $35 million that was used to fund the grantor trust earlier on in the year.

Net cash usage for the month -- for the year, rather, is used by corporate interest, retiree, medical and legacy matters, with Aerojet generating cash to offset these cash usages and certainly, the sale of our 400 acres earlier on in the year did also generate some cash. Essentially, if you look at the cash usage for the quarter, it's pretty flat.

On an overall basis, excluding the transfer to the grantor trust for the full-year basis, we still do hope to be in a breakeven cash flow position or in a slight cash generation position for the full-year, as we pretty much consistently stated from the beginning of the year.

Our liquidity position at the quarter end remains good, with cash balances of $58 million on hand and an undrawn revolver of $80 million.

With that, I'd like to turn the call back to Scott for his comments. Thank you.

Thank you, Yasmin. Looking at our operational performance, the third quarter was marked by a number of positives, including most notably the successful completion of qualification testing of Aerojet's boost motor for the terminal high-altitude aerial defense program. These tests clear the way for Aerojet to deliver qualified boost motors to the US Army for fielding in 2009.

Our work on NASA's Orion crew in-service modules continues to make excellent progress and pass significant development milestones. The program successfully completed a number of engine tests and reviews, paving the way for the first deliverable flight motor associated with NASA's space shuttle replacement program. The first Orion jettison motor is scheduled for delivery later this year.

Aerojet received authority to proceed on development and qualification of Stage 1 propulsion hardware for the Taurus II launch vehicle. This contract from Orbital Sciences will ultimately qualify hardware and deliver NK-33 engines for flight. Orbital's first flight of the Taurus II vehicle is planned for December 2010, and will demonstrate capability to resupply the international space station for NASA and provide another launch vehicle for the commercial market.

On the defense side of our business, Aerojet shipped its 10,000th fire suppression system for the Ford Crown Victoria police interceptor. This is a significant milestone for the safety system, and the shipments of the current system will exceed our original sales forecast for the year as a result of the program extension into 2009.

Other programs strengthening defense revenues include the guided MLRS program, the TOW missile program, and SM-3 TEDACs. Aerojet's ongoing solid rocket motor development missile defense systems, warhead and production contract performance continues to give us additional opportunities to strengthen our portfolio.

Turning to real estate, we continue to make meaningful advances on our major projects. On Glenborough at Easton and Easton Place projects, Sacramento County has begun its work on the final environmental impact report. The Planning Commission unanimously voted to recommend approval to the Board of Supervisors at its July 8 meeting. Hearings went very well, with support voiced by Commissioners and no public opposition testimony. We still anticipate receiving entitlement from the County Board of Supervisors by the end of the year.

With that, I'll now have the Operator open the call up for questions that you may have.

(Operator Instructions). Joe Nadol, JPMorgan.

Good morning. Actually it's Seth on the line for Joe this morning. A couple of questions. If we start out at Aerojet, just sort of looking for some insight into the top line, in both the near-term and I imagine there's some more visibility into next year.

Fourth quarter, would we expect revenues to be higher year-over-year in the fourth quarter? And also, the fourth quarter has been traditionally the highest revenue quarter for the Company. Would we expect that to be the case again in 2008?

We do expect to see an increase in revenues in the fourth quarter over the third quarter. It will be about the same as the fourth quarter of last year, and we have some opportunities there.

Great. And as you look out to next year, what kind of opportunity do you see to grow the top line? I imagine there's some visibility there. And also, if you could comment on the Appropriations bill that Congress passed earlier in the week and how that makes you feel, either better or worse, about the opportunities for the Company going forward?

Okay, well, first the passage of the continuing resolution and -- it looks like we're going to have both defense and NASA authorization bills. We are encouraged by that. We don't see anything damaging to us in either of those bills and we believe that they are going to be consistent with the plans that we have going forward.

We are in the process of putting together our plan for next year. It's too early for me to share any specific numbers with you, but we do expect to see a healthy increase in both top and bottom line for next year.

Okay, and what do you think some of the potential drivers are going to be for next year's growth?

Well, Orion is going to continue to be a very important program for us. We're going to see probably increase in the THAAD program that I just talked about, and some other increases are possible in the area of missile defense. Also, the commercial launch market, both entrepreneurial space and the NASA COTS programs are going to be positive for us.

Okay, great. That's helpful. If we talk about margins at Aerojet, I see they've sort of bounced around a little bit this year. If you talk about what the outlook is going forward, what was the impact of the Atlas program on margins this quarter? I know it was probably quite positive in the second quarter. And also, I know there were a couple of issues earlier in the year that helped margins down. Have all of those been resolved?

I'm going to let Yasmin talk to that.

Okay.

Seth, the issues that we had earlier on in the year are behind us. I think overall, we've said our goal for Aerojet is to have margins on a double-digit basis. I think you've got to, again, look at that on a full-year basis, because from quarter to quarter, depending on the mix of our contracts and the delivery of our contracts and products, you will have a little swing. And I think if you look at Aerojet historically, that's always happened. But on a year-to-date basis, we certainly are striving to have double-digit margins and are certainly doing our level best to see what can we do to improve upon that goal.

And with regard to the Atlas program, the Atlas program is performing at that double-digit goal and we expect that to continue. We actually did a little better than that last year, and that was primarily because we were able to avoid some problems; that helped us in the performance of that contract.

Great. Just the terrible accident that occurred last week, is that going to result in any shutdown that would have an impact on Q4?

The shutdown to the facility is going to be relatively minor. The affected area was 2,000 to 3,000 square feet on a 1 million square foot facility, and we expect it will be fully functional at the facility within another week. And we should be able to make up for that disruption before the year-end. Our concern, obviously, is with the employees, and we want to make sure that they are healthy and prepared to go back to work in a safe fashion.

Of course, of course. And I guess on the real estate, it looks like we're coming up on the possibility of entitlement for Glenborough within a couple of months here. Is there anything you can say about sort of what comes next after the entitlement?

No, our primary focus is really on Glenborough at this point. We need to get that one done.

Right. Okay. And then just a final question, I wonder if you could talk about the delay in announcing a strategic plan for the Company and sort of maybe what some of the sticking points are there? And if there's any kind of timetable for when we might be able to expect it?

I don't think there are really any sticking points. As you know, we've had a couple of new members come on the Board just very recently. It's really more a matter of getting everybody up to speed and the Board coming to a consensus about, number one, what the options are and what we should do with those options.

So there aren't really any sticking points; it's just the process is taking a little bit longer than we anticipated. And of course, the current market disruptions are not helping. That tends to de-focus people, unfortunately.

Okay, all right. Well, thanks very much.

Thank you. (Operator Instructions). Andrew Sidoti, Markstan Capital.

A few questions here. I'd like to start with Aerojet. Overall, how should we be thinking about Aerojet's organic growth rate going forward? Is this a business that you think you would be growing in the low-single digits, mid-single digits, high-single digits? Just how should we kind of look at this?

We anticipate a high-single digits growth over the next five-year period.

Okay, and when did you expect that? Do you expect that to begin in fiscal next year?

Yes, we do.

Okay. And then on the individual programs, some individual programs, how much revenue does Orion currently contribute? And how should we think about that particular program's growth trajectory going forward?

Orion is currently in the $50 million a year range and we expect some growth in that, but frankly, it will be limited by government funding.

Okay, so you expect Orion to be -- from what you said, you expect Orion to be flat next year or down versus what you have this year?

We hope it will be up but it will be modest.

Okay. On the COTS program, can you give me an idea or give us an idea of what the revenue opportunity associated with that particular program is? And exactly what kind of work will you be performing on the COTS program?

We'll be performing -- we'll be part of designing and building the first stage propulsion system and probably some upper stage propulsion as well. I really can't give you any numbers because we've not definitized our role, our scope in that contract yet.

Okay. You mentioned early in the call that you would be delivering engines -- I don't know if it was the AJ-33 or AJ-26 engines to the Taurus II launch vehicle. How much -- I mean, just kind of ballpark-ish, what are we talking about? $1 million per engine? $5 million per engine? Just kind of want to get a handle of kind of what you think you can -- what price you can get for the engines.

Well, they are actually -- I said NK-33 engines. They're actually AJ-26 engines and there is quite a bit of value added to those engines before we deliver them; so that the answer to your question is a little difficult to quantify because there's, as I say, there's work done on the engines before they're delivered and, in fact, after they're delivered as well. And that's some of the scope that we're sorting out. But the engines are in the low millions per engine, depending on how you -- low-single digit millions, depending on how that you allocate that scope.

Okay, and these engines, if I recall correctly, were basically written off a couple years ago or so?

That's correct.

So what would be the margin impact when you start delivering these engines? Presumably, I would think if Taurus II was going to -- the first vehicle is going to be launched -- I think the test is in 2010 -- I would expect you probably would start delivering some of these engines maybe late next year. Does that sound reasonable?

Yes, that's right and the margins will be helpful. It isn't going to replace the Titan program, but certainly they'll be helpful.

Okay. Just going over to the real estate, can you separate land that has been cleared of environmental issues from the rest of the Company? And if you can -- if you can't, why not?

Well, the simple answer is that you can, but the process may not be quite so simple.

Well, all right. Well, then can you maybe talk about what some of the nuances that you have to deal with in terms of separating some of the real estate from Aerojet is? So I kind of get a better understanding of kind of what you're dealing with there?

Well, that's one of the things that the Board is looking at currently, is what our options are in that regard. So, I really can't give you any specifics because we're still looking at what the options are. But the issue, of course, is that there is a continuing environmental legacy associated with that land and Aerojet has a responsibility regarding that liability. And it's really just how you deal with those issues.

Okay, is any of the real estate pledged to banks as part of the credit facility? Is that part of one of the nuances you have to deal with?

Yes, Andrew, most of our real estate assets are collateralized against the bank facility. And obviously, depending on our transaction and the nature of the transaction you're ever undertaking, you always are in discussions with your banks.

Okay. In terms of partners for the real estate, how would you characterize interest from potential strategic partners at this point?

We're always talking. We've been talking for years. We've been talking to potential partners. And we always continue to talk to potential partners. The question is [always] all this comes down to economics, and I think that will always be the question that it will come down to in the future too. You know, what is somebody willing to pay or put on the table for the real estate in whatever form or structure that it takes?

Okay.

And the fact is the market right now is not very healthy and there's just not a huge amount of interest right now. So we're very focused on getting our entitlements rather than on what we're going to do with the land in the short-term.

Okay, got you. But I do know you have $158 million capital loss carryforward that expires, I believe, at the end of next year. I was just wondering if you could maybe talk a little bit about how you might utilize that particular NOL, how you may try to capture that before it expires?

That's one of the things the new Board is working on.

Okay. Just a couple -- all right, well, then you also have an ordinary NOL as well. I guess I also want to get an understanding of how does the ordinary versus the capital NOL impact how you might monetize your real estate going forward?

We've got an ordinary NOL of $220 million. The ordinary NOL has got a long life on it, expiration life on it. And as you know, the ordinary NOL can be used against -- offset operating income. We hope we'd get rapidly into the position of generating operating income as a company and are able to start using those NOL's. And as you can see by the performance in 2008, the Company's operating performance is definitely producing income, et cetera. So we're well on the way to using NOL's as we go forward.

Okay. And my last question would be on your new strategic plan that you're working on. Is it reasonable to assume that this plan will not be announced until after a new CEO has been appointed, and he or she has had the opportunity to kind of review the operations and have their input into it?

Well, again, that's one of the many variables that the new Board is working on.

Okay. Listen, thank you for taking my questions.

You're welcome.

Thank you. (Operator Instructions). We have no further questions in the queue. I'd like to turn the call back over to management for any concluding remarks.

Thank you for being with us this morning. Yasmin, you have any remarks?

No. Thank you, once again, for joining us on this call and we look forward to talking to you when we announce our year-end results in January. Thank you.

Thank you, ladies and gentlemen. That does conclude our conference today. If you would like to listen to a replay of this, it will be available after 10:00 Pacific standard time after today, and it will be good through October 10, 2008 at midnight Pacific Standard time.

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