Curtiss-Wright Corp (CW) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Curtiss-Wright first quarter 2010 conference call. All participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Marty Benante.

Thank you, Molina, and good morning, everyone. Welcome to our 2010 first quarter earnings conference call. Joining me on the call today is Mr. Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Thank you, Marty. Our call today is being webcast, and the press release as well as a replay of this call can be found on the Company website. Before we begin, please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties, and we detail those risks and uncertainties in our public filings with the SEC.

For our agenda today, I will provide an overview of Curtiss-Wright's first quarter 2010 operating performance, then Marty will discuss our strategic markets and update Curtiss-Wright's full year outlook. After the formal remarks, Marty will open the call for questions. So let's get started.

Curtiss-Wright had consolidated sales of $442 million during the first quarter of 2010, a 4% increase over the first quarter of 2009 which was generated across all of our three operating segments. In our Flow Control segment sales increased 4%, of which 3% was organic. Procurement on the Virginia class submarine program, which is increasing to two per year in next year's defense budget, as well as continued strong demand for commercial and nuclear products domestically led to positive momentum.

Oil and gas seems to have stabilized in the first quarter, with a low single-digit decline in sales versus the first quarter last year. We were seeing the beginnings of higher demand for our coker products internationally. However, it was offset by lower capital spending and weaker demand for maintenance and repair work. We did receive substantial new orders for our coker valves in the first quarter which will generate higher sales in the future. Finally, general industrial was down due to continued soft demand for power control equipment for commercial building.

In addition, we had incremental sales of $2 million primarily from our 2009 acquisition of EST, and foreign currency translation had a favorable impact on sales of $2 million. In our Motion Control segment, sales increased 5% overall and 3% organically. Stronger sales to the commercial aerospace market, as well as increased demand for electronics in the general industrial market drove the sales increase. Aerospace defense benefited from a strong increase in sales on the Global Hawk program which more than offset lower revenues on the F-22 program. The increase in commercial aerospace sales came primarily from Boeing's 787 and 737 platforms. Offsetting these increases was a significant decrease in ground defense programs, primarily due to lower orders for the Bradley and Stryker platforms, and the cancellation of the FCS program. In addition we had incremental sales of $1 million from our Sky Quest acquisition and adds 2 million favorable impact on sales from foreign currency translation.

Sales in our Metal Treatment segment increased $1 million from the prior year, including $2 million of favorable foreign currency translation, so organically sales actually declined $1 million. Declines in commercial aerospace and oil and gas markets were partially offset by higher demand in the general industrial market, in particular, domestic automotive. Our consolidated operating income of $31 million in the first quarter of 2010 is flat to the prior year. However, this quarter includes the negative impact of $4 million in foreign currency translation. Organic operating income increased $4 million or 14%, due in large part to our cost reduction programs. And if you exclude the 2009 first quarter one-time bargain purchase gain of $2 million, the organic operating income increase was 22%.

We generated strong organic operating income growth in our Flow Control and Motion Control segments of 33% and 21% respectively. In Flow Control, higher sales volume, as well as savings from our cost reduction programs, including lower headcount and compensation expense, drove an organic margin increase of 180 basis points. And if you exclude the one-time gain from the first quarter 2009 the organic margin increase was 270 basis points. This performance was achieved despite incurring $3 million of incremental costs in the quarter for remediation on the AP 1000 program.

In motion control, foreign currency translation head winds of $3 million masked an organic margin improvement of 180 basis points, mainly driven by savings generated by our cost reduction programs and higher sales volumes. In Metal Treatment, the organic margin declined 170 basis points, primarily due to lower demand for more highly engineered products in the commercial aerospace and oil and gas markets. In all three operating segments, incremental income from acquisitions had a minimal impact. In summary, our consolidated operating margin was 7%, a decline of 30 basis points from the prior year quarter.

Excluding the impact of $4 million of negative foreign currency translation, and our prior year acquisitions, our organic margin was 8.3%, or a 90 basis point improvement. Additionally, without the one-time gain in 2009, our organic operating margin improved 140 basis points. Net earnings for the quarter before the impact of the healthcare charge equated to $17 million or $0.37 per diluted share, an increase of 8% from the first quarter of 2009. Lower interest expense contributed to the increase due to lower debt levels and interest rates as compared to the prior year. On a GAAP basis, we reported EPS of $0.35, and we have maintained our full-year guidance to absorb the $0.02 charge, but it does increase our full year effective tax rate to 34% due to the healthcare charge.

New orders received in the first quarter of 2010 were $502 million, up 10% over the prior year quarter, increasing our backlog to $1.7 billion at March 31st. Our free cash flow defined as cash flow from operations less capital expenditures for the first quarter of 2010 improved $16 million from the prior year period. Our balance sheet remains strong with $80 million in cash, working capital of $394 million and total debt outstanding of 512 million as of March 31st, for a total book debt to capitalization of 32%. Our book-to-bill ratio for the first quarter was 1.14 with all three segments above 1.

I will now turn the call over to Marty to discuss our strategic market performance and our full-year guidance. Marty?

Thank you, Glenn. Not too long ago I reported on our 2009 performance an outlook for 2010. Today I'm happy to report that our first quarter's performance met our expectations. Starting with the benefits of the cost reduction programs we have discussed since early last year. The results are tangible in both our Flow Control and Motion Control segments where, we generated the most operating leverage.

While we usually compare our businesses to prior year quarter, from an operating perspective, we believe a comparison of Metal Treatment business to the fourth quarter of 2009 provides a more accurate trend analysis that indicates the beginning of an up swing in this segment as well. Compared to the fourth quarter, our Metal Treatment sales increased 3%, but our operating income increased 35%. About one-third of the increase is due to a write-off in the fourth quarter associated with a facility closure. But the rest results reflect incremental margin of better than 50% on the incremental sales. I have visited nearly all of our domestic operations over the past year.

I have been in constant contact with our operations as we now get to the new economy. I would like to take this opportunity to thank each and every employee as I am very grateful not only with the flexibility they demonstrated in managing the rapid downturn experienced last year, but also the aggressive new targets set for capitalizing on growth opportunities in 2010 and beyond. Change is always a challenge. But the combination of strategic focus and operational diligence of our employees enable Curtiss-Wright to achieve solid profitability improvements while maintaining leadership positions in each of our marks. Let's now take a moment to discuss our market.

In defense, our 5% consolidated growth was led by strong aerospace growth of 16%. In particular on the Global Hawk, as well as the higher foreign military sales for embedded computing product. Additionally, we experienced 11% growth in Navy defense due to the ramp-up of procurement for the Virginia class submarine program as well as strong sales in helicopter and landing systems internationally.

As we anticipated, ground programs declined 23% in the first quarter after substantial growth in prior years, primarily due to lower orders for the Bradley and Stryker program and the cancellation of the FCS program. However, our foreign military sales are providing a bit more positive momentum, including a $4 million contract to provide cot systems subsystems for the British Army's terrier ground support vehicle as well as other ground defense programs for Germany, Saudi Arabia, and South Africa. Nearly all of our commercial markets improved. Generating 4% sales growth overall.

Commercial aerospace led the positive momentum with 8% growth, which is a combination of higher production on commercial jets, as well as an overall demand for integrated sensors and metal treatment services. In particular, we just signed a $50 million long-term agreement renewal with Agusta Westland to provide data recording and relay equipment, data computers for use in commercial and military helicopters. Business and regional jets continue to be a challenge. As one might expect. But in general, we are encouraged by the strong backlog of our customers and their positive commentary on our production rate increases.

Our commercial nuclear power generated solid gains of 5% due to strong demand from operating reactors as well as the ramp up in AP-10000 production domestically. Our guidance for the full year of a 5% decline reflects the stabilization of production levels for China as well as lower outages later in the year. As you know, the timing of our orders can vary greatly. But we continue to view our unique leverage in this market, a distinguishing factor that will generate positive momentum for Curtiss-Wright throughout the next decade.

Oil and gas contracted 4% this quarter as compared to prior year. But on a full-year basis, we expect this market to show a modest growth. In the fourth quarter of 2009, we began to see coker valve order flow into our backlog. In the first quarter we booked an additional $40 million, including the long awaited Petrobras order for a total of $70 million over the past six months.

As we indicated, only 18% of the new orders were domestic. The up tick in demand is primarily international, including Brazil, India, Saudi Arabia, and Russia. While we see large international private spending ramping up, there's definitely a delay, in maintenance and repair work as well as later cycle awards for our traditional valves in large vessel equipment, which continue to be robust through 2009 due to large backlogs generated in 2008.

Putting things in perspective, we ended up where we expected to be for the first quarter despite absorbing the healthcare charge and additional remediation costs on the AP-1000 program that were higher than we anticipated. While we continue to see a number of challenges in the near term, our recent new order growth of 10% and our solid book-to-bill ratio above one times in both our defense and commercial market give us confidence that our market trends are moving in the right direction. As I reflected back in the first quarter last year, we continue to have strong demand due to solid bookings generated in 2008 and the long production cycles associated with our highly engineered technologies.

The recession began to impact us later in the year, lagging the general business community. Fast-forward to this year, and we're beginning to see some increasing demand in our commercial mark, which is a positive sign that we're beginning to feel the initial impact of the economic recovery in our market. We expect our quarterly performance to improve sequentially and maintain our 40 to 60 ratio earnings split between the first and second halves of the year. While we are optimistic, this signals the early stages of economic recovery, we remain cautious as to the timing and rate of acceleration. For that reason, we are maintaining our guidance for the full year 2010, including absorption of the additional $0.02 from the recently enacted healthcare legislation and higher AP-1000 remediation costs.

At this time, I would like to open up the conference for questions.

Thank you, sir. (Operator Instructions). Our first question comes from Ken Herbert with Wedbush.

Good morning.

Good morning, Ken.

Just a quick question, if I could, Marty and Glenn, at that time high level, you just mentioned from the AP-1000 you're expecting weakness there as the year goes on, or less strength, but it looks like, with holding your guidance steady, the $0.02 aside for the healthcare charge, is you're effectively assuming flat sales over the second through the fourth quarter of last year. Are there any other markets you'd specifically point to where you see -- where you're expecting to see maybe sort of a regression back to the full year outlook relative to the first quarter strength that we saw?

Not really. We're -- when we look at the quarters going out, it's going to be how much of an acceleration you are going to get in the economy. We have some weakness in our oil and gas in our traditional maintenance and repair and overhaul, and that's supposed to pick up in the third and fourth quarter of this year. And we're also seeing some -- a little weakness in our electronic components. Other than that, we see very positive signs going forward.

Okay. Because it looks like at the midpoint of the guidance, the $0.02 aside, on the top line, with the strength of the first quarter, you're looking for sort of flat over last year. So it seems like there's going to be a few markets that might still have, aside from nuclear, maybe some pressure relative to what we saw coming out of the first quarter. Can you just comment within oil and gas, obviously tremendous bookings in the first quarter. What's the lag or can you just remind me in terms of when those get turned into orders? I know you've talked about some lumpiness and unpredictability, but what are you lacking for in terms of translating those orders into shipments?

The shipments normally take about nine months to a year, but you start to get some incremental sales about a quarter after they're placed. So we start seeing sales on the additional $40 million starting next quarter, or this quarter, coming.

Okay. Excellent. If I could, one final question. You had a comment in there about continued sort of slowness in China for -- on the nuclear program there, the new shipments. Can you talk any, about sort of as you look out interest this yes, and anything that might change or any causes for any color upon timing of when that might turn?

No what we're indicating is that we have our first contract for new plants is in China, and what happens is we're set to deliver them beginning of 2012. So what's happening is you have a buildup, and then it starts to -- you start spending less labor the closer you come to shipping the product. And that's all we're relating. It's not a weakness. It's just as the cycle goes through.

It's like a bell curve, and we're on that -- we've already crested on the China orders. The domestic orders, on the other hand, are going up. So it's the timing of the percent complete as we go through the five-year cycle leading up to the delivery. It may help a little bit, but just a tidbit on your last question, the one market that is different, I think we were down 23% in ground defense but we are projecting 35% for the whole year. So there is still some additional head winds as the year progresses in that particular market, if that helps.

Yes, that's helpful, because it looks like in all of the markets you essential outperformed in the first quarter relative to the full-year expectations with the exception of oil and gas.

Right. But at the same time, not to be contradictory to my partner here, we also have increased new orders in both the embedded computing area and also in nuclear power that were over and above our expectations. So hopefully we'll have, as we see the year going forward, probably in the second quarter we'll probably have a little -- hopefully a little better news in what we see for the outcome for the entire year.

Very good, thank you very much.

Thank you.

Thank you. Our next question comes from Tyler Hojo with Sidoti & Company.

Hey, Tyler.

Am I correct to assume that the segment guidance does not change here?

Correct.

So my question in terms of the Metal Treatment segment, obviously nice to see the sequential margin improvement there, but I guess your full-year guidance would imply that margins contract from 1Q levels. Just trying to understand that.

I don't think so. They're relatively flat quarter to quarter. They're not down, they're flat.

And then just a follow-up to the ground defense commentary. It's down 23% in the quarter.

Right.

For the year, you're looking for down 35. What kind of -- what are you kind of looking for to kind of facilitate incremental weakness from where you were in the first quarter, in context with the new orders that you have?

We indicated that we were losing about $60 million between the Bradley, the Stryker, and the FCS beginning -- at the end of last year or in February. But we're also making that up on the intelligence, reconnaissance, and surveillance side. So although ground is down, other portions of our embedded computing systems are looking up. So we don't expect the ground vehicles to change anything by the end of the year. What we're seeing is improved orders on other programs that require embedded computers.

Okay. All right, great. And just lastly, if you wouldn't mind providing the -- either the backlog or the bookings by segment --

Which would you prefer? The orders or the backlog?

I would prefer the backlog.

Okay, the backlog for Motion Control, $442 million. Flow Control, $1.24 billion.

Great, thank you.

You're welcome.

Thank you. Our next question comes from Steve Levenson with Stifel Nicolaus.

Thanks, good morning, Marty and Glenn.

Good morning, Steve.

Going to get a little bit more detail on the ISR answer you just had, with all the airborne platforms looking like there's not going to be a common sensor but maybe a handful of platforms, do you see opportunities to expand penetration there, or are you in any way boxed out?

No, we see increased expansion in those areas. If you remember, at the end of 2008, we took some of the investment in both the Gator and the Rasp, those programs are coming to fruition so the ground there, radar, the radar airborne signal processors, and processors in general. If you take a look at the sensor technology that's being put into the aircraft, they require increased processing performance, and that's actually where we do very good at. So we have seen a very high level, and also quoting activity on the IRSI.

And do you think a lot of this has to do with the upgrade to the VPX standard?

Well, the VPX standard, I think that's going to be a stepping stone from where we are with the VME, up next generation, and without a doubt. We're also a leader in that technology. So I think as more programs come up for upgrades, that you are going to see more of the BPX technology which has higher performance than the VME, it's lighter weight, and that, I think, is going to be the next generation of open architecture.

Thanks. On your Metal Treatment side, Boeing has been discussing or has mentioned that there's a good possibility of a rate increase on the 737. I don't know how the timing kicks in. Have you anticipated any of that in the guidance, or is that --

Like I said, we were encouraged by both Airbus and Boeing, indicating they will be rate increases, but we have not factored that in.

Right. And just in terms of reactor licensing for new projects, do you have any color on just what the general atmosphere is?

I think that the licensing in the United States is relatively slow, and you can see that there are brand-new reactors being awarded, such as Korea just received an order from Emirates for four reactors, and Turkey he is interested in some additional reactors. Think you will see some interest in foreign players. We'll start to see orders from those plants in probably three to five years from now. So I think you are seeing a lot of activity from foreign countries and also for foreign reactor builders.

Great, thank you very much.

Take care.

Thank you. Our next question comes from Eric Hugel with Stephens.

I knew you were going to be next.

How did you know that?

Because as soon as we talk nuclear power, you normally jump right in there. How have you been?

My second question will be about nuclear power, but my first question, can you talk about if you guys have any sort of pre built inventories in sort of areas that would typically be sort of normal longer cycle but, you know, given sort of maybe the downturn you've been building that if you see demand kick in you can sort of, maybe a little surprise with some quick deliveries there?

The thing is, is that we can handle any quick performance whatsoever. Realistically we still have the same capacity of the 2007 time frame. The one area that we're going to eventually get out of having a build up in inventory, which we had to on the gas and oil side, is with our Delta valve product, where we were building inventory ahead of schedule because of the demand, and we had higher inventory costs in inventory than we will see going forward, which will be a nice kicker in the second, third, and fourth quarter.

All right. Can you update us -- I know you said in the quarter you spent a little more money on the AP-1000 in terms of remediation of the issues. Can you give us an update as to where things stand right now? Are you done? Have you fixed anything? Are we going to to hear about this next quarter?

We said that, if you remember, we said that it was about a nickel from this year that we were going to spend on the failure we had on the AP-1000. So we spent $3 million so far. That was really going to be almost all in the first half. We'll probably get a little bit more than that but nothing substantial. And we will be going back on test on about May 15th. We expect that test will be successful.

Great. Do you have any visibility into -- you're seeing nice pickup trends, you said, on the Metal Treatment business in the first quarter. Do you have any visibility as to whether -- how things look in April, as to whether they continue to remain solid or pick up?

They are remaining solid.

Great. I'll get back into queue, let other people ask some questions.

Okey-doke.

Thank you. Our next question comes from Michael Ciarmoli with Boenning & Scattergood.

Thanks for taking my questions. Glenn, if I could just follow up on Tyler's previous question about the Metal Treatment margins so are you guys still guiding to 10 to 10.5% operating margins for the year, which I guess would imply down margins for the rest of the year?

You caught us on that one.

We said we were going to be conservative. We are still guiding to 10 to 10.5%, and it would imply that we will be down.

Normally the only quarter that's a little bit off is the fourth quarter because there's a lot of aerospace shutdowns, but that's normally minimal compared to other quarters.

Okay.

Yes, in order to hit our guidance we'd actually have to slow down.

We will not.

Fair enough.

We won't say any more about that subject.

All right. I guess if you can maybe just on the nuclear side, has your revenue mix changed for this year? I know on the last call you were looking at maybe a combined $330 million with roughly I guess that $80 million from AP-1000. Has that mix changed at all?

No, but we are seeing better orders on the non-AP-1000 side. A lot of the long-term programs are starting to come to fruition. We're just seeing if that keeps up that will be a nice pickup for us also.

Okay. And then just on the -- on ground vehicles, so obviously there's definitely some head winds. There's talk now, the army ground combat vehicle.

The GCV.

Yes. What do you anticipate your content? Can you have as much content on that particular vehicle as any one of the future combat? Obviously there would have been more in quantity of the future combat system vehicles, but what's your take on how the ground combat vehicle evolves here, and will there need to be some increased R&D spend?

Well, you notice that the army is asking for quite a bit of increase for the GCV and also research and development. The three teams that are going to be putting together, demonstrating units. We're active with all three, we're quoting to all three. We do expect to do well. A lot of the technology that they're going to be using on the GCV they want off the shelf, and we have a lot of off the shelf, that the technology was built for the FCS so the next round of new vehicles, and we intend to be supplier on that next round of new vehicles, without a doubt.

Would I be wrong to assume if you're working with all three teams, is it safe to say that your competitors are also working with all three teams, or are you guys --

Of course. That's exactly what they're going to do, too.

But you have to be selected by any of the teams.

We have to do the same thing we did last time.

Last question, and I will get out of the way here, can you just give us an update -- I know we've got the growth assumptions or the current growth by market in the quarter, but can you give us an update on the outlook? I know you've talk about some 35%, I guess nuclear power gen, and some of the other ones. I want to make sure I've got all those assumptions.

Sure. Basically we have aerospace defense, we're looking at 7% growth for the year. Ground defense, 35% down. Navy defense 2,% up. And then we have other defense, about 35% up overall defense down 3% year-over-year.

Okay.

Commercial aero, up five. Oil and gas, up two. Power general, down 5. And general industrial, up six. So our commercial market up one. That's the market guidance.

Great, thanks a lot, guys.

(Operator Instructions). Our next question comes from Eric Hugel with Stephens.

Hey, guys, any more or any restructuring charges as we go through the year that you guys think you're likely to continue to take?

No, we told you for this quarter that we would have about $2 million, about $1 million coming out of the gas and oil, and all told there would be a $3 million charge for the sensors, do most of our manufacturing in China, Mexico, and Arizona, and we so you about $800,000 of that $3 million. So there's still about another $2.2 million left on the sensor side.

And that will be -- will that just be spread through the year or is that heavily weighted to the second quarter?

Heavily weighted second quarter, yes.

With the pace of toward pickup that you are seeing, and I guess it has to do with timing and lead times, I know you're keeping your guidance and stuff like that sort of early in the year, but if you sort of drew the trajectory line of sort of your -- of the orders that you're seeing versus what you need to be on track with your guidance, are you sort of on that line, above it, below it?

We're above it.

Okay, great, thanks a lot, guys.

All right, Eric.

Thank you. Our next question comes from Ken Herbert with Wedbush.

Just a quick follow-up. Are you expecting any potential impact in the second quarter from essentially a four-week halt in 787 shipments into Boeing?

No, not really.

So that's not going to impact you at all.

We don't think so, no.

Excellent, thank you.

Our next question comes from Michael Ciarmoli with Boenning & Scattergood.

Hey, guys, one quick follow-up. On your commercial aerospace outlook, I just want to make sure, talking about some assumptions, you're not assuming any additional increases on, say, ships that may be at the tail end of the year for 747 production increases?

No.

You guys have about $290,000 per platform there?

On the 737?

747.

I'm sorry, I thought you said 787.

Some of the wide body production. I mean, are you guys baking in anything there?

The amount that you indicated, as far as the amount per ship set is accurate. I'm sorry, did you say -- ask another question?

So are you guys baking anything in towards, say, the third, fourth quarter for those wide body increases?

No, not really.

Fair enough. Great, thanks, guys.

Thank you.

Thank you. Our next question comes from Tyler Hojo with Sidoti & Company.

Is everybody going to ask a second round of questions?

I just thought I'd follow the crowd here. You guys can talk about where you sit with acquisitions. Obviously that's a key part of your growth strategy.

Let's just say that there is a lot more opportunity that we've seen over the last year or so. I think because the outlook for the economy is improving that businesses that held on their business through the downturn to get better valuations I think are starting to top out. So I'd say there's quite a bit of opportunity for us right now.

And, I mean, if could you gauge kind of what your preference is in terms of market, I mean, you've been pretty active on the nuclear side, and a couple years back a little more active on the whole defense business.

Right.

Where's your key focus right now?

It's, again, as I indicated, gas and oil, nuclear, embedding computing sensors basically the portfolio we have right now.

So everything.

Everything.

All right, thanks.

You're welcome.

Thanks, Tyler.

I'm showing no further questions at this time.

Okay. If that's it, I would like to thank you very much for joining us today. And I look forward to speaking with everybody again in July. Thank you very much, and have a great day.

So long now.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect. Thank you.