Curtiss-Wright Corp (CW) 2003 Q2 法說會逐字稿

Good morning, my name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Curtiss-Wright second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Caller Instructions) Thank you, Mr. Benante, you may begin your conference.

Thank you Michelle. Good morning everyone, and welcome to our 2003 second quarter conference call. Joining me today on the call is Mr. Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Good morning. If you do not have a copy of the earnings release, which was issued yesterday, please call Ms. Joanne Hobbs, (ph) at 973-597-4711, and she will be happy to e-mail or fax you a copy, and add you to the Curtiss-Wright distribution list, for all future press releases, and other corporate communications. Before we begin, I will mention that you will hear us make some forward-looking statements on today's call. We believe that our operating plans are based on reasonable assumptions. We cannot guarantee that we'll meet any expectations that might arise from these forward-looking statements, or their underlying assumptions. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Security Reform act of 1995, and involve risks and uncertainties that may produce results that are materially different from those set forth during these discussions. Such risks and uncertainties include those factors that generally affect the business of aerospace, defense, marine, and industrial companies. Please refer to 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. Now Marty will begin our discussion regarding Curtiss-Wright's midyear 2003 financial and business performance Martin?

Thank you Glenn. Let me begin with the highlights of our six months and second-quarter operating results. Net sales for the first half of 2003, increased 65% to approximately $363 million, with acquisitions made in 2002 and in the first half of 2003, contributing approximately 135 million in incremental sales, and operating income in the first half of 2003, 46% to 41 -- approximately $41 million, from $28 million in the same period last year. Net earnings for the first half of 2003, of approximately 25 million, or $2.40 per diluted share, were up 24% over the first half of 2002, net earnings of approximately $20 million. Or, $1.93 per diluted share. This was achieved despite the adverse impact of lowered non-operating income, primarily pension income, had on earnings in 2003, which approximated -- amounted to approximately 22 cents per diluted share for the first half of the year. For the second-quarter, sales increased 50%, and operating income increased 16%, as compared to the same period last year. Net earnings for the second quarter of 2003 were 10,873,000, or $1.04 per diluted share, slightly above the 10 million 816, or $1.03 per diluted share for the same period of 2002. However, as previously stated, lower non-operating income; primarily pension income had an adverse effect on earnings in 2003, which amounted to approximately 10 cents per diluted share for the quarter. Backlog increased 7%, to a new record high of approximately $512 million, at June 30, 2003. We are pleased to report that we are progressing along in our plan, to make 2003 our eighth consecutive year of sales growth, and fifth consecutive year of increased normalize net earnings. We've experienced growth in our naval, military aerospace, and land-based military and laser-peening markets. Curtiss-Wright experienced growth in 2002 and 2003, in markets where most companies have experienced major downturns. Especially in power generation gas and oil processing, and certain industrial markets. Achieving this growth in the sluggish economy, reflects our customer's preference, for our highly engineered products and services.

Due to the benefits and inherit strengths of our diversification and acquisition program, we have been able to offset declines in some of our markets, with sales growth in other market segments. With the acquisitions completed over the last two years, we have expanded in to new products and markets complementary to our existing product line that are fueling our internal growth. Backlog and new orders are both at record levels. In 2003, we have a balanced portfolio, with sales divided fairly evenly between the military and commercial sector. Our military business includes Navy, primarily nuclear, aerospace and land-based markets. Land-based defense products, address both the domestic and European markets. We have expanded significantly in defense electronics, and this expansion will add not only to our OEM opportunities, but also increase our ability to participate in the aftermarket, as electronic systems go through multiple stages of redesigns and upgrades. This increase in our aftermarket activities will reduce the overall cyclicality of our defense business. The projected increase in military procurement spending will provide opportunities for us in the future. Our position on many defense programs which includes a mix of products for aerospace, land-based and military platforms, have never been stronger. This balanced blend of defense programs will provide short and long-term benefits in the future for our shareholders. We've been greatly encouraged by Congress's recent approval of the Navy's multi year nuclear submarine procurement, of seven submarines, which will increase production from one submarine to two per year, as each submarine contains approximately $60 million of CW products. Similarly, we hope to see approval for construction of the next aircraft carrier, by the end of 2003, as each nuclear aircraft carrier contains approximately 180 million of Curtiss-Wright products. Long-term, we are working with the Navy on the development of new systems for the next generation of naval craft. Overall, we have significantly strengthened our position in the defense sector. Some of our markets, including oil and gas processing, nuclear power generation, homeland defense systems, metal treatment technologies, transportation and general industrial products, are performing better than expected and show great future potential growth. Looking ahead this year, we expect to see continued growth in sales and earnings. We are optimistic for the second half of 2003, as we expect to see a major ramp up in several of our existing military programs, as well as higher sales for new products, such as our revolutionary Coker (ph) valve and new services, such as our state-of-the-art laser peening processed during the rest of this year. At this time, I would like to turn the call over to Glenn to discuss the financial results in greater detail. Glenn?

Thank you Martin. Our financial results continue to reflect a deliberate effort to improve the quality of our earnings, as we have shifted from non-operating to operating elements. A significant increase in operating income in the second-quarter of 2003 more than offset the decrease from 2002 non-operating income, primarily pension income. When comparing 2003 to 2002, these non operating items, excluding interest expense, reduce net earnings in 2003 by 10 cents and 22 cents per diluted share for the second-quarter and year-to-date, respectively. However, the decline in non-operating income was more than offset by the increase in operating income from our business segments. Operating income from the business segments increased 2.3 million and 12.3 million for the second-quarter and first half of 2003 respectively over the comparable prior year period. These increases equated to an improvement of 14 cents and 73 cents per diluted share, for the second-quarter and first half of 2003 respectively. Foreign currency translation had a favorable impact on sales and operating income. Comparing these years’ results to those of the prior year, the fluctuation in foreign currency rates positively impacted sales by 4.2 million and 7.4 million, for the second-quarter and first half of 2003 respectively. New orders are at a record high level. New orders received for the first half of 2003 totaled 391 million. Which were split evenly between military and commercial. Backlog at June 30th stood at a record high of 511.5 million, compared with 478.5 million at year-end 2002. Approximately 70% of our backlog is from military business. Turning to our operating segments, our flow control segments reported sales of 85.6 million for the second-quarter, which is an increase of 146% over the same period last year. The higher sales reflect the acquisition of electromechanical division and capital international in the fourth-quarter of 2002. In addition to the benefits from these acquisitions, this segment experienced sales organic growth of 4%, which is driven by stronger sales to nuclear, non nuclear naval markets, commercial power generation markets, and higher international valve sales. This business segment also benefited from favorable foreign currency translation. Sales of 179 million for the first half of 2003 represents an increase of 176% over the comparable prior year period. The higher sales are largely due to the contribution from acquisitions, as well as strong organic sales, with contributions coming from international valve sales, commercial power generation products and the highly contributing Coker valve. Flow control segment operating income for the second-quarter of 2003 increased 89% compared to the comparable prior year period. The improvement was due primarily to the benefit of acquisitions, which had strong results in the second-quarter of 2003.

Operating income of our base businesses declined 19% from the prior year driven mainly by an unfavorable sales mix and higher research and development costs for new product development programs. Operating income for the first half of 2003 increased 178% compared to the comparable prior year period. The increase is mainly due to the contributions from our acquisition and a 7% increase from our base business. The motion control segment reported sales of 61 million for the second-quarter of 2003, representing an increase of 2% over last year, due principally to the acquisition of Collins Technologies in February of 2003. The base business experienced lower sales due to the reduction in commercial aircraft production by Boeing, lower sales associated with the overall and repair services provided to the global airline industry, and the slight drop of the European grounds defense business. These lower sales were partially offset by stronger domestic ground defense sales, primarily related to the expedited deliveries of the Bradley fighting vehicles, and an increase in sales of military aerospace products, primarily with the spares for the F-16 program. This business segment also benefited from favorable foreign currency translations. Sales of 118 million for the first half of 2003 represents an increase of 16% over the comparable prior year period. The increase was primarily due to contributions from our acquisition. Our base businesses experienced lower sales, again, mainly due to the week airline industry, the reductions in the productions by Boeing, and slight decrease in the European ground defense business. The declines in the base businesses were partially offset by increases in our domestic ground defense business related to the Bradley fighting vehicle. Motion control segment operating income for the second-quarter and first half of 2003 was down compared to last year, which was driven by the lower sales volume, unfavorable sales mix, higher than planned research and development costs, and the timing of certain tradeshow expenses. However, we expect to see an improvement in operating margins in the second half of the year due to major planned ramp ups on several military programs. The metal treatment segment reported sales of 36 million for the second-quarter of 2003, which were 33% higher than the comparable prior year period. The improvement was mainly due to the contributions from their acquisition and higher sales of shot-peening services, which service primarily the aerospace and automotive industries. Higher European sales shot-peening sales were benefited greatly by favorable foreign currency translation. In addition, higher sales from our new laser peening technology also contributed to the favorable sales performance for the quarter. Sales of approximately 66 million for the first half of 2003 were 25% higher compared to last year. The increase was primarily due to the 2002 and 2003 acquisition, and higher sales of shot-peening services and the favorable impact from foreign currency translation. The start up of our new laser peening facility also contributed to the sales increase for the first half. Metal treatment operating income increased 41% for the second-quarter 2003, as compared to last year. Higher sales volumes, favorable sales mix, cost reduction programs, and favorable foreign currency translation generated higher operating margins for the second-quarter and first half of 2003. A major customer bankruptcy and new facility start up expenses partially offset these gains. Our balance sheet remains strong, with working capital of 151 million at June 30th. Debt outstanding was 175 million at June 30th, which represents a 28% debt to total capitalization ratio.

Our free cash flow, defined as net earnings after-tax plus depreciation and amortization less capital expenditures, was 13.6 million for the second-quarter and is 24.6 million year-to-date. Year-to-date as a June 30th depreciation and amortization was 15.3 million, capital expenditures were 15.8 million. I will now turn the call over to Marty for some closing remarks, before we open the call to your questions. Marty.

Thank you, Glenn. As our first half of 2003 financial performance indicates, we're well on our way to achieve our overall objectives for the year. We're very optimistic about the rest of the year, as we will see planned ramp ups in our military programs, as well as higher sales from our new products and services, and increased sales and profitability for the remainder of the year. While we will continue to see downturns in commercial aerospace and a sluggish economy, we have and we are confident we will continue to offset this negative business cycle with our internal growth in other markets, from our acquisition program, and from new products and services, which will continue to improve our sales and profitability. Our performance has validated our diversification strategy that we implemented several years ago. This strategy and our ongoing emphasis on technology will continue to bring growth opportunities in each of our three business segments. We have built a healthy core of profitable businesses and we intend on continuing this trend in the future. We look forward to reporting to you in our continued progress. I will now open the call to any questions you may have.

At this time (Caller Instructions). Your first question from Peter Armande (ph).

Good morning Marty, Glenn, good quarter. Just a couple of quick questions. Could you give me a little more color regarding, when you say you are ramping in terms of your sales and your profitability, I mean the first quarter was materially stronger in terms of your profitability than the second-quarter. Are we returning to those levels? Or could you just give us a little color, I know you don't give out specific members.

Sure, no problem whatsoever. I think when you take a look at the guidance we have for this year, the first half of the year represents a very good first half. One of the reasons why, the quarter for quarter differential is based on our military business -- we're approximately 50% military, and 71% of our backlog of 512 million represents our military programs. So you're going to see as time goes on those contractual shipments will change quarters. If you take a look at the second half of the year, our controls business has an increase of approximately 20% in shipments, of which almost all of it is military. And that will be to ramp up going into the second half of the year, as far as our military programs are concerned.

Okays so 20% from an organic standpoint for the controls business?

That's correct.

Okay, and how about metal treatment, it seems like you had, sequentially, a pretty good quarter in terms of the top line. Could you give a little more guidance there?

There we had -- we're winning more work from competitors in markets that we serve. For the cost reduction program that was implemented, we will tend to see their margins grow until the end of the year to approximately 50% return on sales area.

Okay, and then, now in terms of laser peening sales going?

Very good. We're again, continuing to project that we will hit 5 million sales for the year. Our second plant, which we just put into progress in England will be coming online in August. So we will see improved sales from our second laser peening facilities.

And just one follow-up. It looks like the House and the Senate it looks like they're going to be adding more money in the FY'04 appropriation bills for the Bradley upgrade program. Is there any -- what's the impact on Curtiss-Wright? Is there any?

There's going to be positive impact as far as that is concerned. Our Lau (ph) division up in Boston has some major programs and retrofit on that particular program so, that will take the Bradley out to about 2005, 2006. That is going to be a very positive situation for us. We're also seeing that we think that the upcoming budget that there'll be several programs that we participate on that will have increased numbers and some new programs for us going into the future.

Is this regarding F-22, or what specifically?

Some are aircraft carriers and some are in related business.

Okay great, I'll let someone else in, thanks again.

Your next question comes from John Walsalvan (ph).

I appreciate -- good results here again. Could you help me in giving a little bit more detail on the programs that you expect to be ramping up in the second half of the year?

There are several. We have the F-16 program, we've recently indicated that we received 2 major spare contracts -- that will have about a $5 million improvement in the second half. The F-22, we are overall going to ship approximately $18 million this year, of which we shipped 7 million in the first half, that leaves 11 million or approximately $4 million in the second half. The joint strike fighter, the F-35, we have about $2.5 million in the second half of the year, then we've had none, 0 in the first half. Bradley spares and multi year procurement is about 6, almost $7 million, and also, the new sensor package that we won on the global Hawk will be an additional 2 million, and our antipersonnel sensing devices will be about another $1.5 million.

Good, and those should all be good margin pieces of business I would take --

They are. Well, none of it is really products that we have developed or already developed. We have all of the kinks out of them. We will do very, very well on them.

And, the -- I think we had an up in the quarter on the non nuclear navy, what business was that that we are really talking about?

We provide launching sleds, also some valves to the non nuclear navy.

Okay, that is helpful. Looking at the Company in a broader sense, with all the acquisitions that we have done, if I look back a couple of years ago, we had gross margins of almost 38%, now we are down to 31%, how much of that is a shift in the mix and how much is that these are just businesses that you haven't really gotten your arms around yet in terms of making your improvement?

I would say about half and half -- I think we definitely can make up about 5 percentage points on improvement, and the remainder of it is just the nature of the businesses themselves don't carry as high a margin as our traditional businesses do.

And to get that improvement we should calculate a couple of years to do that or is it longer-term than that?

I think you'd look at it as a couple years. As we continue to buy companies that process is forever ongoing.

Sure.

It normally takes us about 2 years to get that, our new business, into the profit range that we're really looking for it to be in.

I guess, in a couple of segments site higher R&D spending. Is that indicative of some new programs that you're working on, trying to get launched? Or is that just the timing on when it is reimbursed, and when it is not?

Mostly it's programs that we're looking at to get developed and get on -- the new programs.

Is there any one or two that we should focus on?

We're looking at the future combat vehicles and doing some preliminary development work there. We also have some development work on our JP 5 program. We received an order for a second [pumper] there that we're the process of negotiating a $50 million contract that we're looking to get in the third or fourth quarter of this year depending on the funding. So that research and development will come in obviously when we get that production contract.

Good, thank you very much.

Your next question comes from Jim Hong (ph).

Good morning Marty and Glenn. Going back to the motion control, when you mentioned the incremental revenues in the second half, I noticed you didn't mention I guess the submarine or the aircraft carrier. Are you getting any incremental business in the second half from those two programs?

Yeah, well, mostly the aircraft carrier and yes, we are.

Okay and how much would that be?

Right now we really haven't looked at that. We don't have that number quick frankly, but if you give us a call back a little later on today we will have that.

Oh, okay.

We have development -- what it is basically development work on the aircraft carrier. And I think there's a few million dollars there.

Okay, and then on the submarine, from 1 to 2?

That, we will see the new orders in October or the fourth quarter of this year. Either the end of the third or the fourth quarter. That's slated for year 2004, fiscal year, which is the end of 2003.

Oh okay, so you see the revenues slow in '04 then right?

That's correct.

Are you going to quantify what the magnitude might be in '04?

The thing is we're not sure if we're going to be turned on -- a multi year procurement for the submarines whether it will be all at once or it will be over a three-year timeframe. It will be a pretty good number, normally we have again, $60 million of the submarine, so if you times that by 2 your incremental increase would be about 60 million. And obviously, the aircraft carrier, you're looking at probably the same amount of money.

Okay.

And that will be done over a three-year timeframe, that $180 million.

I guess with the new revenues coming on incremental revenues in the second half, should we be looking at operating margins and motion control similar to the first quarter level? Kind of like 9 percentage?

No, no, on the motion control we expect to be closer to 11%. We'll average about 13.5 or higher in the second half of this year on motion control.

With the incremental revenues that you're getting?

That's correct.

So that's where the jump is. That's terrific.

What you'll see is you'll see margin improvements in controls and in MIC, and you'll see a lowering of margins from the flow control area because in the first quarter we had a large commercial program that had very nice margins associated with it. So, we will settle down into right around 11% return there.

In flow control right?

That's correct.

That's correct. So that's going to average out to 11% by the year end average then.

And controls will go to about 7.8% right now up into that 11% area.

Okay, right. And then in metal treatment, I guess those margins kind of stayed fairly level around 13.5, 14?

We expect that to go a little bit higher than that. In or around the 14, 15% area.

Right, that was your target, okay the 15%.

We still see that. I mean, we still see the year the same way we saw it in the very beginning of the year, it's just that the more military business we have which goes very strictly according to contract delivery schedules, you're going to see some up-and-down quarters.

Right, military business tends to be lumpy because of the program nature.

And the thing is we just have a lot more scheduled military programs in the second half of the year.

One last question. I guess you kind of mentioned some non-recurring expenses with customer bankruptcy in facility start ups. I guess taking an aggregate, how much of that did you experience in the second quarter that would be considered quote, non-recurring, these onetime expenses that hit your number?

Well, I would -- about a million and a quarter.

A million and a quarter which you don't expect to repeat then right?

No, not at all.

I will let someone else go. Terrific, good quarter thanks.

Your next question comes from Greg Ramsey (ph).

Yeah, hi, I'm with PrinsRaces Oil (ph) Congratulations on a nice quarter. I had a couple of quick questions. If I look at your R/D spending, you touched on this a little. Year over year in the quarter was up $3 million, I think it was higher in the second quarter than it was in the first quarter, what is your outlook for that in the second half?

About 2.9% of sales.

So lower than it was in the second quarter?

Yes, if you look at last year, we're about 2.3% of sales, this year we're going to about 2.9. When you look at Curtiss-Wright as a whole, that's not a lot of money when you consider that we are an engineering company because a lot of our research and development is paid for by the government.

Okay, my second question was given the stellar operating performance you guys are turning in, particularly in a tough environment, have you given any thought to increasing your dividend?

No we have not, because we think that we will better serve our shareholders by just continuing our acquisition process. When you really look at the sales growth that we've generated over the last three years, and the profitability associated with it, I think we've performed very well. And as we continue to perform in that fashion, we think our money is better spent for our shareholders by acquiring more companies.

Thanks very much.

(Caller Instructions) There are no further questions at this time.

If there is not any other questions, I would like to thank everybody for participating on our call today. We look forward to speaking to you again in October, to update you on our third quarter results. Thank you very much and take care.

Thank you.

Thank you for participating in today's conference call, you may now disconnect.