Curtiss-Wright Corp (CW) 2002 Q1 法說會逐字稿

From the Curtiss Wright Corporation first quarter results conference call, at this time our participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Participants will be provided at that time for you to for questions. If anyone has any difficulties during the conference, please press star zero for me to assist.

I would like to advise everyone that this conferecence call is being recorded and now I will turn the conference over to Mr. Martin Benante, Chairman and Chief Executive Officer. Please go ahead sir.

Thank you Tim. Good morning everyone and welcome to our 2002 first quarter earnings conference call. Joining me in this call today is our treasurer, Gary Benschip; our corporate controller, Glenn Tynan. We now have a copy of our earnings release, which was issued yesterday. Please call our offices at code 201-896-8400 and ask for Ms. Roby and she will be happy to post you a copy.

Before we begin, I will mention that we will herewith make some forward statements of today's call. We believe our operating plans are based on assumptions. We cannot guarantee that we will meet any expectations that may arise from these forward looking statements or their underlying assumptions. Such forward looking statements are made pursuant to the Safe Harbor provisions of the Securities Reform Act of 1995 and evolve risks and uncertainties that may produce results that are materially different from those set forth during this discussion. Such risks and uncertainties include risk factors that generally affect the business of aerospace, defense, marine, and industrial company. Please refer to the our SEC filings under the Securities and Exchange Act of 1934, as amended, for a more thorough discussion of risks and uncertainties as well as further information relating to our businesses. With that set aside, we would now to discuss our highlights of our first quarter results.

We are pleased to report another consecutive quarter of year over year earnings and earnings growth in the first quarter of 2002. Our diversification strategy curved as well and has allowed us to grow during this soft economic cycle and stop the decline in commercial aerospace industry.

Net sales for the first quarter rose 22 percent to 97.8 million from 79.9 million from the same period of 2001. The increase was prinicipally due to additional sales from the 7 acquisitions made during 2001. We are also pleased to report

organic growth in our core Motion Control and Flow Control business segments. This internal growth was driven by strong defense sales. Looking at our inmarket, we had strong growth in product sales, land based, and aerospace defense industries. Product sales were also robust in the and the commercial power generation market.

Commercial aerospace however OEM product and overhaul repair services remained weak, which affected our Motion

Control and Metal Treatment business segments. Metal Treatment was also affected by roll activity and the outsourcing of services from the automobile industry.

First quarter net earnings increased approximately 1 percent, 9.3 million or 90 percent per diluted share compared with 9.2 million or 90 percent per diluted share for the same period last year. On normalized basis, which includes unusual items, net earnings increased approximately 4 percent, 9.6 million or 0.93 cents per diluted share compared with last year's first quarter. Even without acquisitions, our base business overall generated sales and improved profitability despite weaknesses in several of the markets that we serve. We have improved the quality of our earnings and we have redeployed assets from cash items and non operating real estate to acquiring businesses, which increased our operational

sales and profitability.

Our normalized operating earnings shows an improvement of 2.1 million with 90 percent over the first quarter of last year. This reflects an additional contribution of 13 cents to our earnings per share over last year. With that overview of our first quarter, I will turn the call over to Gary Benschip for more a detailed discussion of our financial results.

Thanks Martin and Good Morning everyone.

Our sales for the first quarter 2002 increased primarily from the acquisitions we made in late 2001. These acquisitions are accounted for 16.2 million of the total 17.9 million sales growth for the quarter. Excluding the contributions from acquistions, first quarter sales grew 2 percent compared to the corresponding period last year. Reported operating income for the quarter increased 13 percent to 12.8 million from last year's 11.3 million. Again the increase was primarily related to acquisitions and internal growth.

Reported first quarter operating profit margin declined 13 percent compared to 14.1 percent for the previous year's first quarter. The decline in margins was primarily the results of lower margins from our Metal Treatment business segment. Any addition of acquisition have lowered profits in our existing businesses. As I mentioned during last quarter's conference call, our businesses amongst the industry leaders and profitability and the unusual find and position candidates with equivalent profit margins. We do expect our profitability and operating margin basis to improve as the acquisitions are fully integrated. We have demonstrated our ability to do so in our earlier acquisitions.

We had recurring items in the first quarter of 2002 that affected our operating income. Net unusal charges in the first quarter totaled 600,000 dollars. There were no unusual items from last year's first quarter. Excluding this year's items operating income would have increased 19 percent to 13.4 million from last year's 11.3 million. The unusual items and operaing income of the first quarter included 500,000 dollars related to the relocation of one of our Metal Treatment facilities and 100,000 dollars for the declining market value prior to sale of securities we received related to the mutualalization of an insurance company.

Adjusting for these unusal items, operating margins would have been 13.7 percent for this year's first quarter compared to 14.1 percent of last year. The significant overall margin improvement in our Motion Control and Flow Control business segments were partially offset by the decline in the Metal Treatment operations.

Looking at our business segments, Motion Control accounted for about 43 percent of the quarterly sales, Metal Treatment 26 percent, and Flow Control was about 31 percent of sales. On the segment operating income basis, Motion Control contributed 53 percent, Metal Treatment 20 percent, and Flow Control 27 percent. Sales for the Motion Control segment increased 41 percent to 42.3 million for the quarter. Approximately 9.3 million or 75 percent of the total 12 million dollar increase was related to acquistions. Taking out the contributions from acquisitons, sales still increased 10 percent over the first quarer of 2001.

Again in this segment, the organic sales grew 10 percent for this segment related largely to an increase in the volume for all OEM defense aerospace products and aiming and stabilization systems for armoured vehicles. These increases were partially offset by a continued decline in overhaul repair services and commercial aerospace and over volume for OEM commercial aerospace products.

Operating margins for Motion Control segment increased to 17.1 percent for the quarter compared to 15.3 percent last year. The margin improvement was eventually due to stronger profits in defense OEM aerospace components and aiming and stabililation products, land based military vehicle to our European markets.

We have significantly reduced our cost structure to aerospace overhaul repair services, while our margins in this area are below year ago levels due to the decline in volume. We have profitability levels from what we experiencing from the fourth quarter of last year.

Sales in our Metal Treatment segment declined 9 percent for the first quarter compared with corresponding period of last year. Sales decline was partially offset by acquisitions, which headed approximately 1.1 million sales for the quarter. The overall sales decreased, which was caused by weaknesses in two major in markets. Automotive and commercial markets. These two markets make up about 60 percent of total sales for the Metal Treatment segment. Operating margins for this segment declined to 10.9 percent in 2002 first quarter compared with 19.6 percent last year. This year's margins were affected by start-up costs for the new facilities, which was 400,000 higher than start-up costs last year.

There were also factility relocation costs to another 500,000 dollars, which I have already mentioned. Adjusting for these items, operating margins in the first quarter of this year would have been 14.2 percent as compared to the first quarter of last year of 19.6 percent. The lower margins are largely volume related.

Sales in the Flow Control segment increased 36 percent to 30.1 million for the first quarter. Acquisitions contributed 5.6 million or 71 percent of the total 8 million dollar increase over last year's first quarter. We are also pleased to report strong internal growth in this segment. Excluding acquisition, sales for this segment increased to 11 percent. This was primarily due to higher volume sales to the Nuclear Navy in the power generation market. The sales increase was partially offset by its lowest sales in the oil and gas and processing markets, as well as heavy and automotive related markets and heavy truck markets. Operating margins for this segment increased to 12.4 percent in the first quarter compared with 5.5 percent last year. The significant increase in operating profit margin was principally the result of higher volumes in profits and products use in nuclear applications, partially offset by lower profits on automotive and heavy truck products, which were volume related.

We continued to maintain an exceptionally strong and balance sheet. Given consideration to the use of cash

and additional borrowings to fund an acquisition in April, our debt-to-capital ratio on a pro forma basis at March 31st was 14.3 percent.

I will turn the call back to Martin for some closing remarks before we open the call to your questions.

Thank you Gary.

We believe that our recent acquisitions are just beginning to show their potential. Since the beginning of 2001, we had 9 acquisitions that strengthened each of our buisness segments to enhance our market position to the addition of new technologies, products, markets, and customers. We are advanced by our strength and competitive edge as a niched industrial technology leader.

Our sales in defense-related markets has increased to approximately 32 percent of our total sales from 20 percent previously. We have strengthed our Motion Control business segments by adding sophisiticated electronic component and system technology used in firing, aiming and stabilization systems, for powered vehicle and unmanned flight control.

We also acquired other advanced technologies in our Flow Control business segment. These include proprietary valves for the process industry and for Electronic Control, for Flow Control systems for the US Navy, all of which enhanced and broadened our offerings in Curtiss Wright current market.

Over a short time we expect to improve the performance as part of the Curtiss Wright, highest reduction of greater manufacturing efficiency, streamline processes, and by leveraging our industrial reputation at worldwide distribution network. We are encourged by a number of economic indicators that point to a recovery, including first quarter growth, an industrial indicator like manufacturers capacity utilization rate, which have increased for 3 consecutive months after reaching a 20-year low in December of 2001.

We believe that our company is well positioned to benefit even further from the general level of economic activity and I believe that the same economic growth will be gradual. We expect to strengthen our defense related in markets to continue as we move through 2001. As we stated during the last call that we have been building our presence in the defense electronic market and our position in many military programs have never been stronger.

We expect that the commercial aerospace market will remain weak through 2003, but will improve in 2004. At the same time, our aerospace defense program like the F22 and Joystrike fighter will regain ramping up production. During the first quarter we experienced an increase in power demand for the nuclear Navy and the commercial power generation industry. We believe that positive trend overall are improving gradually or will improve in .

I will open the call for any questions that you may have.

Thank you one moment please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question please press the star followed by the one on your touchstone phone. You will hear 3 tone prompt acknowledging your request. Your questions will be polled in the area they receive. If you like to decline for the point press yes. Please press a star followed by the 2. Be sure that you lift your handset, if you are using a speakerphone before pressing any keys. First question comes from Steven Wortman from Sidoti & Company. Please go ahead.

Good Morning.

Hi Steven.

Just going through each of the segments, I just have a couple of questions. I know you did provide the internal growth figure at Motion Control, but can you actually give us what defense did versus commercial?

The defense was our strongest segment. The actual throughout all of our business segments, each one of our business segments do have a ..

You know I am talking in percentage terms.

Yeah overall I do not have the figures here.

I can talk to you later. Now in the OEM side you did refer to some increase in defense. Was that majority due to the F22 or were there some other things going on, some repairs?

Well there are repairs, there is a lot of defense electronics as far as our is concerned in both ship building, and in tanks and armored vehicles. And there is some ramp up increase on the F22. We see that continuing through 2002 but will also in the foreseeable future.

In the extremely strong and was up and I was looking for over 17, I mean you guys did reasess and were doing product mix and did you get any benefits in the quarter?

No Steve, if you look at our margins and we exclude acquisitions that we have made recently, we have a very strong cost reduction program. We are proving that year in and year out and then you can see some of the other companies that we purchased previous to last year and then we are improving costs. You will start to see that the new equipment that we put into plan, the positive improvement that we put in will definitely pay off. Even though the volumes in some of the businesses have gone down, the improvements in profitability is more of an share of that.

Going over to Metals first, have you guys seen any improvement in orders late in the quarter on the automotive side?

Yes we did. In fact, what paces our shot-peening business, you know the Metal business has both heat treating and

shot-peening. We saw a pick up in activity and our heat treating and thats where we will see the first change or improvement in the automotive sale and then the last area would be shot peening, which is at the end of the cycle. So we would expect that a couple of things in the Metal Treatment business. First of all obviously, we are not going to have the unusual item of relocating a plant. We will have a lot less start-up costs of the three new facilities that we have and we see a pick up in the automotive industry that we will carry through. We expect that business will improve every quarter from now into the third and fourth quarter.

In obsolete dollars terms of the start-up cost, can you give me an amount on how much you are going to go down in the first quarter?

Well we experienced, first of all you heard about approximately 400,000 dollars over the last year and we would expect that would reduce significantly and I am not going to give you the exact number that we think is there.

I am just going over the guidance for 2002, in terms of sales and bottomline. Are you going to provide any today?

No, we are not. We are not breaking any today.

Thanks a lot.

The next question comes from Mark , C.L. King. Please go ahead.

Good Morning.

Hi Mark. How are you doing?

Pretty good. Just a follow up on some of Steve's questions, if I could ask this question in a slightly different way. For the Motion Control segment, can you give us a sense of how much both the commercial aerospace after market and the commercial OEM business was down, may be on a year over year basis?

Yeah. Year over year on the OEM was down about 20 percent from the previous first quarter. And as far as are concerned, it is down about 25 to 30 percent. Obviously after the fourth quarter and the problems associated with the ommercial aerospace industry, we have made several changes in the services and overhaul areas and we are starting to see

that volume pick up and are actually performing a lot better than we had expected in the first quarter and obviously we see that continuing through the rest of the year.

Yes that will certainly correlate with the information that we have been getting for schedules for recovering.

Yes, but I think on the OEM side it is going to take some time, but that has only been in the numbers that didn't mean anything positive or above what we all projected 30 percent overall decline in the OEM. Obviously it is going to be a nice improvement.

As far as the OEM business, you said you projected 30 percent decline but was down 20 percent in Q1?

Yeah, what we expect is another further reduction in our outlook for third quarter. As Boeing is reducing their airplane build schedule, we did receive some information that the 21 ships, that is the month which is going down through the third quarter of May at the 24 level for another month or two, but we haven't received confirmation on that.

Okay, once we reach that level, I think Martin that you said that there was going to be a similar in 2003. So we will just get down to that level and stay down there pretty much through 2003?

Yeah.

Okay good. A couple of questions on the Metal Treatment, you said that you are going to have some additional start-up cost in

Q2?

No, what will happen is you will see a decline in the start-up cost. In other words we are not opening up any more plans. We are

just going to have a reduction in the start-up cost as we go out in the second quarter.

Okay. Were those start-up costs higher than you had anticipated or were they pretty much in line?

No, we have opened plants up in a continuous paces over the last few years and we are in line. We are pretty much .

So there were no unusual problems with any other line?

No, not at all.

What do you think those segments margins can recover to, may be either in Q2 or through the rest of the year?

We expect that we will be at the end of the year at an average effect of about 14 percent and I think that is conservative.

Okay great. And one further question, do you have, and this is a general over to all the three segments, do you have any idea of any further cost reductions and where they might be?

We will continue, you see, cost reductions again in the Metal Treatment and the Motion and Flow area as we have. We have some of the new acquisitions that we have just made such as allowing this to completely overhauling some of the assembly area. We have been putting new equipment into some of the new plants that we have purchased for Flow Control. So you are going to continue to see good margins coming out of those businesses.

Okay. Are there going to be any associated like one-time or unusual charges in any of those?

No.

Okay. Great. That's from me. Thanks a lot.

Okay Mark. Thank you.

The next question comes from James Foung, Gabelli & Company. Please go ahead.

Hi James, how are you doing?

Hi Martin, how are you guys? Good quarter. I just picked up in the last question when you talked about the Metal Treatment, you expect the margins for the year to average 14 percent. Is that on an adjusted basis excluding the unusual cost you took in the first quarter?

No, that's with it.

That's with it, okay. So actually your normalized margins will be actually be better than that?

That's correct.

And then, can we just go back to Motion Control, how much F22 ships that you shipped this quarter versus a year ago?

I don't have the exact number on that becasue one other problem that we have is we don't ship about... I will show you the complete ship . There is so many actually that did go out, somebody , so the volumes are up and we could put in equivalent basis on it, but the volumes are up from the first quarter. Do you remember what I said in the last conference call, we shipped about 8 to 9 ships, that's last year would be up about 13 to 14 ship levels this year. And that will be equally spaced in the four quarters.

So you are on track to do that?

That's correct.

And then talking about the overhaul and repair business, I know you have done a lot in terms of improving the operations there including relocating and consolidating operations up years ago. Just assuming flat revenues, how much of they are, from the cost reductions that you have done, how much of a pick up in earnings can we see in the overhaul repair business this year?

Compared to last year?

Correct.

Last year, in that business segment we lost money overall because of the actual coming to a complete halt in the fourth quarter. This year we are making money. And we have done things better than what we had anticipated. So obviously the margins are going to be a lot better than what they were last year. We will expect that the trends in the service and overhaul will continue to improve, therefore we will have a positive return, a nice positive return for that business this year.

Could you give us an idea in earnings this year versus last year just in that business?

Jim, I do not have that right now. I will give it to you later.

Okay, I will follow with you later one day. And lastlty Martin, do you think you have been making a lot of aquisitions and done terrific jobs in finding good mutual companies to add to your portfolio. Going forward, are you going to continue kind of acquisition pace that you have done since late 2001?

Without a doubt.

Okay, and you will just stock at all time high? Are you looking at positively doing something bigger than what you have done in the past and using stock as a currency?

We are not anticipating anything in that area.

Okay. Terrific. Good job this quarter.

Thanks a lot Jim.

The next question comes from John Walthausen, C.L. King. Please go ahead.

Good Morning guys. Congragulations.

Hi.

I will just say in honor of your good job, mark it out, double team .

I was wondering when you would really come out.

Okay, the question. Where do we stand on the fuel systems for aircraft carriers? I know you were doing some trials on that?

We fit very well, as a matter of fact, they in the Navy are scheduling a post order in June. So we are not sure how large it is going to be. We are not sure if it is going to be just a couple of the pump rooms or a commitment to retrofit, we have options in the retrofit in the entire fleet, so we are right on schedule. We said we would give the first order in the second quarter. Looks like

that will happen. And it should be a very nice program for us. The entire overhaul of the aircraft will be approximately 50 million dollars and right now that's involving tremendous business.

Good. And in the Penny & Giles acquisition, are there any integration costs associated with that, that we should anticipate?

No. Not at all. But we are looking there obviously we now have a quite have a few companies, from that a150 million dollars in electronics and particularly the to electronics. The biggest thing there is each one of them has a specialized mention geographic areas and good customers and right now our job is trying to put those companies together and get some synergical additional at leveraging their capability. I think that is going to be a very very nice business for us in future.

Good. And finally, I know it is a small loss but the loss in the demutualization of the insurance company. Could you walk us through that and I guess particularly whether I assume that you got some stock and took a loss on it. We still own the stock or are we out of that exposure?

Yeah, John this is Gary. We will see the stock that is prudential through years and years and years. And when they went through their demutualization that is the result, they distributed the stock based on some formulas. We received that in the fourth quarter last year, at the end of the fourth quarter last year and the sort of timing thing one would receive and one of us when we saw, but right now we are completely out of the position for a couple of months.

Okay excellent. Is that all?

Yes that's all.

Ladies and gentlemen, if there are any additional questions at this time please press the star followed by the one. As a reminder if you are using a handset phone please lift the handset before pressing any keys. Next question comes from Tim McNormic, . Please go ahead.

Good. Thank you. First I wanted to come here and thank you for breaking out the revenues and operating income between organic and total acquisitions. My question was cash flow. Do you have any cash flow numbers in terms of what the cash flow was and capex for the quarter?

Total operations, we more or less broke even. We had some unusual items. We had a large like a 15 million dollar tax payment we had to make in the first period associated with.. in the first quarter associated with sales of our Wood Rich facility that occured last December. Factoring that out, we were sort of at break even from operations. We did have capital expenditures as Martin mentioned, we have been making some investments in our new facilities that we acquired. That amounted to about 7 million dollars. So we have a little bit of reduction in our cash flow.

So for the year, would you expect to have cash flow to differ much than its historic trend related to revenues and for the year what is the budget for capital spending?

I think our budget for capital spending for the year is around 30 million dollars. Okay. And but our cash wall is going to remain strong in all of our units and continue to generate good amount of cash.

Okay thanks.

We have a follow up question from Mark Keiler of C. L. King. Please go ahead.

You are coming back again.

Yes this is an easy one. I am just following up on the Twinstrike fighter program. Now the F22, I know you have osme good content on that program and that is beginning to ramp up. Could you give us a few comments on the Jointstrike fighter and when that could possibly make some contribution?

The joint strike fighter, we have approximately 70,000 aircraft, in the F22 we have about 1.3 million. Obviously the joint striker fighter is going to be sold in much larger quantities. We should start seeing revenues there in about 2004 and 2005.

Okay, so that a little bit about the F22 versus the bigger contribution in the aggregate?

No, I would say the monthly shifts at levels, the F22 will probably outpace the JSF.

Okay thanks. That's all.

Mr. Benante, there are no further questions at this time. Please continue.

Thanks. Well if there are no further questions, we will conclude this call by thanking you all for dialling in today. We look forward

to speaking to again on our second quarter results.

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating and please disconnect your lines.