諾斯洛普·格拉曼 (NOC) 2002 Q2 法說會逐字稿

Good morning.

My name is Judy.

I'm the conference facilitator.

I'd like to welcome everyone to the TRW second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session period.

If you would like to ask a question during this time, simply press star and then the No. 1 on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you Mr. Vargo.

You may begin your conference.

Good morning.

And welcome to TRW's second quarter conference call.

I'm Ron Vargo, vice president and treasurer TRW, responsible for investor relations.

Since our last earnings release in April, a number of significant events have transpired here at TRW.

In short, we've reached agreement to sell our aeronautical systems business and of course we've agreed to merge with Northrop Grumman.

And although reaching these agreements involved a significant amount of management time and participation, I'm happy to report that our operations have maintained their focus and we continue to deliver on our operating commitment.

Today Phil Odeen our chairman will begin the call, with comments on the second quarter operating highlights and key developments.

He will then discuss the business outlook and update the company's earnings guidance for 2002.

Bob Swan, our CFO will review the second quarter financial performance and provide some additional details on the 2002 outlook.

After his remarks, Phil will sum up and we'll open the lines for questions.

As usual we posted our slides relating to today's conference call on our web site at TRW.com/investor presentation.

You'll probably find these very useful in following along with the topics we're discussing.

We're also web casting this call and it can be accessed at the same web page.

Before we start, let me just remind you as you know that statements made during this call that are not historical facts may be forward-looking statements.

And information regarding important factors that could cause actual results to differ materially from forward-looking statements can be found in today's earnings release.

With that, I'll now hand it over to Phil Odeen.

Thank you for joining TRW on our call today.

I'll start with the familiar slide the TRW to enhance shareholder value.

Slide two.

Although today's discussion will focus on TRW's second quarter earnings, I want to begin by reviewing our value enhancement plan announced in mid-March of this year.

I'm sure you'll all remember that our plan to deliver on our commitment accelerate deleveraging and ultimately spin automotive to create two pure play business that will unlock shareholder value at the direction of our board we later announced a decision to pursue other strategic alternatives with several parties including Northrop.

Our efforts during the second quarter proved successful as we completed an agreement with Goodrich to sell aeronautical systems and an agreement to merge with Northrop Grumman.

During today's call we'll review the status of these agreements and discuss the operational performance of our continuing businesses.

We recognize the importance of continuing to deliver on our operating commitments for 2002.

In fact, we've exceeded these commitments again in the second quarter.

Slide three: Second quarter overview.

As you'll recall, the groundwork for 2002 performance was established in 2001, a year of significant change at TRW.

We changed several members of our board of directors.

We restructured, reduced our corporate staff and reorganized each of our business segments, including the consolidation of our automotive segment.

Internal business processes were all transformed by the company wide application of Six Sigma.

These changes are helping to drive our performance in 2002.

TRW entered 2002 with a customer focused performance driven culture that I'm happy to report has delivered sustainable earnings and improved cash flow over the past six months.

We've been able to deliver on this performance while we've pursued our value enhancement plan.

First let me focus on continuing operations.

We're confident that TRW's on the right track as earnings for the sixth quarter in a row exceeded consensus.

On a year over year comparative basis, our second quarter operating earnings from continuing operations increased by 72 percent.

And our operating per share from continuing operations improved by 69 percent.

On top of the approved profit numbers, we continue to do a great job of cash flow.

In the quarter our net debt was reduced by 5.3 an improvement of about 200 million at the end of the first quarter.

Last year we were break even for cash flow over the first six months.

This year our cash flow was approximately 180 million dollars positive.

Our earnings and cash performance the first two quarters gives us great confidence that we will have a strong year in 2002.

In a few minutes Bob will discuss the operating results that support this confidence.

Now let me talk about the business outlook as we remain positive on the improving market conditions.

In automotive we remain encouraged by the increased automotive production levels in North America.

As most experts predict production in 2001 will exceed the 2001 volume of 15.5 million light vehicles bias much as one million vehicles.

We're not quite this bullish as our assumption for North America is 16 million vehicles.

We do see a moderating influence however in Europe as production is predicted to be three to five percent below last year.

Even though European production is off from last year, production rates are expected to improve in the second half of this year.

The outlook for our systems and space electronics business continues to be promising we achieved 15 percent growth in the systems sales this quarter, while space electronics sales were down slightly, due principally to the discontinuance of the Astro link program.

We remain confident that our growth expectations for the year will be realized.

We received several new awards in the quarter that will support continued sales growth, such as the AEHF Satellite Program.

The Minuteman command in control upgrade and a systems integration role on the joint tactical radio system for the Army.

We also had several Homeland Security related wins.

We're also encouraged by the projected growth of the defense budget over seven percent per year through 2006.

With the emphasis on many technologies and arenas where we're leaders.

Let me add a few comments on the sale of aeronautical systems and our merger of Northrop.

On June 18th we announced an agreement to sell aeronautical systems to Goodrich for 1.5 billion dollars.

This represents a significant step in our debt reduction program as we expect net proceeds of 1.4 billion.

We remain confident the deal will close early in the fourth quarter.

As a result of the announced sale we now report aeronautical systems as a discontinued operation.

For the merger we announced between TRW and Northrop, TRW's shareholders will receive 60 dollars in value of Northrop stock.

Assuming Northrop stock price remains within 112 to 138 dollar collar.

The deal requires approval from the European U.S. regulatory agencies as well as shareholder approval by Northrop and TRW shareholders.

TRW and Northrop are proceeding with the anti-trust filing and neither TRW nor Northrop expect any problems associated with the approval.

The closing of this transaction is expected to be during the fourth quarter.

In summary a very positive quarter, as operating earnings from continuing operations increased 72 percent and cash flow allowed for additional debt reduction.

Strong quarter reflects the restructuring and performance enhancing initiatives we have implemented last year.

As a result the improving market trend and recent sales awards in all our businesses will support further growth and performance improvement throughout 2002 and beyond.

Reduced debt from the sale of aeronautical systems and the outcome of the Northrop deal positioned TRW shareholders for a bright future.

With that now I'll represent Bob Swan our CFO.

Bob over to you.

Thanks I plan to cover three items.

First some general housekeeping, secondly the results of Q-2 in a bit more detail, and third provide an update on our out look for the total year.

First, I'll discuss housekeeping issues that relate to how we are reporting our numbers.

As you know, we adopted FAS 142 at the beginning of the first quarter eliminating the amortization of goodwill and certain intangibles.

Therefore, all the comparisons in our discussion this morning and in our press release are adjusted for this change so they're comparable on an apples-to-apples basis.

During the quarter, we announced an agreement to sale our aeronauticals systems business to the Goodrich Company.

Because of this agreement the aeronautical system segment results are reported as discontinued operations and will be discussed separately from continuing operations.

As a point of reference, the inclusion of aeronautical systems with continuing ops would have increased our operating earnings by an additional nine cents per share, resulting in a total of $1.14 earnings per share, instead of the $1.05 EPS we're reporting today.

Let me go to slide 4, Q-2 sales from continuing operations versus prior year.

I'll walk you through the second quarter results from continuing ops, excluding unusual.

First, the top line.

Total sales in the quarter were 4.3 billion dollars an increase of seven percent over the second quarter of 2001.

Automotive sales were up six percent for an increase of 162 million.

An increase in the North American production volume and the stronger Euro more than offset a decline in European vehicle production, a continuing effect of pricing pressures and the negative impact on businesses divested in 2001.

Sales for our defense businesses increased by eight percent or 100 million dollars.

Systems had a great quarter, with double digit top line growth building good momentum going into the second half.

The top line was up 15 percent due to increased sales in core programs such as our ITBM contract and several missile defense contracts.

We also realized gains from new contracts such as joint tactical radio system.

Space and electronics sales declined by four percent in the quarter, due primarily to the discontinuation of the Astro link program in late 2001.

Offsetting the decline was sales growth in the ADHF Satellite Program the airborne laser program and production of avionics modules.

Excluding the effect of the Astro link contract, the states and electronics sale would also have been up double digit over the prior year period.

On slide five I'm going to walk you through Q-2 EPS from continuing ops versus the prior year.

These results exclude unusual and discontinued ops compared to the second quarter of 2001.

Operating earnings as Bill mentioned were up 72 percent to 133 million, versus 79 million last year.

Operating EPS increased by 69 percent to a dollar five versus 62 cents in the previous year's second quarter.

A 43 per share increase.

Let me review the components of the increase.

First, automotive contributed an additional 16 cents per share as profits were up 22 percent over the second quarter of last year.

This increase was due to cost reductions associated with restructuring programs initiated last year.

The increase in North American production volumes in the absence of the products recall in the second quarter of 2001.

Offsetting these increases were the decline in European production volumes, product mix, pricing pressures and the absence of profit of divested business.

Second, defense profits contributed an additional six cents per share as profits improved 13 percent.

This improvement was due to an increased level of sales in the systems business and lower investments in the commercialization of defense technologies.

Partially offset by completed programs, particularly the profit on the Astro link contract.

Third, due to our relentless focus on debt reduction, and the effect of lower interest rates, our financing cost declined by 14 percent, worth an additional nine cents per share versus last year.

Fourth, corporate headquarter costs were down over 40 percent, contributing an additional six cents per share as a result of last year's restructuring actions and continued tight cost controls.

And finally the increase level of net employee benefits income added six cents to our EPS total.

This improvement net employee benefits income was due to the effect of the strengthening british pound and its impact on our UK pension assets and an annual adjustment (inaudible) from the assumptions used for actuarial valuation algorithm.

Slide six.

Q-2 GAAP earnings.

My next subject is a reconciliation of our operating earnings before unusuals and discontinued operations.

To our reported GAAP net earnings.

As indicated earlier, operating earnings from continuing operations excluding unusuals were 133 million dollars, or a dollar five per share.

Q-2 GAAP net earnings were a loss of 559 million dollars, or $4.38 per share.

The two reconciling items were unusuals in the quarter.

And the reclassification of aeronautical systems to discontinued operations.

For the second quarter, the unusual items resulted in a net loss of seven cents per share.

The net includes a charge of 14 cents per share incurred from fees associated with Northrop's exchange offer and a charge of two cents per share from automotive restructuring costs.

These costs were partially offset by a gain of nine cents per share from the sale of real estate assets in the quarter.

The primary impact on our operating earnings is due to the announced sale of aeronautical and the result of reclassification of aeronautical and discontinued ops generating a loss of 683 million dollars, or $5.36 per share.

On slide seven I'll walk you through a bit more detail on the drivers of the loss per share discontinued ops.

Phil already talked about the terms of the announced deal.

I'll focus on the associated accounting treatment in the second quarter.

We anticipate the net proceeds from the sale after income taxes to be approximately 1.4 billion.

These proceeds will be offset by the book value of the business.

The book value of 1.9 billion includes 750 million dollars of goodwill and 250 million dollars adjusting cumulative translation effects, previously booked into equity the currently reported as P sub B net asset position.

Additionally, a second part of the sale impact results, relates to the restatement of pension assumptions.

This noncash loss of 144 million dollars reflects the process to adjust valuation assumptions to actuals at the time of the announced sale.

In addition there are transfer cost fees associated with the sale.

These costs were partially offset by the aeronautical systems operating earnings in the quarter.

In total, the impact of the sale and the classification of aeronautical systems is a discontinued ops is an after tax loss of 672 million dollars.

A few other comments on the quarter.

Debt reduction remains a key initiative in focus for our operating teams.

For the second quarter, we generated approximately 200 million in cash, reducing our net debt position of 5.3 billion dollars, excluding the 350 million dollars of securitized receivables.

Also during the quarter we retired a maturing 400 million debt issue with commercial paper.

Of the debt outstanding approximately 20 percent is in floating rate instruments such as commercial paper and floating rate loans.

The weighted average interest rate on our total debt outstanding is approximately 7.3 percent.

Maintaining investment grade rating has always been extremely important to us.

During the quarter we remain that rate and access to the commercial paper market.

Slide eight I'm going to talk about guidance update for 2002.

As Phil mentioned our business out look remains very positive.

Since our last earnings guidance update on June 14th, we've announced the sale of aeronautical systems, resulting in classification to discontinued op.

Obviously this change in classification impacts our continuing operations earnings outlook.

Our last full year 2002 guidance was $3.70 to $3.75 for operating earnings per share before unusuals.

Our new outlook is lower due to two major drivers.

The first one is the estimated 2002 net impact of moving aeronautical systems from an operating segment to discontinued operations.

This change results in a net reduction of approximately 35 cents per share.

The components of this change are the negative impacts from removing aeronautical systems segment profit as offset by a reduction in interest expense from the anticipated debt repayment in the fourth quarter.

And the change in the share count.

The second driver is the positive effect of improved net employee benefits income, up an additional ten cents per share.

The improvement as related to the strengthening of the british pound and the positive effect of the annual act rare al valuation of the pension income.

Therefore our new guidance is $3.45 to $3.50 per share excluding unusuals and discontinued operations.

For the third quarter, our guidance is 80 cents to 85 cents per share.

Let me now handled it over to Phil for the summary then we'll take your questions.

Thanks, Bob.

The final summary chart, slide nine.

As we reported in Q-1, again in quarter two our continuing operation delivered strong top line growth, improved earnings and cash flow.

Based on our performance in the classification of discontinued operations, we're now revising our earnings guidance for the full year to $3.45 to $3.50.

And the third quarter of 80 to 85 cents per share.

We also received several key awards during the quarter that will help drive our growth for the rest of this year and beyond.

Lastly, we signed an agreement to sell aeronautical systems, reached a merger agreement with Northrop on friendly terms.

All things considered, this quarter's accomplishments were lined with our original intention and my primary focus over the past five months to maximize TRW's shareholder value.

We're now ready for questions, operator.

Do you have a question?

At this time I would like to remind everyone if you have a question at this time, please press star and then the number one on your telephone key pad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Steve binder with Bear Sterns.

Good morning.

Can you perhaps give us an update on space and electronics on some of the equity investments, as well as the other investments you're making right now, what do they amount to in the quarter?

We'll be happy to do that.

Bob do you want to briefly touch on that?

As I indicated, Steve, some of the improvement in profits in space and electronics in the quarter is a result of lower expenditures related to commercializing our technologies.

The dollars we're spending today are really in two primary areas.

The (inaudible) business or Indian (Phosphide) technology and our commercial laser business.

And both of those businesses obviously the telecom sector continues to move to the right.

And as a result we curtailed our expenditures, really focusing on continuing to develop our technology and really challenging every other Nick col we'd be spending in those veins.

So we continue to drive down costs in those two primary areas.

Those really, since last year those are really where we've been focusing our commercialized technology dollars.

We've kind of stripped away any other expenditures.

Were you operating at kind of a preinvestment, about nine percent or so in the quarter?

I think that's probably a little bit rich.

We don't break out the specific expenditures of commercializing technologies.

But I think that would be a little rich for core profitability.

And when you look at systems and space electronics in the quarter, any red or yellow programs that come to mind at this point in time?

Anything that's kind of a cost issue?

No, I think our programs are in good shape.

We've obviously, I spent fair amount of time at the pentagon and there have been no issues that came to the for and I believe we're in good shape.

Thanks very much.

One other thing.

Phil, you talked about some of the campaigns right now, especially in space and electronics program and some of the others and the status of them as well as systems.

Well, I think the big - near term decision is in end (POES) which we expect by the end of August.

I met with the senior leadership of (Noah) last week.

They assured us they're on track to make a decision by that time and to very rapidly start the program on early September, as promised.

They're fully behind that program.

Obviously we're very hopeful, but there are two competitors there.

We're competing head on with Lockheed Martin.

We feel we've got a great team, great proposal.

The orals went well.

We have our fingers crossed.

We expect the decision to be made on schedule.

The other big one in that area is NGST.

That's also expected to be decided sometime this summer more likely early fall.

Again we're competing head to head with Lockheed we didn't feel good about it, but we'll have a result here within the next couple of months, I believe.

Thanks very much

Your next question comes from John (Banussti) with JP Morgan.

Your line is open.

Can you hear me?

I'm sorry about that.

Just a couple quick questions.

First, pretty simple one here.

I was looking at the tax rate for the quarter it seemed to be a little bit higher than traditionally it's been.

I'm just wondering if that has anything to do with the discontinued operations.

Is the current quarter's tax rate a good run rate going forward or is that just a little bit of noise in this quarter?

It is a result of the discontinued ops.

It's a little bit higher than the continued run rate going forward, because we had to kind of a cumulative catch up for first quarter.

I think it's about a point high as you look going forward.

Great.

Also corporate expense came down four million quarter over quarter.

Obviously there's cost cutting efforts there but I'm sure some of that is also from the discontinued operations.

Can you flush out where that four million decline came from?

I hope it came down more than four million.

Quarter over quarter.

Q-1 to Q-2.

I'm sorry.

The restructuring, that's really restructuring announcements we announced last year.

The people are now gradually at the end of last year and in the first quarter continuing the second quarter.

And in addition to that we continued to scrutinize our cost controls here at corporate headquarters.

So that's not really affected in any way by the sale of aeronautical.

Okay.

So continue sort of the trending down that we would have expected before this, but just kind of setting the bar a little bit lower?

Yeah, and I think you'll see it kind of levelling off as we go forward for the rest of the year.

You gave us some guidance there on the pension income.

Obviously with the markets doing what they're doing, can you just kind of go into what you might look at for an impact in 2003 to that line item?

You know, I don't have a clue, honestly.

Our long-term after return rate is above 9 for the U.S. and above 8 for the UK.

You can assume that the asset return for our portfolio are not nearly at that level they're more in line with the market as of that date.

I'm sure it will turn around and there will be no impact in 2003 but other than that I don't know much more.

And one last quick question.

You described the 35 cent impact for the remainder of the year from the discontinued operations.

I just want to clarify, that does not include the first quarter, right, the first quarter is going to continue to include aeronautical systems.

So that will be - that will still be included in year-end numbers?

And that's not included in this 35 cent?

Actually the 35 cents is the full year effect.

Because we basically have to restate for the year assuming aeronautical is out of the results.

I just wanted to clarify that.

Thank you very much

Next question comes from Drew Newton with Dresner Kleinwort.

I had three questions here.

First one is are we saying net price erosion in the second quarter was only two percent.

And now I feel surprised.

Have you seen these kind of numbers on the safety side?

We don't usually break out our price erosion on a product line by product line basis.

But what we did say is overall for the automotive business pricing pressures continue as they always have and the team has managed, the automotive team has managed them very effectively.

But prices are down year over year.

You're not seeing any break in - no break in patterns or anything like that?

No.

It was surprising to me because that seemed like a break for them T all right.

The second question is just because I'm going to be a little lazy here in the first quarter what was the EPS impact on the aerospace, aeronautical systems?

You are lazy.

Actually, our segment profit in the first quarter was about 17 million dollars, I believe, aeronautical systems on a pretax basis.

So I assume about eight cents a share, I think.

But you ought ta put pen to paper and figure that out.

The last question is I don't know who is the person to ask this but any date on the automotive timetable?

Well, we continue to pursue our plan.

There's an independent company that's spin off automotive.

So we have filed our S1 and filed comments with the SEC to their response and we continue to pursue the tax plan that we've talked about on prior calls.

And Northrop has indicated they will evaluate other alternatives including a sale of automotive.

And I think they're best off to answer that aspect.

We are working closely with them during all this but you better ask them that question.

Do you want to add something on that?

To clarify the first quarter was nine cents a share

Again if you have a question at this time please press star and then the number 1 on your telephone key pad.

Your next question comes from Andrew Casey with Prudential Securities.

Good morning.

Just a couple of clarifying questions.

On the aerospace, should we just look at operating impact and no impact on pension at all?

I'm sorry, Andy.

Try it again.

The discontinued operations formerly known as aeronautical systems, should we just look at the impact that you talk about, the 35 cents, just take away the operating earnings assumption within that segment, or is there any impact on the employee net benefits line?

I think there's really kind of three elements that are driving that 35 cents.

First, operating earnings.

And that's going to basically - if you use consensus, you're going to get to about 48 to 50 cents a share that goes away when we restate the entire year.

Secondly, reduced interest costs, the billion four proceeds that we use to pay down debt and lower associated expense that we anticipate from that.

And then third effect is really, is a result of the large loss on a GAAP basis.

We will use on our total year EPS, we're going to use basic shares in our calculation of EPS again.

Because total year GAAP earnings will be at a loss as a result of the significant loss from that transaction.

Therefore, you're going to have a lower share count rather than a fully diluted which is going to partially offset that 50 cents from operation.

Those are really three drivers.

Okay.

Thanks.

And then the last one, just really a housekeeping, can you help us quantify the FX translation benefit in the quarter, if there is one.

Where we're primarily affected is in as a result of the pound on our UK pension asset.

That's what the biggest effect was.

While we have some translation effect of a strengthening Euro the biggest one was the pound and it was nominal few million bucks in the aggregate.

Thanks a lot

Your next question comes from Chris Manuel with McDonald Investments.

Good afternoon, guys.

Just a couple quick questions for you.

I guess you can't provide a lot of update on the timing for potential auto spin and that kind of stuff, but do you still have plans there to bring in some outside equity for first part.

The second part is what are your plans for leadership of that unit?

Will that be headed by John plant or do you anticipate bringing some outside, someone in from the outside there?

Our plan is that John plant will be the CEO of that organization.

He's doing a great job.

And we have hopefully made it clear that he'll be the leader of that organization as we go forward.

We are as Bob said earlier we're proceeding with the auto spin.

Including evaluating sponsor equity, et cetera.

The final decision obviously will be made by Northrop assuming the merger agreement goes forward.

But we are moving ahead with the plan as you understood it in the past.

Okay.

Can you give us an update on what you anticipate capital expenditures or depreciation, that sort of stuff for the year, with the departure of the aeronautical business?

Will it change things?

Yes, it will.

I think our prior guidance on cap ex for the total year was around 650 million dollars.

A relatively small portion of that was associated with aeronautical systems.

So I think in the 50 million dollar arena.

So I think for the year we'll probably be in the 600 million dollar area for cap ex.

And depreciation?

I don't know.

I'll have to get back to you.

Okay.

Then the last question I wanted to ask, and I apologize if you addressed this earlier.

I jumped on it a little late.

But looking at your deal with Northrop, do you anticipate any anti-trust concerns?

I mean I realize you're trading outside the color for the deal but you have a 60 dollar deal in place your stock is trading about 53, 54 bucks, as you look at this what do you see as the risk to getting this deal done.

We see the risk as very slight.

And I believe Northrop would say the same thing.

We are actively meeting with justice and the pentagon people.

We're providing all the information that they requested.

They are conducting their evaluation.

We do not see any significant issues.

I'm sure there will be minor points we'll have to address, but we don't see any serious risk for the deal.

Thank you.

This concludes the question and answer session portion of today's call.

I will now turn the call back over to Mr. Vargo for closing comments.

Again, thank you all for taking part in the earnings call.

As I said earlier, we feel very good about the second quarter.

Solid top line growth.

Very strong growth in operating earnings.

And we anticipate continued strong performance for the rest of the year.

Thank you for joining us and we'll be talking to you again in another three months.

This concludes today's conference call.

You may disconnect at this time.