Curtiss-Wright Corp (CW) 2004 Q1 法說會逐字稿

Good morning and welcome to the Curtiss-Wright first quarter 2004 investor conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time it is my pleasure to introduce your host, Martin Benante. Martin, you may begin.

Thank you and good morning everyone. Welcome to our first quarter 2004 investor conference call. Joining me on the call today is Mr. Glen Tynan our CFO who will begin our forum today.

Thank you, Marty. If you do not have a copy of the earnings release which was issued yesterday please call Ms. Deb Tory at (973)597-4712. 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 communications. Before we begin we will make certain forward-looking statements on today's call such as statements about the company's confidence and strategies or expectations; about the results of operations, future contracts or market opportunities. While we believe that our operating plans are based on reasonable assumptions, we cannot guarantee that we will 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 or achievements that are materially different from those expressed or implied during this discussion. Such risks and uncertainties include those factors that generally affect the business of aerospace defense, marine, electronic, and industrial companies. Please refer to our SEC filings under the Securities Exchange Act of 1934 as amended for a more thorough discussion of risks and uncertainties as well as further information relating to go our business. Now Marty will begin our discussion regarding Curtiss-Wright's financial and operating performance for the first quarter of 2004. Marty?

Thank you, Glen. I am pleased to report a strong first quarter of revenue and earnings growth. The first three months ended March 31, we increased sales 19% to $215 million, from $180 million in the first quarter of 2003. Operating income increased 6% to $25 million in the first quarter with acquisitions contributing to $.3 million in incremental operating income. Net earnings for the first quarter increased 11% to approximately $16 million or 74 cents per diluted share as compared to $14 million or 68 cents per diluted share on a split adjusted basis in 2003. Our net earnings for the first quarter included a one time tax benefit of $1.5 million resulting from a change of legal structure of one of our subsidiaries.

In addition, the increase in net earnings was achieved despite a $1.4 million increase in interest expense or approximately 4 cents per diluted share and a $600,000 decrease in pension income or approximately 2 cents per diluted share from the first quarter of 2003. In addition, our backlog increased 10% to a new record high of 558 million from 505 million on December 31, 2003 our strong performance is due to our diversification strategy and solid growth in our core markets, particularly defense, defense electronics, in our Metal Treatment segment, specifically laser and shot peening. We successfully increased sales and earnings despite a slow down in some of our markets due to our ability to consistently deliver a high performance technologically advanced product for which Curtiss-Wright is world renowned. Our sales increase of 19% quarter over quarter was due to solid organic growth in strategic acquisitions made during 2003 and 2004 which contributed approximately $30 million in incremental sales. Excluding contributions from our acquisitions we experienced a 4% overall organic growth in the first quarter of 2004 over the prior years quarter.

We achieved organic growth of 17% in our Metal Treatment segment and 10% in our Motion Control segment. This organic growth was partially offset by a decrease in Flow Control segment sales due to the shipment of two large projects completing in the first quarter of 2003 which will not occur in 2004. These projects accounted for approximately $14 million in sales and $4 million in operating income for the first quarter of 2003. Without these two projects the overall organic growth of Curtiss-Wright corporation and Flow Control would have been 12% in the quarter.

In our base businesses, higher sales from our military aerospace and domestic ground defense businesses, higher sales of Flow Control products in the commercial power generation and the nuclear Navy market and higher sales from our laser peening and global shot peening businesses are contributing to the organic growth. In addition, foreign currency translation favorably impacted sales during the first quarter by $5 million. Operating income for the first quarter 2004 increased 6% over 2003 due to higher sales volume and a favorable sales mix. We experienced organic growth of 51% in our Metal Treatment segment and 39% in our Motion Control segment. This increase is partially offset by a decrease in the Flow Control segment margin related to the two projects mentioned previously. In addition, we experienced lower volume for our European ground defense business and lower pension income.

Our position on many key defense programs which includes a mix of high performance products for aerospace, land based, and naval platforms produced 17% higher sales in the first quarter of 2004, as compared to the prior year and should continue to provide growth opportunities for us in the future. Our balanced blend of defense and commercial businesses is expected to continue to provide some short and long-term benefits to our shareholders. In addition our recent acquisitions have achieved better than expected results while increasing our market penetration, particularly within the defense electronic sector and expanded our geographic reach and technological capabilities. I will now turn the call over to Glen to discuss our segment performance liquidity and capital resources.

Thank you, Marty. We had strong performance in all of our segments during the first quarter resulting in a $2 million increase in consolidated operating income from our business segments. In our Motion Control segment sales increased 46% to $83 million in the first quarter of 2004, principally due to organic sales growth of 10 percent, and acquisitions made in 2003 and 2004. The organic sales growth was driven by an increase in sales of military aerospace products for F-16 spares, F-22 production, higher electronic sales for the Global Hawk program and also Joint Strike Fighter development. In addition this segment achieved slightly higher domestic land based military and European sensor and drive sales. These higher sales were partially offset by lower European ground defense sales and lower sales associated with the overhaul and repair services provided to the global airline industry.

Sales also benefited in this segment from favorable foreign currency translation of $2.1 million in the quarter. Operating income in the Motion Control segment increased 63% for the first quarter of 2004 as compared to last year. The improvement was driven by higher sales volume as previously mentioned, favorable sales mix on various military programs, and the benefit of cost control initiatives previously implemented. These improvements were partially offset by lower margins at our European ground defense business. Additionally the operating margins for the overhaul and repair business improved mainly as a result of our successful cost control initiatives.

In our Metal Treatment segment sales for the first quarter of 2004 of $42 million were 43% higher than the comparable quarter. The improvement was due to organic sales growth of 17% driven by higher overall shot peening revenues and contributions from our 2003 and 2004 acquisitions. The higher shot peening revenue was generated from the exceptional sales growth of our new laser peening technology as well as strong growth in our core shot peening services in both North America and Europe. Favorable foreign currency translation positively impacted sales for this segment by $2 million in the quarter. Operating income in our Metal Treatment segment increased 75% in the first quarter of 2004, over the comparable prior year period. Margins improved substantially in our shot peening businesses primarily as a result of overall higher sales volume and increased margins, specifically from our laser peening business. In addition favorable sales mix, cost reduction programs, and favorable foreign currency translations also contributed to the increase in the segments operating income.

In our Flow Control segment we generated sales of $89 million during the first quarter which is an overall decline of 4% over the comparable period last year. Lower sales were mainly due to the completion of the two previously mentioned projects. This decline was partially offset by a sales increase of 12% in our other base businesses over the comparable period. Higher sales to the commercial power generation market, higher sales of Flow Control and electronic products to the nuclear naval market and higher sales of our coke beheading valve (ph) to the oil and gas industry all contributed to the increase in sales. Sales also benefited from favorable foreign currency translation of approximately $800,000 in the quarter. Operating income in flow control segment decreased 27% in the first quarter of 2004 compared to 2003. The reduction was mainly due to the profit impact related to the two previously mentioned higher margin contracts. Excluding these two projects operating income increased approximately 6% over the prior year period. Also contributing to the lower operating income was less favorable sales mix of electronic components and lower margins on certain valve products for the nuclear Navy.

Operating income improvements for are our commercial power generation and oil and gas products were due to higher volume and stronger sales mix. Our balance sheet remains strong with working capital of $208 million as of March 31, and total debt outstanding of $277 million. Our net debt to capital is approximately 33%. Our free cash-flow defined as net income plus depreciation and amortization less Capital Expenditures was $19 million during the first quarter. Depreciation and amortization was approximately $9 million and Capital Expenditures totaled approximately $6 million. I will now turn the call back to Marty to conclude our presentation. Marty?

Thanks, Glen. I am very pleased with our first quarters performance for 2004. Our technological leadership, diversification and growth strategy continue to generate opportunities in each of our three business segments and provide our investors with superior returns. In our Flow Control segment our Delta valve Coke beheading product received record orders for the first quarter and as the premiere unrivaled product it is just beginning to tap the international processing market. In our Metal Treatment segment demand for our laser peening services is steadily building and we recently made two acquisitions which have enhanced our portfolio of highly engineered coating surfaces, Esham and Everloo (ph). This business segment is well positioned to benefit from improvements in the general economy, the early stages of which we are currently experiencing. And the return of the commercial aerospace market.

Finally we are particularly pleased to report the integration of our imbedded systems division, the Motion Control segment is on schedule and performing better than expected. As you know the Rugged I imbedded systems market is the newest growth segment of Curtiss-Wright and we believe it will provide excellent returns over the next several years by tapping end markets such as defense, aerospace, medical, and general industrial. Although the balance of the year will continue to be challenging due to sensitivity in the geopolitical environment and timid economic recovery in the United States we remain focused on executing our operating strategy, maintaining our conservative financial targets, and enhancing value for our shareholders. We have now concluded the presentation portion of our conference call and would like to open the line for questions. Lynn? Would you please instruct the participants on how to ask us questions?

Thank you. The floor is now open for questions. If you have a question, please press star one on your touch-tone phone at this time. If at any point your question is answered you may remove yourself from queue by pressing the pound key. Questions will be taken the order that they are received. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. With those instructions in mind, if you do have a question please press star one at this time. Our first question is coming from Eric Hugel of Stephens.

Good morning, guys. I want to talk about the Metal Treatment business for a minute. I know you guys don't have a huge amount of visibility into your backlog and all that stuff but first of all was there any, your margins for the quarter were nicely above your expectations for the year. Were there any unusual mix issues that drove that number higher?

No. As a matter of fact, it's not so much the mix issue, it's where the revenues and the profit really came from. The increase in revenue came both from shot peening and from laser peening. In shot peening it came out of automotive and general industrial and a little bit of defense. So to me, we've always said that we look at shot peening as a little bit of a bell weather for the economy. It started to see some improvement in getting the industrial products that we were not getting in the past because of the general economy.

Okay. Then I guess, sort of, translating that going forward, if the mix was sort of a usual type of nothing that you would expect that wouldn't recur going forward and the higher margins are volume driven and the business is being driven by the recovering economy, if we can sort of go out and say, look, the economy continues to accelerate, are your, I guess your expectations for this segment of $160 million, and I guess that doesn't include the two most recent acquisitions that you've done.

Right.

And your operating margins expectation of 13 to 15%, given that you've done 15.6 in the first quarter and the volume should continue to grow, is that sort of, can you update sort of what your expectations are there?

Eric, I am not going to do that. I am just going to go back to what we've always said in the past and that's very simple: When the economy turns around and those increases in volumes flow through MIC we've indicated that the recent performance, about 13% return on sales, is low and we've operated in the mid 20s, we would expect that things recover, that we will continue to drive up into that space. How well the economy recovers, and we've only looked at this having one quarter effect, is going to determine how that happens. I'm not really in a position to say how well we recover but I can tell you one thing, as we do recover we will react to it, therefore, we will maximize the dollars we get out of that improvement in the volume.

But there's nothing, if the economy does continue to recover, you would expect to see those margins continue to accelerate from where we are today?

Without a doubt. And that we've always professed that. Yes, we do and right behind that the economy starts to recover we will see commercial aerospace which would be the third leg of our three business units. So, you know, defense is going very well as you can see. It's interesting that for the first quarter we received 57% of our new orders were commercial, 43% was military. So it says that we are starting to see some more commercial volume coming into Curtiss-Wright. But not only on the MIC side but in particular the process industry and also power the regeneration markets which we have done, we did very well. We had a 14% improvement in our power generation. We thought that would be flat; for the first quarter. And we had about a 6% improvement in the process industry in sales from last quarter, for the quarter this year compared to last year. So we are starting to see some good movement in that commercial market.

The $1.5 million tax benefit for the quarter, is that something you are going to realize at the end of the day in actual lower-cash tax payments?

Yes, good morning Eric, it's Glen. Yes, it is. It's actually a state tax benefit that will lower our cash tax payment as well.

And when you factored in your guidance last quarter, the 270 to 295, is that tax benefit included in that or is that not included in that, that 7 cents?

It's, I'd have to check. I don't think it was, Eric, no. This was a first quarter issue.

All right. I'll let other people ask questions. Thanks, guys.

Thanks a lot, Eric.

Thank you. Our next question comes from Peter Arment of JSA Research.

Hi, Marty, Glenn. How are you? Nice quarter. A question in the Motion Control segment. What is your mix there in terms of your exposure on the MRO? You mentioned that was still a little bit week to the airlines. How much of percentage of that segment does that make up?

That's very low. I mean maybe about 4%, 5%.

Oh, really, that low.

Yeah. Actually 3%. The only thing we've done there, we've improved our margins but we haven't seen any increase in volume from last year to this year.

So is the bulk of it in the military side then that you are seeing the benefit?

Without a doubt.

Okay. Then switching over, your European ground defense operations, can you give us a little more color on what exactly is going on there that you are seeing some problems there?

Well we're not really seeing any problems. What we are seeing is we are seeing some contracts that were completed last year and that volume not picking up but we do expect that as time goes on since we do have a fairly healthy win rate in new contracts and repair contracts there that that will do fine. It's just a moment in time.

Okay. So it's more timing than anything else?

Yes. Without a doubt..

Okay. Do you have any, have you gotten any awards or packages as part of the future combat systems related to?

Yes, we have. We received at least four new programs which would amount to about a 2 to $3 million increase per year in sales over the next few years, actually not a few years but many years after that. So there's still a lot of quotations that are out there on the future combat system.

Okay. All right. Then just following up on the metal treatment questions that Eric was mentioning, the laser seems to be really benefiting here, not only your growth but your profits. Could you give us a little update on where that stands?

Right now it would be the amount of sales for this quarter was $2.5 million. Last year I think we did about $5 million we project that to be about 7. Obviously if things continue to go where they go we should do better than what we were forecasting. But we expect it, as we've told everybody there is going to be, I think we feel that that's going to be a very good market for us. It's a matter of timing. Obviously we would like to see that timing come sooner than later.

And your mobile laser, has that come on line yet.

No, no. The mobile laser and the modulating head laser will be available the third and fourth quarter of this year.

Thanks, guys, nice quarter.

Thanks, Peter.

Our next question comes from Herb Tinger of Advest.

Thanks, good morning. Another question on the laser peening. Can you give any flavor at all as to where current demand stands relative to your existing capacity to perform that?

The relative demand still is greater than our ability to perform that. We are receiving a lot of inquiries from a lot of industries on how to improve the obviously the life cycle of their products. And it's coming from both commercial and military. We are doing a lot of developmental work that will eventually turn into sales. We are bringing on the two additional lasers on board. One of them will be more dedicated to improve the wing forming of the 8380 and the other will start our mobile laser capabilities. But we'll continue to bring them on. We know the demand is there. We will continue to bring more lasers on line.

Okay. A question on Motion Control. Can you provide a split Q1 sales military versus commercial?

I don't have that readily available but if you call back we can do that.

Okay. Sure.

The predominance of their sales, when I say predominance, obviously greater than 50% of their sales, would be in the military side. Approximately I think 62% increase from last year to this year. So right now our sales in that area is about 65% military and 35% commercial.

Okay. One last question on the tax rate going forward, do you expect that to be more in the 35 to 40% range on a quarterly basis the rest of the year?

It's, Herb, it's probably going to be approximately 37.5 somewhere in that range for the next three quarters and it will blend out to about 36% for the year.

Thanks a lot.

You're welcome.

Thank you. Our next question comes from Jim Foung of Gabelli and Company.

Hi. Good morning. Could you talk about the 7E7 in Motion Control in the company, are you bidding on any projects?

Yes. We have, we are bidding on about four to five major programs.

Okay. Then I guess could you just give us an idea of when you plan to here from them and what the potential value of these programs may be and what they are?

Jimmy, I would rather not. The projects that we are looking at on the 7E7 I think are would be substantial, are substantial. And I think like anybody else we'll hear over the next six months or so how successful we are there.

Okay. I mean, I'll just pick that up as you make more progress.

Right.

On the overhaul and repair I guess I am a little puzzled as to why that business is down, I mean, capacity is coming back on stream and other suppliers have seen pick up in the after market business, I was just kind of puzzled, could you give us--?

No we just haven't -- to me it's in terms of timing I know that some people who, some company's have indicated that they have seen some increase in their commercial aerospace business. We have not. We do have almost all of our positions sole source so the only company they could go to for those products would be from ourselves. So it's just a matter of when that time comes it will come.

I guess just as a frame of reference, 2003, how much of that overhaul and repair business was and where was the last peak on that?

The overhaul and repair business 2002 was about 22, $25 million. We're projecting it to be somewhat in that same area this year.

You are you are talking about 2003?

Yes, correct.

And they're the same thing. All right. What was the last peak on that, do you know?

The last speak was in 1998 or 1999. We were pretty close to $50 million.

Okay. So you are about 50%.

Very similar to the way our OEM has been cut by 50% from those time frames; the repair and overhaul has gone the same way.

Right. Okay. Then a quick question on the F-22. What was ship sent this quarter versus a year ago and then just on an update of where you think you will be this year versus last year?

Well, we don't have the quarter from quarter. We do some place but. But the thing is that last year we shipped about 15 ship sets and this year we are going to ship a little over 20 ship sets.

Right. Okay. And then quickly on the aircraft carrier, have you started work on that or when does that come on stream for you?

No, we've started work on that. We started working on it last year. We had over $22 million worth of IR&D programs and we are still doing some IR&D programs and we have quite a bit of production contracts that we have in-house that we are starting on. So we still see it to be a robust program for us. In fact we do see a lot of additional opportunities that would probably drive our install base higher than what we have indicated in the past.

Okay. And if (AUDIO DIFFICULTIES).

I'm sorry, I didn't hear you, Jim.

How much would you do this year with the new aircraft if you did 22 last year?

We said we would do about $40 million. We might be able to do a little bit better than that.

Okay. Then I guess just, on the Flow Control, are there any other, kind of, major projects that are non-recurring, I guess that's kind of, you know, what happened in the first quarter.

What happened is we mentioned in the past that we were pursuing the E miles program which we did not win but our research and development cost was up higher in the first quarter as compared to last quarter and overall for the year; compared to last year. Based on our involvement in that E miles program.

Okay. Is that the major project or one of the two major projects, you said.

The other one was the program that we currently have in-house which is the you cast mile points program, the Winch.

Jimmy, in terms of those two projects in Q1 '03 that's a one time deal. There are no more other.

No more out there for the rest of this year.

No.

All right. I guess I'm just surprised at the acquisition margin in the first quarter business -- it seemed like your margins were substantially lower than your corporate margins?

Again one of the reasons why, is that, they got hit with the amortization right up front. So, you know, everybody is starting to see this year we had $1 million more in amortization than we had last year. All of it is contributed to the new acquisition. As far as our new acquisitions are concerned we just reviewed our acquisition, and how we have operated those acquisitions and just showed them to our Board of Directors at the beginning of this week, and we are substantially ahead of our models. We track all of our acquisitions and how they perform against the model and our model has to be accretive in the first year and return 12% return on investment by the third. And we are substantially, substantially over those models. So we know we are doing well there.

Okay. All right. Thank you very much.

Thanks a lot, Jim.

Thank you. We have a follow-up question coming from Eric Hugel.

Hey, guys. Just wanted to follow up on a couple of things that Jimmy mentioned. With regards to the, can you quantify the purchase accounting impact from Dy 4? I guess what I'm looking at is the operating margins in the Motion Control business around 10%. I guess your guidance for the year is between 11.5 and 12.5%. I guess what I'm trying to figure out is, you know, I know there's some deals, just some bit of seasonality in that business and you obviously have the purchase accounting there, is that purchase accounting going to have a disproportionate impact in the first quarter than it is over the rest of the quarters as you sell off the zero profit inventory and stuff like that, or is that, are we going to see significantly higher margins going forward so you can make that 11.5 to 12.5%?

You are going to see our margins going up but it's not because of the amortization is going to be reduced we pretty much see that continuing on for the next, for this year. The thing is you are going to see a lot more sales and profitability coming out from Motion Control in the second half of the year. That's really where we have increased volumes and sales which would reduce our costs and improve our margins. But obviously since they made most of the acquisitions last year they are going to get hit the hardest with purchase accounting. But we feel very confident that their margins are going to increase and hit those numbers but we don't have any problem. As a matter of fact, as we are talking about quarters and how we see things line up, you know, last conference call I gave guidance that we thought we'd have a weak, a weaker first and third quarter and a strong second and fourth. I'd like to change that a little bit, just better forecasting into our numbers. We see our second quarter being a little bit down but our third and fourth quarters being very good. But we are extremely comfortable with the guidance that we've given especially based on our first quarter performance.

Also on the carrier, you have $180 million of equipment that you put on to a carrier, correct.

Right.

And you are talking about doing 20 million last year. That is not included in the 180, that's sort of general and development work?

That's correct.

So the 40 million that you are going to do this year, is all of that included in the 180 million? Or is part of that not included?

Well part of that is also not included because there are research and development contracts that we have. We just won a contract for two large titanium valves that will end up on an aircraft carrier and that was about, almost $3 million. So a lot of that work will be done this year. So we constantly are getting additional opportunities. In fact the 180 is a little bit low and that only includes our nuclear content and not our nonnuclear content which is increasing steadily on an aircraft carrier and on submarines and also surface ships.

Can you, do you have any sense as to what, from what we've talked about in the past is $180 million over around a three-year period. Now you are going to do $40 million around this year. Do you have a sense as to how that sort of works over the next say two years? I mean, does it do a huge spike up, so it's steady state of around $70 million, or how should we think about that going forward? Do you have any clue?

I don't have, but I know how normally these things work and that is you are going to see a lower, the lowest you'd see is the first year, you will see a much higher second year and the third year will be, you will start to ramp down. How that, those numbers break out I'm not certain and I don't want to say what they are. But that's generally how these programs work. Because what happens is in your first year you are bringing in our materials and from a cost standpoint they are not as great as when you really start manufacturing and then assembling and testing. So the second year normally is a much better year.

Do you have, your backlog increased nicely about 52, $53 million. I guess a chunk of that was from Dy 4?

Yes.

Can you quantify that, how much Dy 4 brought in.

We don't have that at our fingertips Eric. If you want to call back I can--

Did Dy 4 account for a majority of that increase?

About half I would imagine. I think the numbers we have on that backlog is about $25 million or so. But we can give you the exact number if you're interested in finding that out.

All right. Great. Thanks a lot, guys.

Thanks a lot, Eric.

Thank you. We have a follow-up question coming from Herb Tinger.

Thanks. Just a couple of quick questions on the 7E7. Have you submitted any proposals for that program yet.

Yes we have. We have submitted programs, we have submitted quotations on five major systems.

Okay. I didn't realize that you had already submitted all of those. Okay. Last question on Metal Treatment on that program, other than the Rolls Royce engines are there any other opportunities for that business segment on that program?

You mean as far as the laser peening is concerned?

Or shot peening, metal forming, whatever.

I missed that question, are you saying in terms of--

Metal Treatment in general, that business segment, other than the shot peening you do on Rolls Royce engines, laser peening you do on Rolls Royce engines are there any other opportunities on the 7E7 program for Metal Treatment revenues for you?

Oh, on 7E7, yes. But that's not something that we submit quotes to at this point in time. I mean those were strictly Motion Control quotations. What will happen is as people win contracts and start breaking, finally designing some systems and breaking them apart that's when metal improvement will start quoting. So those numbers that you're, those quotations we are talking about have nothing to do right now with metal improvement corporation.

I was just kind of following on to see if there were any other opportunities and it sounds like there are, for Metal Treatment in general.

Their biggest sector is commercial aerospace. So we would expect that they will have very good opportunities on that 7E7.

Okay. Thank you.

Thank you.

Thank you. There are no further questions at this time.

Okay. Well thank you, Lynn, and thank you, everyone, for joining us today and we look forward to speaking to you again during our second quarter conference call in July. Take care. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.