Curtiss-Wright Corp (CW) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2007 Curtiss-Wright earnings conference call. My name is Frances, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the ends of this conference call. If at any time during the call you require assistance, press star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Martin Benante, Chairman and Chief Executive Officer. Please proceed.

Thank you, Frances. Good morning everybody. Welcome to our 2007 third quarter earnings conference call. Joining me on the call today is Mr. Glenn 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 Deborah Tory at (973)597-4712, and she will be happy to 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, please note that 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, electronics, marine and industrial companies. Please refer to our SEC filings under the Security and 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, I will provide an overview of Curtiss-Wright's third quarter 2007 operating performance, and then Marty will discuss our strategic markets and our full-year outlook. After the formal remarks, Marty will open the call for questions. Curtiss-Wright had consolidated sales of $396 million during the third quarter of 2007, an increase of 27% over the third quarter of 2006 including organic sales growth of 12%. Our organic sales growth was driven by balanced contributions from all three segments. In our Flow Control segment, sales grew 47% due to strong organic growth of 12%, and the contributions from our acquisitions of Scientech, Valve systems and Benshaw. From a market perspective, the sales was driven by strong growth in the oil and gas market , as well as commercial nuclear power market. This growth was slightly offset by lower sales to the U.S. Navy. In our Motion Control segment, sales increased 13% primarily due to strong organic growth of 12% and a small contribution from our acquisition of IMC Magnetics which closed in September. The key driver of the organic growth was higher sales of actuation systems and integrated sensors to the commercial aerospace market, and higher sales of embedded computing and marine defense products to the defense market.

Sales in our Metal Treatment segment were up 12% from the prior year, all of which was organic. The sales growth was driven by higher revenues from growth shot peening and specialty coatings for the commercial aerospace market along with strong demands for our specialty coatings in the automotive market. Our consolidated operating income of $45 million in the third quarter of 2007 increased 19% over the prior year, including 8% organic growth. The organic growth was driven primarily by the Metal Treatment segment at 21% and the Flow Control segment at 3%.

Our consolidated operating margin in the third quarter of 11.2% is 70-basis points lower than the prior year. The lower operating margin is due to the combination of our more recent acquisition, increased levels of development work, unfavorable foreign currency translation and unfavorable sales mix in some of our businesses. Of the 70-basis point decreased, 30-basis points are due to the acquisition and 20-basis points are due to unfavorable foreign currency translation. As previously stated, our fourth quarter has historically been our strongest quarter and should continue to be based on the nature of our long-term contract.

Flow Control's operating income increased 34% over the prior year, 3% of which was organic. Contributing to the improved operating income is the turnaround at our recently completed business consolidation in our oil and gas business, offset partially by higher investments in development programs. Operating margin for the third quarter was 9.8%, 100-basis points lower than the third quarter of 2006. However, Flow Control has made three acquisitions in 2007 and continues to have a high level of investment in development programs such as the AP1000, the EM Gun, DD X., Emal and AAG which, although it drag on margins in the short term, should lead to future growth opportunities and increased profitability.

In our Motion Control segment, third quarter operating income was 4% lower than the prior year resulting in an overall margin of 10.4% versus 12.2% in the prior year. A portion of this decline is due to unfavorable mix resulting from higher sales of lower margin new business and lower sales of higher margin spares business. Also negatively affecting operating income are unfavorable foreign currency translation and increased R&D expenses primarily in the embedded computing business. The [FX] issue alone accounted for a 70-basis point differential in the third quarter operating margin as compared to the prior year. On a YTD basis, Motion Control's operating margin is up 120-basis points from the prior year.

At the corporate level, we were favorable $1 million in the quarter due primarily to lower unallocated medical expenses. We also had a lower tax rate in the quarter due to the reconciliation of our forecasted tax rate to the actual tax returns recently filed. Consolidated net earnings of $25 million or $0.56 per diluted share in the third quarter equate to a healthy 24% growth over the prior year. New orders received in the first nine months of 2007 exceeded $1.4 billion, up 47% year over year. And our backlog reached a new record level of just under $1.4 billion, up 57% from the 2006 year end. Our book-to-bill ratio was 1.7 for the quarter with all segments above one. Approximately $245 million of the increase in new orders and backlog is a result of the award of the contract with China and Westinghouse for four new AP1000 reactors. Excluding our 2007 acquisitions and China order, our backlog is up 12%. Now I will review our liquidity and financial position.

For the third quarter, our free cash flow, defined as cash flow from operations less CapEx was negative $18 million versus positive $13 million last year, primarily due to the purchase of long lead materials and the general build up of inventory for Q4 2007 and early 2008 sales. YTD free cash flow is approximately $11 million versus negative $3 million last year. This includes $22 million higher cash flow from operations offset partially by $8 million higher CapEx. Depreciation and amortization was approximately $16 million in the quarter and $44 million YTD. CapEx were approximately $12 million during the third quarter and $35 million YTD. And we are updating our 2007 free cash flow guidance to be in the range of $75 to $85 million, primarily to reflect increased spending estimates for the AP1000 programs.

Our balance sheet remains strong with $59 million in cash, working capital $384 million and total debt outstanding of $573 million as of September 30, 2007, for a net debt to book capitalization of approximately 37%. In addition, we renegotiated our revolving credit facility in August, extending the facility to 2012, improving the pricing in terms while increasing the capacity to $425 million with an additional accordion feature to expand to $600 million. I will now turn the call over to Marty to discuss our strategic market performance and our full-year guidance.

Thank you, Glenn. I am very pleased with our strong third quarter performance. Our two-pronged strategy of profitability, organic growth compared with incremental growth from acquisition is following in all [cylinders] this year. Also, we are investing heavily in new development programs which will add to our future organic growth. YTD, we have generated sales growth of 21% while operating income grew at 24%, a better than one times profit and sales growth. It is particularly impressive when you are making the kinds of investment in the future as we are. Organically, we continue to make notable strides in the energy market with our gas and oil and nuclear power business growing significantly faster than the market. These businesses are offsetting slower growth than some of our defense businesses primarily related to the ongoing war in Iraq and its drain on funds for new programs in the R&D. At the same time, we made four acquisitions this year, for a total purchase price of $282 million which will significantly enhance our product offerings and systems capability.

Let me take a moment to discuss each of our end markets. Starting with the defense market, there are two dominant issues. Ship building program costs and funding for 2008. Despite the fact that our largest defense programs are with the Navy where the growth is essentially flat, we are expecting 6% overall organic growth this year in our defense business. In the Navy defense market, we are dedicated to providing the security of engineering and manufacturing of our core nuclear reactor powers. As we have done since the inception of nuclear Navy program and we eagerly anticipate the opportunity to provide state-of-the-art technology with the Emals and AAG development programs that are baseline requirements for the new class of aircraft carrier.

Funding for 2008 is in process, and initial reports indicate positive momentum for the Virginia-class submarine programs. The Senate and House overwhelming passed defense budgets for 2008 that would increase the rate of reduction of Virginia-class nuclear submarines from one to two per year commencing in 2010, [through] advance to the Navy program of record. The budget reports stressed that United States Navy ship building industry is really in need of stability and that the own way to obtain such stability is through increasing production throughput. In military aerospace, 7% growth YTD was driven by helicopters which has increased to nearly 30% of our total market versus 20% last year. In addition, the F 22 and B22 provide steady production while the development continues on the F35 and 767 tanker programs.

In our newer programs, we are recently awarded a $3.6 million contract by Boeing for commercial off the shelf video interface units to be used on the P-8A Poseidon. They have already started shipping our products although initial Boeing deliveries are not anticipated at the beginning until 2009. In total, we have been awarded nearly 700,000 per ship set in actuation and embedded computing systems on the P-8A. And as we discussed last quarter, the Black Hawk helicopter program has become a significant program for us at approximately 150,000 per ship set, and the Army in securing this aircraft in significant quantities. While new orders for Bradley and Abrams technology upgrades slowed in the third quarter as compared to 2006, we continue to win new awards in other application and markets. In August, we received a $7 million contract from [Patch Wheel] of Finland, with our HYDROP suspension system for the Slovenian armed modular vehicle. This award is indicative of our technology leadership and worldwide presence in the ground defense markets. Manufacturing and delivering will be from our facility in Switzerland in 2007 through 2011. Our Stryker orders are expected to increase with the acceleration of procurement of the successful combat vehicle for the Army.

As a final comment on the defense market, I'd like to note that despite the headline pressure typically of an upcoming election, we feel there is a bipartisan consensus for strong defense spending particularly for naval ships. The debates on Iraq withdrawal will continue to dominate the budget discussions but it is unlikely our operations will be materially impacted. There is a need to replenish our armed forces infrastructure, significant opportunities to upgrade program technologies and a global environment that requires a dedicated long-term strategy.

For our commercial market oil and gas continues to provide growth due to significant demand for our advanced technology and robust growth in the international market. This equates to significant return on investment for our customers through reduced cycle time and less unplanned downtime for maintenance while ensuring the utmost safety for our employees. The demand of our coker valve continues to be significant in the United States, and international orders for our coker valve and pressure relief valves are even stronger. Simultaneously we are investing in better designs that will enable our suppliers to provide us turnkey products. We also developed new products such as cutting tools, isolation valves and control systems that will enable us to offer a fully automated system solution. Additionally, we have achieved the operational efficiency goals that we targeted through consolidation of our top goal and for businesses that are focused on booking new, higher margin orders for the balance of the year and beyond.

In the commercial power market, we continue to drive demand in existing domestic markets with our substantial portfolio of products which was complemented by our recent acquisition of Scientech. With any acquisition, there are certain integration plans that are typically worked through in the first year of ownership and expect to see incremental margins over the following 12 to 36 months. In addition, we officially kicked off our China contract in September and have already began construction of the new facility necessary to build the AP1000 reactor cooler pumps and other products.

In the commercial aerospace market, we are meeting the challenges of Boeing 737 production increase which has an impact on inventory and cash flow early but will provide very long-term profitability. We have previously reported that we had several contracts pending on the 787 program, and that our ship set content will be around 235,000 per airplane. As part of that contract, we are pleased to announce that we have received an initial order from [SAAB], the 787 cargo door subsystem worth approximately $16 million. Over the life of the program, this has the potential to be more than $150 million for just the cargo doors alone. We've also reached agreement with [Walden Smith] to provide components on the 787. And we are in final negotiations with another customer for an additional large package of work.

And on the Eclipse program , we have increased our ship set content to approximately 32 thousands to an additional contract for fuel pump motors for the engine. In the general industrial market, I am very pleased to announce that in October, Siemens Power Generation has begun utilizing Curtiss-Wright's laser peening technology for their advanced steam turbines. Although laser peening technology has been utilized for several years, this strength in critical titanium components in commercial and military turbine engines, this application represents its first production use in the power generation's steam turbine. In the near future, we are also expect to announce a production order for aerospace structural components, so stay tuned. We believe that these contracts are testimony to the significant benefit that this advanced technology can offer for critical application outside of the traditional turbine engine applications.

To conclude our remarks today, I'd like to update our guidance for the full year 2007 to include the two recently announced acquisitions. Benshaw Advanced Controls and Drives in our Flow Control segment and IMC Magnetics in our Motion Control segment, we expect our revenues to be in the range of $1.555 billion to $1.575 billion. Operating income in the range of $176 million to $183 million and full year diluted EPS in a range of $2.14 to $2.24. Overall, we are very confident we will achieve our goals for 2007 and we are equally confident in 2008 and beyond. As a result of our strong operating performance and future prospects, I was pleased to announce a dividend increase in September of 33%. Our investors - - as investors, you know corporations do not implement such increase slightly but we feel it's important to distribute some of the strong profitability we are achieving along the way as evidence of our disciplined strategy for returning value to our shareholders. And at this time, I would like to open up the conference call for

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Chris Donaghey with Suntrust Robinson Humphrey. Please proceed.

Hi, good morning, guys.

Hi, Chris. How are you doing?

I'm doing well. Glenn, I wonder if you could just talk a little bit about the fourth quarter margin assumptions there? Obviously, there is going to be an uptick sequentially from the third quarter to the fourth quarter. How much of it is volume and how much of it is a reversal of some of the issues that impacted the the third quarter?

Well, primarily it's - - as you can tell, we are going to have a higher volume in the fourth quarter.

Chris, why don't I help you out with that one? If you don't mind. Right now, if you take a look at 2006 and 2007, we basically have the same increase in sales and profitability, about 30% increase in sales for the quarter and 35% increase in the profitability, which is basically where we've been over the last few years. In particular, if you look at Flow Control, Flow Control sales are going to go up 46% over the average quarter over the last three months, while our profitability is going to go up also 46% which is basically a reversal between Motion control last year and Flow Control this year.

If you look at motion control, one of the - - besides the 70-basis points on foreign currency, the biggest change was embedded computing sales were down in the third quarter. And they will be up, and normally that has been a phenomenon with us in the first two quarters. We've had very strong sales in embedded computing in the first two quarters, and we expect those strong sales to go back up into the fourth quarter. Most people ask me about our margins in embedded computing area. Obviously, we make better than average or average profitability in that business segment, and we expect that the sales will go up there in natural volume and better profitability of some of the programs at the Flow Control will be in the fourth quarter. But it's typical. Basically it's typical where we've been over the last few years.

Okay. Great. And just from, and I'm sorry if I missed this one. But the tax rate for the quarter was about five percentage points lower than what I was expecting.

Yes.

What - -what, what happened there?

Well, which, we needed - - we filed our tax returns in September and needed to throw up the actual tax liabilities to what we were estimating for the year. There were a number of adjustments over from - - some of the international tax rates were lowered during the year, as well as a higher manufacturing deduction here in the U.S. But it was a one point, approximately $1.4 million adjustment in the third quarter. The tax rate for the fourth quarter will be 36% as-planned for the year will be about, one down to 35% for the year.

Okay. Great. Thanks for that. And lastly, just on the oil and gas market, Martin. And oil keeps going up, and I think it touched $92 in today or something like that, and so with 51% organic growth in the oil and gas business so far. Does that -- is there room for that to continue to accelerate?

The thing, is I think , as the price of oil as we've indicated at our investors conference is expected to stay high for the next three years. So we would expect capital equipment to be upgraded, especially with our equipment that's more automated obviously reducing the maintenance and reducing cycle time which is a tremendous benefit to our customers. So even if the price of oil came down, I still think there will be a very strong demand for our products based on the life cycle cost advantages it gives to our

Okay. Great. Thanks, guys.

All right. Thank you.

Your next question comes from the line of Myles Walton with CIBC World Markets. Please proceed.

Thanks. Good morning.

Good morning, Myles. How are you?

Good morning, Myles.

Good. Good. Hey, a couple of things, first, I just have to follow up on Chris' question a bit, so you rate guidance $0.04 and I guess, Glenn, it sounds like $0.03 were from taxes. But from Martin commentary, it sounded like operations are certainly going better than expected, as well. Is it conservatism there or are you expecting one of the other segments or corporate expense to tick up into the fourth quarter?

No, I mean there's a lot of variables that go into our forecast, Myles. I mean, there's a lot of good things that happen, and as you know, timing always affects in context. We are going to have a good, solid fourth quarter like we normally do and, but there's many number of things that can swing that either way. So, we have to keep that kind of range.

One of the things, Myles, is one of the - - another margin compression on our Flow Control has been the amount of investment we've put on the AP1000 in the third quarter which was over $2 million. A lot of that was due to our [coating] activity in the United States. It has increased dramatically. So, what you are seeing is the effect of increased expense without the benefit of any sale. And obviously, we are going to continue to support those endeavors. So, you are going to continue to see some drain in margin based on the [coating] activity being as high as it is in the United States.

What is the revised or new guidance for operating income? I think, it was 174, 181.

It's 176 to 183. Let me just make one other comment. The other thing, as we're looking forward into the fourth quarter, our margins, is the question mark on the foreign currency impact in Motion Control. It had been favorable in the beginning of the year and that has been increasingly getting worse. So, the fourth quarter is still a question mark for us in terms of where all of the rates are going to go. That's another variable for us. But, if that helps. The overall guidance was 176 to 183.

Okay. That's great. And then, I guess corporate expense, you mentioned it came in a little lighter. Is it still $2 million the target or are we kind of expecting that to run a little lighter than that as well?

No, it's actually going, it's probably going to go the other way, for the, in the fourth quarter. We are expecting corporate and other, including pension to be somewhere around $6 million for the year, a little bit - - possibly a little bit higher than that.

For the year.

Yes, for the year. So, it will swing back around somewhat in the fourth quarter, we believe.

Okay. That's great. Marty, you talked - - you mentioned that the laser peening opportunity, and I think that business maybe is running around the $15 million mark today.

Right.

As you look out, you have a new relationship with Siemens, you have a new relationship yet to be announced, where can this business go and is it still sitting around those 20% type margins?

Yes. Obviously, the business is starting to gain some momentum. We did indicate that we are going to have another announcement. I think, when all is said and done, you realize that we are going to have some very [marky] names associated with laser peening, and what's going to happen then as happened in shot peening many, many years ago is that obviously if the premiere contractors are using this process, there must be something behind it. So, I think that right now, we are about 15 -- I don't see -- none of these contracts in themselves is going to add a lot of value but the thing is we are going to be getting into these premiere customers that it will grow from there. So, I don't really want to predict where I think the thing is going to go. I've been disappointed in where I thought it was going to go in the first place but now obviously it's going to go up, and it's going to continue to be at higher margins without a doubt.

Okay. And just lastly, and this is in [connection] what Chris had asked previously. I think there was a $3 million [ETC] in the second quarter you anticipated being able to catch up on by year end. Is that something that's going to flow through the fourth quarter?

Yes. We anticipate that, yes.

And so you don't have it under your belt yet but it's kind of been confirmed?

We anticipate we are going to get it up.

Fair enough. Thanks a lot.

As a reminder, [Caller Instructions]. And your next question comes from the line of Carl [Osleider] with Banc of America. Please proceed.

Hey, good morning, guys.

Good morning.

Marty, you talked about some of the issues that might have caused revenue to have some slower growth in areas, and one of them was the Iraq situation and some of the issues there have caused drains and funding for some items. Can you talk a little or more about that? I imagine it's going to be at least partially the embedded computing business but if you could add some color there.

Well, no. A lot of the Iraq - - they are truly affecting us. This in the areas where we provide leakless valves for the [retrofit on] for nuclear aircraft carriers. That's been somewhat put on hold. We expected that 2008 - - 2007 was supposed to be the lowest point of ship building for us. It looks like 2008 is also going to be flat even - - because of spares that the government is not buying the spares that it normally would from us in that Navy business. So, that Navy business is staying down, which is half our business. So, for us to be growing at 6% and the other says that obviously the need for our hardware, in both new products and for Iraq deployment is extremely strong. When the new submarine billed schedule comes out and they do start buying spares again, you are going to see that that business is probably going to grow greater than most companies will over the next few years on an organic basis.

Okay. And 6% growth this year for Navy, what does that imply in the fourth quarter?

That's going to be for the year.

That's for the year. Right. What has it been, so far this year?

At 6%, it depends. Not [in this case].

Okay.

It's just has been 19% commercially. We've not really actually averaged this year 13% and we are going to stay at 13%. In our original guidance, I believe at the beginning of the year was 8% to 10%. But we see that kind of growth sustainable in the future.

Okay.

The 787, your ship content now is 225,000 that you talked about and there's further opportunities that you think that you are pursuing. How big should we think about? how big those opportunities are?

That's about it, the 225 is the order that we are negotiating is not incremental. It's part of that 225.

Okay. And finally on the mix issues, embedded computer was down and that's a higher margin business. Is there other, are there other products that you can talk about that affected the margin on a mix basis?

The only other thing is that we started shipping some 787 and some newer programs to Boeing that had lower margins because of just learning curve. So, obviously, as time goes on, we'll be able to improve those margins. You are just seeing some additional production on not only 787 but some other new programs that went with Boeing and they just go through their learning curves, that's all.

On the other side of that, too, Carl, if for example in the prior year, we had a higher level of the F-16 spares, they come and go, sometimes from quarter to quarter and they are high margin for us. So that was a lower, that also obviously affects our margins. We also had big spares orders in Switzerland in our Switzerland business last year in the third quarter that don't repeat. So, the spares sort of caused it to be a little lumpy from a margin standpoint.

Okay. Thank you, guys.

All right.

Next question comes from the line of Tyler Hojo with Sidoti & Company.

Hey, good morning. I actually hop down a little bit late so I'm not sure if you hit this on not but I believe last quarter, you guys, said that just in terms of AP1000 expectation for '08, I believe it was $50 million at 13% margin. Does that still stand?

No. Actually in our investor conference, we updated that to about $50 million in sales but the margin would be about probably 9% in the first year due primarily, a couple I think, we have a lot of start up costs and learning curve in the first year plus the way we were recognized revenue in the [tech] transfer changed from September. But that was our numbers in accordance with our investor conference.

Okay. And do you care to maybe provide, maybe a first look at 2009 and beyond just in terms of how this ramps?

I don't have that here, Tyler, but I would tell you that was also presented at the investor conference.

Okay.

I believe it's on our Website.

Yes. I haven't gotten around to that yet.

I just don't have them in front of me but I know we did provide those and they are available.

Okay. And did you guys provide just kind of how the updated guidance breaks between the three business segments?

No, we did not.

Would you mind doing that?

Sure. Sales, you got Flow Control between 732 and 737; Motion Control, 574 to 584; and Metal Treatment, 250 to 255.

Okay. And how about operating income?

Well, the operating margins, we expect Flow Control to be in and around 10%; Motion Control in and around 11%; and Metal Treatment within around 20%.

Okay. Great. And just the backlog per segment, as well in the third quarter?

Yes. Controls, Motion Control is $534 million; Flow Control is $842 million; and IMC is $ 2.5 million.

All right. Great. Thanks a lot. I really appreciate it.

All right. Thank you, Carl.

And there are no further questions in the queue at this time. I'd like to turn the call back over to Mr. Martin Benante for closing remarks.

Okay. Well, I thank everybody for joining us today and look forward to our year-end conference call in February. Take care. Bye.

Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.