Curtiss-Wright Corp (CW) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 Curtiss-Wright Corp. earnings conference call. My name is Lisa and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Martin Benante, Chairman and CEO. Please proceed, sir.

Thank you, Lisa. And good morning, everyone. Welcome to our 2006 full-year and fourth-quarter earnings conference. Joining me today on the call is Mr. Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Thank you, Marty. If you do not have a copy of the earnings release which was issued yesterday, please call Ms. [Deborah Torrey] at 973-597-4712 and she will e-mail or fax a copy to you and add you to the Curtiss-Wright distribution list for all future press releases.

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 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, electronics, marine 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 our business.

For our agenda today Marty will open our discussion with an overview of our 2006 performance, then I will provide a more detailed discussion of segment performance and financial position. And finally, Marty will conclude our discussion with our 2007 market outlook and financial guidance. After that we will open the call for questions. Marty?

Thank you, Glenn. I'm very pleased to report that it was an outstanding growth year in all areas of our company, once again demonstrating the power of applying our advanced technologies across diverse markets around the globe. In 2006 sales increased 13% to $1.3 billion, representing our 11th consecutive year of sales growth. Our sales were driven by an 11% overall organic growth. In 2006 our segment operating income of $158 million equals our overall sales growth at 13%. Net earnings increased 7% to $81 million or $1.82 per diluted share.

2006 was an excellent year for Curtiss-Wright due to strong demand in all of our commercial businesses, in particular oil and gas and commercial aerospace, and a continuation of strong spending by the Department of Defense. Our commercial markets generated a total of 17% growth, most notably driven by our gas and oil businesses at more than 40% year-over-year and our defense businesses contributed a very healthy 9% growth.

Our consolidated operating margin of 11% was negatively impacted by costs of $6.5 million associated with an unfavorable legal adjustment, $5 million of costs associated with the adoption of FAS 123, and incremental pension expense of $4.2 million. In addition, 2005 margins benefited from $2.8 million gain on sale of a property. Without these items our consolidated operating margin increased 20 basis points in 2006, 12.2% from 12% in 2005.

In addition, after adjusting our net earnings for the items mentioned above and non-recurring tax benefits our earnings per share increased 12% in 2006 from 2005. We generated strong free cash flow of $104 million in 2006 which equates to a 129% cash conversion. In addition, we had a solid footing for 2007 with new orders of $1.3 billion in 2006, an increase of 6% over 2005, and a strong backlog of $876 million that is up 9% from 2005. I will now turn the call over to Glenn to discuss our segment performance and financial position in detail. Glenn?

Thank you, Marty. Each of our segments made significant contributions to our overall performance in 2006. Starting with the Flow Control segment, a remarkable 18% sales growth was driven by organic growth of 15%. In the oil and gas market high demand for our coker valves continued in 2006 as this product's performance continues to gain greater market acceptance. In addition, strong capital spending in the energy market for repairs, maintenance and expansion drove sales for this market as well as our power generation market.

Sales to the U.S. Navy provided stable revenues from our aircraft carrier and submarine programs as well as solid growth from several developmental programs. Operating income for Flow Control of $61 million is an 11% increase over 2005. Overall Flow Control's margin of 11% declined 70 basis points from the prior year. First off, we had the added $1.5 million expense associated with the adoption of FAS 123 which negatively impacted the margin by approximately 30 basis points.

In addition, the lower margin reflects several factors including business integration costs, higher material transportation and fabrication costs, particularly with long lead fixed-price valve contracts as well as additional testing and qualification costs on newer products such as the controlled rod drive mechanisms in the commercial power market.

Strong performance was achieved in our Motion Control segment where sales were up 10% to $509 million in 2006. Organic sales grew 8% driven by robust commercial aerospace and ground defense sales. This segment is heavily tied to the Boeing platforms which had significant volume increases and we also generated increased sales from our expansion into new platforms such as the Eclipse very light jet.

On the defense side ground vehicles drove high demand for our embedded computing products including repair and upgrade orders for the Bradley fighting vehicle and new product orders for the armored security vehicle. Additionally, we are seeing growth in sales of our ruggedized military ground vehicle sub systems to be used on the future combat system program.

Lower volumes in the military aerospace market were slightly offset by strong helicopter programs, especially the Blackhawk. The Naval defense market in the Motion Control segment was essentially flat 2006 as spending on non critical upgrades continues to shift to the right. Motion Control's operating income increased 9% to $55 million in 2006. The base business operating income grew 11% while acquisitions negatively impacted operating income due primarily to delays in the timing of the Naval defense contracts I had just mentioned.

In addition, FAS 123 expense of $1.5 million, which equates to approximately 30 basis points, and also foreign currency exchange negatively impacted Motion Control's operating income in 2006 as compared to 2005. Improvements in operating income resulted from higher volume in the commercial aerospace and ground defense markets, but were partially offset by higher investment spending including startup costs on new programs, higher material costs on long-term programs and some cost overruns on fixed-price development contracts for the 767 tanker program. These operating issues were mostly resolved by year-end as evidenced in our solid fourth-quarter margin. But we do expect the aerospace market to remain competitive requiring continued investments to win new programs.

Our Metal Treatment business provided a healthy 13% sales increase to $225 million. An organic sales increase of 8% was led by higher global shot peening revenues in the commercial aerospace market and strong demand in our heat treating business in the general industrial market. Operating income for our Metal Treatment segment increased 23% to $42 million in 2006, mainly due to the increased leverage from the higher sales volume. Organic operating growth was 21% and our acquisition of Allegheny Coatings contributed operating income of approximately $600,000. Overall Metal Treatment's margin improved 160 basis points despite absorbing FAS 123 costs which negatively impacted operating income by approximately $1.1 million or 50 basis points.

Now let me review our liquidity and capital structure. In 2006 free cash flow, defined as cash flow from operations less capital expenditures, was $104 million, representing cash conversion of 129%. All segments contributed to the strong cash flow performance. Our balance sheet remained strong with working capital of $331 million at year end 2006. Total debt outstanding was $365 million at year-end and our net debt to capitalization ratio was 24%. Our current liquidity provides us the flexibility to continue our acquisition program of strategic niche businesses that broaden our technological capabilities, product offerings and market penetration.

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. Our strong financial performance in 2006 was the result of successful organic growth initiatives combined with efficient acquisition integration execution. Continued strength in the U.S. economy provided a solid foundation for which our commercial business thrived. The commercial aerospace market continues to provide exciting growth, both in volume and new platform design. In 2006 we generated nearly 20% growth from our Motion Control and Metal Treatment segments in this market.

In 2007 the Boeing 787 Dream Liner is scheduled to make its first flight and will include approximately $230,000 of content from Curtiss-Wright. And we are experiencing expanding into the growing regional jet market with new content on the Embraer and the Eclipse platforms. We feel there is a tremendous opportunity in the regional jet market as the industry continues to develop the air attack concept.

In addition, we experienced phenomenal growth in our oil and gas business during 2006 with organic growth in excess of 30%. The primary driver of this market continues to be our coker valve products. We are expanding into directions as well. In 2006 we announced two important partnerships that will unite our technical expertise in creating the world's most advanced pumps and valves with market leaders in the global oil and gas industry.

We formed a joint venture with Cameron International to market and supply sub sea multiphase pumping systems for the international offshore oil industry and we are teamed with Dresser-Rand Company to design and supply high-speed motors to power Dresser-Rand's compact integrated compression systems. While these programs have just been launched we are confidence that continued high demand for national resources production should result in significant market growth for us over the next few years.

In our power generation market we experienced 14% growth in 2006 and our outlook continues to be strong. As most of you on the call know today, our existing business is primarily driven by the U.S. plant recertification process as most of the 103 existing nuclear power plants are in the process of applying for plant life extension. In addition to the plate recertification, the industry is gearing up for a resurgence in new construction both internationally and abroad.

In December the Chinese government (technical difficulty) one of the largest international (technical difficulty) contracts in history. Initially Westinghouse will build four new Generation 3 nuclear power plants. Curtiss-Wright expects to participate in these new builds as a supplier to Westinghouse of the reactors coolant pumps and potentially other associated hardware. Although the value of this opportunity is not yet quantifiable, it is therefore not included in our 2007 guidance.

In addition, there are 14 companies that are pursuing combined construction and operating license for over 30 new reactors in the United States. Westinghouse's AP1000 design has been selected for 10 of those applications and our product portfolio will support nearly every power plant design. Once approvals are in place construction is expected to begin around 2010 in the United States.

In the defense market we continue to leverage our advanced technologies that we have developed over the past 50 years for critical applications on every platform. In 2006 we celebrated the first flight of Lockheed Martin's joint strike fighter which is equipped with nearly $400,000 of Curtiss-Wright content. This exciting event dovetails with our solid performance on critical platforms such as the Navy's aircraft carrier and submarine program and the Air Force's (technical difficulty) Raptor and B22 Osprey which provided a (technical difficulty) stable recurring revenues.

In addition, the strong performance of our embedded computing group has provided significant increased ground defense platforms and expanded our content on numerous naval and aerospace platforms. Last year we were awarded a prime contract from General Dynamics to provide the Servo Motor Controllers for its future combat systems manned ground vehicles which will play a major role in transforming the U.S. Army for decades to come.

In addition, we were awarded a significant contract from the United States Navy P-8A multimission maritime aircraft program. On the horizon we are developing a number of technologically advanced (technical difficulty) including aircraft carrier, flight arresting gear and launching systems, destroyer program electrical propulsion and power systems and the electromagnetic gun.

First and foremost Curtiss-Wright is an engineering company focused on advanced technology for high performance platforms. But we also never take our eye off the bottom line. We are dedicated to providing (technical difficulty). We expect our market positions and advanced technologies to provide many opportunities for growth and excellent returns for our shareholders in the future.

Now I'd like to provide guidance for our 2007 financial performance. We anticipate total revenues for 2007 to be in the range of $1.37 billion to $1.40 billion, an increase of 7 to 9% over 2006. We anticipate operating income in the range of 166 to $173 million including $6 million of pension expense. Without the adverse jury verdict awarded in 2006 this represents a 13 to 18% increase over 2006. We are forecasting earnings per share of between $2.00 and $2.10 per diluted share. Without the adverse jury award and the tax benefit in 2006 this equates to 10 to 15% earnings per share growth.

Our earnings per share guidance assumes an average of 45.5 million shares outstanding. Additionally, we expect free cash flow as, defined as cash from operations less capital expenditures, to be in the range of 70 to $75 million for 2007. This assumes depreciation and amortization and capital expenditures of 55 to $60 million each. As I mentioned previously, the 2007 guidance does not include any potential impact resulting from our participation in the AP1000 program.

There are some exciting opportunities on the horizon in 2007 and we'll look forward to generating solid profitable growth for our investors. At this time I would like to open the conference call for questions.

(OPERATOR INSTRUCTIONS). Chris Donaghey, SunTrust Robinson Humphrey.

Good morning, guys. Marty, I was wondering if you could talk about China a little bit more specifically. You're talking about it not -- about your '07 expectations not including any contribution there. But is the implication however that work could begin next year on those reactors but you're just not sure about the timeline so it doesn't make sense to include that in your guidance yet?

Chris, the reason why I'm not including it in the guidance is right now we are currently in negotiations with the Chinese and the form of the contract is very fluid. So the amount of revenues, profitability in 2007 right now is not predictable and it's also a very sensitive subject -- another reason why it we're not going to shed a lot of light on it. But right now I guess the best thing we can say is we expect to be a participant in the Chinese project with Westinghouse. We are and we expect good things to come from it, we're just not going to be able to describe it right now until negotiations are over with.

Okay, that's fine. And as far as the first four reactors go, is that the first four of how many ultimately? Do you have a feel for what the targeted number is at some point in the future when this infrastructure is fully built out?

Right now we're looking at about 30 over the next decade or so in China, but that's not the end of that program.

Okay. And Glenn, on the earnings number for this quarter, I'm getting that if you exclude the legal expense and the tax benefit the normalized earnings would have been about $0.66 for the quarter, is that correct?

That sounds about right.

Okay. And one last question. It seems like the pace of acquisition activity has slowed a little bit for you guys over the past year or so. Is that just a conscious decision to get through the integration of some of the previous acquisitions or are valuations too high or is organic growth just strong enough that you don't really see a need to keep going at the pace you were going?

A little bit of everything. No, our organic growth is going to look good for the next few years or so. That's not the reason why we've slowed down, and it's not so much the integration of the acquisitions that we -- already have taken place. It is more of an evaluation and the markets that we want to participate in that slowed it down. But if we do find companies that we are attracted to we will definitely enter into negotiations with them.

Okay, great. Thanks, guys.

Myles Walton, CIBC.

Marty, could you break down the '07 guidance a bit further by segment maybe? And apologies, I might have missed it, I just hopped on from another call.

No, I actually didn't give it. But right now if you look at our defense, we're looking at a 3 to 4% increase there over 2006. We see good markets in commercial aerospace at about close to 10%; gas and oil will be up over 20; automotive over 10%; and right now power generation, since we're not really forecasting power generation, it's going to be good growth with or without China.

And could you maybe put that into the segments?

Right now if you look at Flow Control we're looking at about a 3 to 6% growth over last year, but again, that's being hampered a little bit about not projecting China. Motion Control up 8 to 10% and Metal improvement between 15 and 20% increase.

Okay, that's great. And the share count, Glenn, is just $45.5 million for '07 guidance, implies a 1.2 million share creep that's kind of doubled the last couple of years. What's driving that?

Probably a variety of various -- part of our long-term incentive programs. We have a couple new programs, performance shares and restricted stock programs, that are driving that.

Okay. And the cash flow guidance -- obviously great cash flow here in the fourth quarter, bringing it home in '06. In the '07 outlook the $30 million implied growth from working capital I think about what it is implied in the guidance, what's the biggest driver to that working capital?

For '06 or 07?

For '07.

Probably -- one of the things that happened in 2006, Miles, we had a very high level of advanced payments which is obviously a good thing. And in our guidance we did not build in any expectations for that to reoccur. That's probably the biggest single driver -- there's probably a bunch of other little things in there, but that's one of the things we benefited from in '06 and right now it's not in our guidance for '07 right now.

Okay, that's great. And the bookings backlog by segment? I know your K is probably not going to be out for a little while.

The backlog by segment is Flow Control -- Motion Control is about $446 million; Flow Control is about $483 million. Those are the two pieces. I don't really have Metal Treatment, it's really not significant for them. Probably a small number to tie to our total.

That's fair. And just on quarterly progression for '07, is it safe to assume historical norms hold here going into '07 kind of 22% sales and 16% EPS in the first quarter.

Miles, you couldn't get any closer to what -- 2007 will mirror 2006. If you look at our sales, they'll be very similar both government and commercial. Looking at the first half versus second half will be identical to 2006. When you look at profit the same and earnings per share, 40% in the first half, 60% in the second half -- exactly like 2006. 2007's profile looks, again, exactly like 2006.

Okay. And then one last one. On the guidance for '07, the 166 to 173, does that exclude corporate and other expense?

No, it includes approximately about -- in and around $2 million for corporate expense, Myles.

Perfect. Thanks.

(OPERATOR INSTRUCTIONS). Jim Foung, Gabelli & Co.

Good morning, guys. Glenn, just getting back to the margin, could you kind of give us some idea of what the segment margins would look like in 2007 by your segments?

Yes, our guidance on the margin side for the segments is for Flow Control and Motion Control between 11 and 11.5%. For Metal Treatment in and around 20%.

And then Marty, can you just talk a little bit about the China business or the nuclear business? Those four reactors that Westinghouse was awarded, did Areva get any business or did that all go to Westinghouse?

No, that all went to Westinghouse.

I know you said over the next 10 years you expect 30 more, but near term, like in 2008 or '09, are there any more awards coming from China or India?

I think there will be a better chance of another award coming out of India than it will be out of China. I think for China this will be the first four and they will probably look at 2009 or so as looking at the next round of reactors.

So these four would take them to 2009 so to speak or 2010?

As far as what they're planning. They won't get built that quickly.

I'm sorry, they will what?

They will not get built that quickly.

How long does it take to build a reactor?

Right now they've got it down to about three years.

But your shipment will all be in year --?

Right now it's going to be 2008, '09 and '10 or so.

For these four?

And probably 11, so they're going to be spaced out.

Okay. So these four reactors will take you from 2008 to 2011 to fully --?

Somewhere in that area.

Okay, good. And then on the Eclipse very light jet and the Embraer, can you just talk about the dollar content on those ship sets?

Right now on Eclipse we have about 30,000 per aircraft and I don't believe I have a number -- a full up number right now on the Embraer.

And what are we hearing from Eclipse? Are they still producing -- I think they had some really big stretch goes 2,000 aircraft per year or something in 2008 or something. Could you just kind of give us some light in terms of what the production plans are?

That's the right now, but we're looking at producing more in 2007, so right now that's the latest out of Eclipse.

Okay. And then lastly, on this adverse jury award, could you just kind of elaborate a little bit more about that, what exactly was that?

It was a verdict of about $4.5 million against the Company based on the Company's failure to promote a former employee resulting from sex discrimination. And the Company had retaliated against her by terminating her employment. But we will be appealing this verdict.

Okay, great. Thank you.

Eric Hugel, Stephens Inc.

It's actually Barbara Duncan for Eric. How are you guys doing? I was actually -- you guys did a great job generating cash this year and we were wondering, do you guys have any specific plans of what you're going to do with cash or can you give us a little bit more color on that?

At the end of the day -- forgetting accounting free cash flow -- at the end of the day we paid off -- at the end of 2006 paid off all our variable debt and put about $70 million into the bank. What's good for that is, as you know, usually in the first quarter and sneaking into the second quarter we go negative from a cash flow standpoint. So the good part is that should help us fund our needs for the first part of the year.

I'd like to say it will go longer but we'll wait and see. Last year we only had about $20 million in the bank, this year we have about $70. So $70 million additional funds. So that's a good thing. We don't have specific needs for that, it's just going to either fund our acquisition program or our working capital needs for the first part of the year.

And then I don't know if I missed it, but did you guys give the G&A, what it was for the quarter or for the year?

You know what, I don't think we gave it for the quarter. We did give it for the year 2007, we put it out in our guidance. I don't have the actual quarterly breakdown of that.

Okay. And then I guess my final question would be in the past you guys have talked about -- I know that you said you don't have exact numbers for the content of the reactors in China and things of that nature. But in the past you guys have given some indication of how much you thought this would be for you. Are you still maintaining that kind of level of content?

Yes.

Great. Thank you.

Robert Stallard, Banc of America.

Good morning. Just a couple of questions. First of all, I was wondering if you could give us some color on why new orders in the fourth quarter were down 4% versus last year.

In the fourth quarter?

Yes.

Yes, the only thing that comes to mind is we had several really big delta coker valve orders at the end of -- in the fourth quarter of last year that didn't necessarily reoccur this year. That's the only single biggest item I can think of, Rob.

Also we received some large submarine orders at the end of the fourth quarter last year. And sometimes you get them in the fourth quarter, you get them in the first quarter, it depends on how quickly the purchasing agents for the government take.

Okay. Looking at embedded computers, the fourth quarter is always your biggest quarter for that. How did that end up performing in 2006 and what's your expectation for 2007?

It actually from a profit and a growth standpoint exceeded what we thought it was going to last year. This year we're expecting double-digit -- small double-digit growth, as small as you can get in sales and profitability.

Okay.

So it's doing well.

What about the margins on this business? Is expanding or is it fairly steady?

Actually it's expanding. I said that we're getting double-digit expansion in ROI also from 2006 to 2007.

Looking at the Metal Treatment division, you highlighted some of the areas that did well in this division, but there must be some offsets that weren't growing quite as fast. Can you elaborate on what those might be?

I think the one thing we didn't -- I think the shot peening was well, and I think we mentioned obviously the heat treating was doing well. The laser peening is not -- probably not growing as fast as we had hoped. Other than that -- this was Glenn.

It's not growing as fast but it has very good margins and it is growing and it's growing in 2007. About the only area in Metal Treatment that is a little bit adverse is Airbus. Airbus production is going to be cut back a little bit. Boeing is going up, but we do a lot more shot peening in the Airbus area. But with that in mind, our margins and our growth is still going up. So that's about the only adverse area is Airbus.

Right. And just finally, going back to the cash question, can you give us some of your thinking on why you wouldn't think of using some of the cash that you have to buy back stock and avoid the share creep?

We discuss capital structure, capital deployment issues with our Board frequently, Rob, I think as we've told you before and the current feeling is we have a pretty steady dividend program and we're going to continue that. But share repurchase right now in the mode we're in, even though the acquisition activity may have slowed for a number of reasons, but our activity hasn't slowed. [We may not have completed them]. So we continue to feel that our cash is better uses for our acquisition program and strategic initiatives rather than a share buyback.

Okay, thank you.

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Martin Benante for final remarks.

I'd like to thank everybody for being on the call today and we look forward to our first-quarter call. Thank you and take care.

Bye-bye now.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.