Moog Inc (MOG.B) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Moog’s second quarter earnings conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session, with instructions given at that time. If you should require assistance during the call, please press 0 then *. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Susan Johnson. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors, is contained in our news release of today’s date, our Form 10-Q for the quarter ended December 31st, 2002, and in certain of our other public filings with the SEC. And now, here’s Bob Brady, Moog’s Chairman and CEO, with our second quarter earnings.

Morning, everybody. Thanks for joining us. Today we’ll report on our results for the second quarter and we’ll discuss the events and influences over the quarter and their impact on our segments for the balance of the fiscal year. Results for the quarter tracked very well with our overall projections for the year. Sales were 190 million, up 4.3 percent, from 182 million last year. Earnings, 10.3 million, 67 cents per share, up 10 percent from a year ago. So now we’re half way through the year, and we’re right about where we had hoped to be. Six-month sales, 370 million, are up 4 percent. Earnings per share, $1.31, are up 10 percent. During the last half of fiscal ’02 and the first quarter of this year, a pattern had developed wherein our aircraft business was very strong, the space business was weakening, and our industrial business, although it wasn’t great, was showing promise. And that pattern has persisted through the second quarter. Fortunately, the strength in our aircraft sales and margins, coupled with much lower interest expense, allows us to achieve the financial plan that we set out, at a time when the space market seemed a lot stronger.

Now let me go to the segments. Sales in aircraft were 99 million, up 10 percent or 9 million from a year ago. The $9 million increase is the net of a $15 million increase in military, and a 6 million decline on the commercial side. First, I’ll talk about the strong performance in military. Military aircraft revenue was 62 million in the quarter, up from 48 million last year. And the big story of course, is our start-up on the joint strike fighter. In last year’s second quarter, we had just signed our first contract in the primary flight controls, and in that quarter we had revenue of 1.4 million. A year later, this year’s second quarter, the development program is in full swing. It’s going very well. We had revenues of 11.4 million, a $10 million increase over last year. In addition, sales of the V-22 were up substantially. As you know, the current aircraft delivery rate, about one a month, is the same as last year. But we have the additional task of replacing slosh flight actuators, which are being updated to a revised version of the specification. As a result, our sales in this quarter were 3 million above the same quarter a year ago. Also during the quarter, we signed a contract to restart delivery of flight controls for the Indian Light Combat aircraft and sales of $1 million on that program. And the Blackhawk, we had a big quarter sales of 2.7 million, up 1.3 million from last year.

The only aggravation we have in the military aircraft business is that some of the after-market orders that we know are coming, are being delayed. Usually the delays are the result of funding limitations. But as a result, year to date, our military after-market is down 1.6 million from last year. This is a year when we were looking for a $9 million increase over the year. And we’re now thinking that we will have a strong back half. We will see an increase, but it’s probably going to be 5 million, instead of 9 million. The $4 million shortfall in the after-market from our original forecast though, will be picked up through increased shipments to Sikorsky on the Blackhawk, increased sales to Boeing and the V-22. So we still believe that our forecast, 249 million for total military aircraft sales for the year, is achievable.

Switching to commercial aircraft, revenues of 37 million for the quarter were down 6 million from last year’s second quarter. The decline is all in the OEM business with Boeing Commercial. Last year, with Boeing Commercial we averaged 15 million a quarter, but the second quarter was very strong. We had sales in the second quarter of 19 million. This year we’re looking for average quarters of around 11 million, but the last quarter was a relatively weak 9 million, and therefore, the quarter-to-quarter comparison was down by a $10 million margin. On the other hand, we had a pick-up in the business jet part of our business. As you know, we have development programs at work and the revenue on those was over 3 million higher than last year. There are a bunch of other minor shifts in the product line. On a net basis, the product line was down only 6 million, in spite of the $10 million decrease at Boeing Commercial.

After-market, commercial airplanes, 12.6 million, was actually up 400,000 from a year ago. Year to date in the commercial after-market were 28 million. We’d forecasted 50 for the year. So, even if the SARS impact on the Asian airline max our run rate down by 20 percent, we’ll still make our $50 million forecast for the year.

For the first half of ’03, our total commercial aircraft revenues were 78 million. Our projection for the year, 145. So, it looks like we’re in reasonably good shape on the commercial side. For the aircraft segment in total, [technical difficulty] staying with our forecast of 394 for the year. At the half-year point we’ve achieved 49 percent of that. Margin performance in the aircraft segment continues to be strong. The quarter margins were 17.5 percent, up substantially from 16.5 percent the second quarter of last year. We began this year forecasting 16.4 for the year. Last quarter we increased that forecast to 17 percent and based on the results of this most recent quarter, we should move to an average of 17.5 percent for the year. So, that’s some of our good news. Now to the space segment and some not so good news.

Before I get into the details of our space and missiles business, I want to remind everybody that , although this is an important part of our business, it is our smallest segment. Our original plan for the year in space represented 13 percent of total sales. Sales in this quarter, 22 million, were down 7 million from the 29 million of last year. Quarter-over-quarter decline comes about in this fashion; 2.6 million related to the completion of a couple of sizeable programs. The Crew Return Vehicle for Space Station is done and the gas management system for Gravity Probe B has been delivered. Another 2.4 million of the decline is simply a lower level of activity in the commercial satellite business. What reflects is a [indecipherable] of orders for new satellites and the inventory position of some of our major customers.

Third contributor to the sales decline has to do with equipment we’re building for a couple of scientific space vehicles in Japan. One of these is the lunar explorer and the other is a satellite, which will monitor ozone layers. Both these programs are multi-million dollar jobs that have been in work for some years, and they should be done by now. We’re still working to achieve required performance. Had some, sort of, late breaking technical issues. The result is that the cost we’re incurring are contract overruns and they generate no revenue in the quarter. Lastly in the quarter, our missile business experienced a net decline of a little over $1 million, despite a $2 million increase in program associated with national missile defense. That increase is offset by a decline that we’ve talked about, in the number of tactical missile programs, including Hellfire, TOW and the AGM-142. All these factors taken together, add up to a $7 million decline in the space segment, to get us down to a level of 22 million for the quarter. One could wonder where does that lead our forecast for the year.

We began the year looking for 98 million in this segment. Ninety days ago, we reduced that to 94 million. Over the quarter we’ve seen the delay of a couple of very important government funded satellites. We’ve been counting on a program called NPOESS, the National Polar Orbiting Environmental Satellite System; the next generation weather satellite. Apparently, overruns and delays in NPOESS’ preparatory program have resulted in what’s now thought to be a two-year delay in orders for the follow-on. In a somewhat similar fashion, we were hopeful about a program called Advanced EHF, an Airforce satellite intended to replace Milstar, and to provide high band with secure military communications. We learned during the quarter that funding has been stretched and this program will also be delayed a couple of years. Beyond that, in the tactical missile arena, Boeing’s RuSpace interceptor vehicle development program was cancelled and that cost us some near-term revenue. Other than the continuing orders for the national missile defense type programs, it’s been tough to find good news in the space and missile business for us lately.

Taking all of the foregoing into account, we now think our 94 million for space and missiles for the year, is more likely to turn out to be 87 million. And we’ve got to adjust the quarterly revenues of around 21 million in the segment. Given the cost structure we’ve got in place, at a sales level like last quarter, of 21.6, we’re not able to generate much operating profit. In fact, during the quarter, we took a $500,000 expense for restructuring the operation and that reduced our operating profit to a negative 67K. The restructuring reduced the fulltime permanent staff in this operation by about 100 people, 40 of whom were able to be placed in other parts of our company. However, things being equal, this reduction resulted in improved margins, but we’re anticipating even lower volume over the next couple of quarters. The net effect is that on the 87 million in sales, we’re now predicting we’re likely to generate operating margins of only a couple of million dollars for the entire year.

So, as I said at the outset, space and missiles is the weak part of our business at the moment. I’d like to emphasize the, at the moment part. There will come a time, I believe, in the not too distant future, when more satellites will be needed and we’ll be replacing those that are currently in use. And I also believe that eventually, the administration will get serious about deploying a real national missile defense system, and when those events occur, I think we’ll be glad that we were able to support this segment of our business through the current [indecipherable].

Now back to some more good news. Our industrial sales in the quarter, 69 million, were up 10 percent. This increase occurred in spite of a $5 million quarter-over-quarter decline in turbine controls. So our other industrial product lines generated an increase of close to 12 million. Admittedly, part of that increase is the fact of exchange rates. The Euro is much stronger today than it was a year ago, and that alone accounted for about 6 million of the $12 million increase.

Looking on the bright side though, we did have substantial increase in the sales of controls for plastics machines. Including the currency affect, the increase was close to 5 million in the quarter. We had an increase of over 3 million in controls for presses in metal forming equipment. Combat controls for military vehicles is up by 1 million bucks, to almost 8 million in the quarter. Sales to our Formula One racing car customers were up by 800,000. After-market up by 1 million, to a level of over 7 million in the quarter.

Given the results of this quarter and what we know about our incoming order rate, we’re now more comfortable about our forecast for 264 million for the year. We’re half-way through the year and we’re more than half-way through that forecast and that’s a good thing. We’re hopeful that this quarter’s results are the beginning of a trend and we’re hopeful that we actually are in the early stages of the industrial recovery, for which we’ve been waiting for a long time. Margins for the quarter are also showing recovery. Margin 7.4 percent, up from 6.7 a year ago. This improvement comes about in large part as a result of restructuring moves made in our industrial segment during last fiscal year. We had targeted 7.5 percent for this year, the year we’re in, so we’re very close to achieving that level. Expenses we incurred in the first quarter of this year, of 800K to make a factory move in Germany, knocked our first quarter down, but if we maintain the current level of margins, we’ll complete the year at about 6.8 percent.

So, to summarize, in our overall operational picture, there’s no question that our space and missile segment is suffering from a lack of incoming orders. We’re now looking at a forecast for that segment that’s 11 million lower than our original plan. However, the difficulty in this part of our business is more than overcome by the vibrant activity in military aircraft and our recovering industrial business. So, we’re still forecasting total sales increase to 745 million, which is up 4 percent or 26 million from last year. And we continue to be confident about our net earnings projection for the year of 2.75 a share. The operating profit that we will be able to generate, taken together with reduced interest expense that Bob Banta will describe in a minute, should allow us to move through the next couple of quarters and achieve at least a 10 percent increase in earnings per share that we’ve been talking about for the last three quarters. Now I’ll turn you over to Bob, to talk about cash flows and the change in our capital restructure, capital structure, and the expected reduction in interest. Bob?

Thanks, Bob. Good morning. As you may have seen by now, cash flow in the quarter was exceptionally strong. In the last 90 days, we’ve reduced our net debt by 14 million. Here are some of the details. At the end of December, 90 days ago, total debt was 309 million, with cash balances of 13 million. So net total debt 90 days ago was 296 million. At the end of this quarter, total debt was 303 million, with 21 million of cash balances, therefore, leaving us with net total debt of 282, and hence, and $14 million reduction in the quarter. For six months, debt has been reduced even more. We’ve reduced net debt by 18 million, which is close to our guidance for all of fiscal ’03. So what can be said of this rather favorable and good news?

First, we were too conservative in our forecasts. The second is that our contract folks had great success in negotiating increased customer advances on a number of programs. Customer advances have increased in six months by 5.3 million. Now to be sure, this means that cash flow will slow in the succeeding quarters – perhaps many quarters. We’ve collected in advance, money for costs like labor and materials that we’ll incur in the periods ahead. Also in May, we’ll pay the last half of a year’s worth of interest on our 10 percent high-yield notes. That’s $6 million worth of cash use in the third quarter – actually, next week.

As you know, next week will be our final interest payment on our 10 percent bonds. They’ll be paid off out of our new 390 million, five-year bank credit facilities and the cost in cash savings will start from that point onward, next week. For all of ’03, we think interest expense will now total only about 18 million. Our interest cost estimates for the whole year then, assumes that we’ll swap-out a fair amount of variable rate LIBOR instruments to fixed rate instruments, for an intermediate time period. Like you, we’ll be watching the economic tea leaves to determine exactly what might be appropriate.

All in all, we think it’s fairly safe to assume that we’ll exceed a $20 million net debt pay-down for the year. And as I said earlier, we’re at 18 already. At the halfway point, you might be interested to know, we’re slightly ahead of our planned cash pension contributions for the year. So, that’s on-plan or on-target as well. Capital expenditures for the quarter of 7.3 million, matched depreciation of 7.3 million in the quarter. Thank you, and I think we’re ready for Q and A.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone and you’ll hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time, by pressing the # key. If you pressed 1 prior to this announcement, we ask that you please do so again at this time. And if you’re using a speaker-phone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press the 1 at this time. And our first question comes from Cai von Rumohr, with S.G. Cowen. Please go ahead.

Yes, guys. Good quarter. Could you review for us, kind of, any abnormal items you had in the quarter? You mentioned, kind of, a write-off in space, kind of go through and I think you had the down-sizing. How big was the write-off or the overrun in space? You mentioned the 500 million restructuring. Were there any other items, like in the bus jets, recoveries or anything else?

We mentioned that we took a restructuring charge in that segment for the quarter – I shouldn’t say we took it. We incurred expense. As you know, we’re not trying to get you to add that back. We consider it an expense of doing business. But it did depress margins in the quarter by about $500,000. In terms of the overrun on the satellite programs that I referred to, the effect there, Cai, as you know, is that we’ve got folks working and incurring expense, and in normal circumstances, if they’re within the framework of the normal contract, that generates sales for us. The size of the overrun incurred in the quarter was slightly in excess of $1 million. Other than that, I don’t think there were any extraordinary items that we’re talking about.

I can’t think of any.

Okay. And you mentioned the technical issues. Do we think that the satellite overrun is behind us, or is this –

Yes, we think it’s behind us. Well, we think that we’re going to complete both of the programs I’m referring to, we think we’re going to complete them in the quarter that we’re now in. This is a situation, Cai, one of them is a really good example. It’s on a program called GCOMs, a Japanese satellite. We’re delivering one large instrument package. I mean, this is a $4 or $5 million job. And we’re in the circumstance when the thing is altogether a non-test and we have a few technical anomalies that we’re still troubleshooting and we’re working around with software fixes and stuff like that. So, I think they’ll clean up in the quarter that we’re now in. And I don’t think the impact on that quarter is going to be sizeable. But, it’s part of the – when you make the quarter-to-quarter comparisons, 29 million a year ago and 22 million this year, it’s part of what’s going on. We’ve got folks working and they’re not generating any revenue.

Okay. And you’ve maintained your industrial sales target of 264 million. That would require that sales slow by about 3 million or more from [multiple speakers] the second quarter run rate. Normally that doesn’t happen. Is that a conservative number or are we missing something that the orders, kind of are very weak?

No, the orders actually, are not weak. And I’m hopeful that it’s conservative. We make it as a couple of million dollar difference, but it all has to do with one phenomenon, Cai, and that is that this nice business we have in the Formula One racing car business, is, believe it or not, a seasonal business. These guys buy everything in the December and March ending quarter and there will be very little activity over the spring and the summer, while they figure out what they want to buy next year. So, as we have that forecasted, we’re kind of forecasting that everything else holds steady, except for the Formula One. We think we’re in good shape for the third quarter. The unknown is the fourth quarter, because this is a business wherein our normal lead times are 8, 10, 12 weeks, so we have rather low visibility on much of the industrial business into the fourth quarter. I hope that we’re being conservative. But, I think we’ll be close. If we have a stronger quarter, it’s not going to blow the doors off. On the other hand, if there’s a shortfall, it probably won’t be significant.

Okay. Last one, could you give us – you said interest expense was 18 million, how much is that with the debt pay-down charge and what do you expect the effective tax rate to be for the year?

Well, 18 million is the interest cost component and the debt write-off on the high yields of about 1.2 million, 1.3 million. And that’s in other expense line.

Okay, good. And then the tax rate?

We’re about 20 for the whole year. It’s down slightly from earlier guidance, about 28.4 or 28.5, somewhere in there.

Okay, great. Thank you.

And we have a question from Sue Kecmer, with Merrill Lynch. Please go ahead.

Morning. Just a follow-up on Cai’s question. Why was the effective tax rate so much lower in this quarter?

During the quarter, Sue, we completed another amendment to an earlier tax year – we’ve been on a program of doing this kind of in a rolling way. We can’t get it all done at once. And this has to do with, there are some benefits that some of our accounting experts – actually, outside accounting experts, along with internal staff, have come across in that the way the final laws are interpreted on [indecipherable] sales corporation structures – of course, that’s not used currently, but in prior periods it was, and you can get benefits for re-categorizing the cost associated with your foreign, and in particular, your domestic sales. So, as we re-file those, what are still open, tax years, we’re getting increased tax savings and ultimately cash refunds.

Okay. And what do you expect interest expense to be for the year?

18 million.

Okay. And your free cash flow target for the year?

Well, earlier, as we define it, which is total net debt paid out, we had earlier said, at the beginning of the year, sometime in the fall, we’ve reduced it by 17-20 million. And that included a hefty increase in our pension contributions. Since we’re already at 18 million for the first half, I think it’s safe to say we’re going to make our target. We don’t know of any big outlays and as I said, on the tax delete, we think it will be in excess of 20 million. We haven’t reclined it any further than that at this time.

Okay, great. And lastly, last quarter we kind of touched on how you guys were seeing the international airlines move to outsource more of their maintenance. And I was wondering how that was going? And also, if you’ve seen any increased interest from the US airlines?

We’re still talking. Nothing’s happened, no deals have been made and the talks are of more interest with the European airlines. The US airlines, they’re not – at least in our experience, they’re not paying much attention to that part of their business at the moment.

Okay, that’s great. Thanks a lot.

If there are any additional questions, please press the 1 at this time. And we have a question from Jeff Hammond, with McDonald Investments. Please go ahead.

Hi, good morning. A couple of housekeeping items. Can you give us your full-year expectation for corporate expense? And then also, can you provide what your Euro assumption is, inherent in your sales forecast?

Let’s see, the first one, Jeff, corporate expense for the year now should be about 10.5 million. Within that will be the debt write-off that earlier was asked. Okay, so then you add 1.2 million, plus that. Okay, sorry. And as far as the Euro goes, we’re hovering kind of at a flat level, right around here, [indecipherable] area I guess you can say, for the quarter would average just a little below that, I think. As you know, it’s a little higher right now – 1.09, I think. So, we’re not assuming much further appreciation, on the other hand, we’re not thinking it’s going to fall out tremendously either.

Okay. And then, can you give us a sense of your commercial after-market business that’s directed at the Asian market and maybe the related impact, given curtailed travel around the SARS issue?

Well, as I said I the presentation, we’re anticipating – our forecast would allow a decline in total commercial after-market of about 20 percent. The after-market for the quarter was 12.6 million. We’re at 28 million half-way through the year. We had a strong first quarter, as you will recall. Of that, of the total, the Asian airlines are probably 1/3. So, you can do the arithmetic. And if the Asian airlines come down 20 percent, it may be only $1 million in the quarter. I mean, it’s hard to tell what the impact is going to be. They’re continuing to fly at a reduced level and we’re pretty sure they have little or no inventory of repaired items. So, if they keep flying, we’re hopeful that the repair and overhaul activity will continue.

Okay, thanks.

And there are no further questions at this time. Oh, we just had one more queue-up. Cai von Rumohr, with S.G. Cowen. Please go ahead.

Yes. Your 18 million indication of interest, obviously kind of assumes no refinancing. It assumes you use bank debt. And I guess would get you to about 3 million plus in interest expense in the final quarter. What is your plan with respect to – are you going to stick with bank debt or kind of refinance with something a little bit longer? Because if you do and rates don’t move up, that would suggest a very generous uptake in earning, potentially, in 2004.

Yes, well we can’t see any reason to go way out on the yield curve, you know, with say, a new high-yield instruments. Certainly the banker types from all corners are knocking on the door, love to peddle some paper and get a big fee. But that would move us out significantly on the yield curve. We just closed, March 2nd or 3rd, this new five- year – it’s mostly a revolver, with 11 banks and a little bit of it is of a term nature. So, while you can’t go right to the end-stops, because you’ve got to roll them over, say at the beginning of the fourth year. That’s a pretty long period of time, and we’d rather stay at the lower end of the yield curve. We swapped out of that amount, about 150 million, and so we’re using post payoff, or we will be using next week, post-to-payoff of the high yield monies are something in the 280 area. So, a little more than half is swapped. We might do a little more. The average duration of the swaps right now is about 2.2 years. So, if we did anymore we’d go probably a little bit longer, and that’s why I hedged the interest savings in which we’re leading to.

Maybe it’s sensible to lock-in to some rate. It’s a pretty flat yield curve in the first few years, and then it really swings out when you get into five or more years. So, you’d be up there very expensive money. In terms of any other needs for debt, why, it would all be a function of some large transaction, which there’s really nothing on the burners right now. So we just can’t do out and raise the money, not withstanding those that might say long-term rates are at low points too and could be higher in half a dozen years from now or whatever you want to imagine. But, we’re going to stay at the lower end of the yield curve and swap out to ensure that low cost, some portion for the next few years – an immediate number of years, let’s say.

Okay, great. And the last one, getting back to the industrial again, I mean, Formula One was only 800,000 so, if you just blew it away, you still would have done 68.6. So, you’re still assuming a sequential down-tick. And I also, is that conservative or are plastics getting better, or does that just assume some SARS effect, kind of slows the business. And what was your guidance for the industrial margin? I know, was it still 7.5 or did you bring that down a little bit?

We eased it down a little bit, just presuming that we’d stay at about the current level, 7.4, 7.5 percent for the balance of the year. And that arithmetic, given what happened in the first quarter, gets you to 6.8 percent for the year. But, let me go back to your comment about Formula One. Formula One, for the first half of the year, Cai, was almost $5 million. And in the quarter, it was $2.7 million. So, if that blows away, as you say, over a couple of quarters, it does have an impact. I mean, if we’ve got arithmetic straight, we’re pretty much presuming that the rest of the business continues at the current level.

Okay. But I mean, the plastics – my understanding is while you make good money on the Formula One, great money, and you also do well, my understanding is, for combat tank turrets, and you do well on the plastics [multiple speakers]. Okay, I think I get it. Thank you.

And there are no further questions.

Okay. Well, thank you all very much for joining us and we’ll talk again in 90 days.

Thank you. Ladies and gentlemen, this conference will be available for replay after 1:30 PM Eastern time today, through midnight Eastern time on Friday, May 2nd. You may access the AT&T executive playback service at any time, by dialing 1-800-475-6701 and entering the access code of 682999. Those numbers again, are 1-800-475-6701, and entering the access code of 682999. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.