First Quarter Conference Call Fiscal 2004 Archive
02 / 02 / 2004Highlights
INTRODUCTION FOR CONFERENCE CALLAircraft Group Q1’04Space & Missiles Q1’04Industrial Segment Q1’04SummaryAttachments
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The refurbishment work on the Space Shuttle has slowed down. Last year, in the first quarter, we invoiced $2.7 million – this year $1.6 million. At this time last year, we were still refurbishing solid rocket booster actuators.
The level of activity in the launch vehicle business was pretty consistent this year to last, and actually running ahead of our forecast for this year.
Missile defense is down this year, with less activity on the National Missile Defense Programs. Some of that difference is made up by the build-up of Minuteman refurbishment in the strategic missile category. But the big increase in activity this quarter is in tactical missiles. At $6.9 million, we had the biggest quarter for tactical missiles that we’ve had in a long time and it’s spread across a number of programs, including Maverick, Hellfire, TOW, VT-1 and the Vertical Launch ASROC. All in all, sales of tactical missile hardware in the quarter were almost double what they were a year ago. On the other hand, it’s a level we don’t expect to sustain. Our forecast for the year for tactical missiles is about $22 million.
For the Space and Missiles Segment, we’re right on track in terms of production activity. There are some signs, though, that an upturn could be at hand. We had a very strong booking quarter and are optimistic that the trend will continue. Our 12-month backlog has been building over the last three quarters.
That’s the good news. But the gods still don’t seem to be smiling on this segment. We had predicted, in terms of operating margins, that we would simply break even in fiscal ‘04. We made that projection as a result of our experience in the previous year, operating at the current relatively-low sales levels. For the quarter, we would have been on the slightly positive side of that projection were it not for one unfortunate turn of events.
Towards the end of fiscal ’02, we acquired a very small product line of space vehicle control valves from the Perkin-Elmer Corporation. These are solenoid-operated thruster valves that generally meter the flow of hydrazine into attitude control thrusters on spacecraft and satellites. In the course of transferring the production from the Perkin-Elmer facilities to our own, we recognized a few opportunities to make manufacturing changes that would make the production process more reliable and, in some cases, reduce the cost of manufacture. One of these attempts at an improvement change has backfired. As a result of a change in manufacturing process, we moved from the middle of a tolerance range on a particular set of parts to the low end and, in fact, about 20% of the parts in question are out of specification on the small side. The result is an inadequate press fit and the potential for unreliable operation. Incidentally, the part in question is less than 1/4” in diameter and the dimensions are below the tolerance in the worst case by 1½ ten thousandths of an inch. The frustrating aspect is that the only way to discover whether a particular valve has the fault is to take it apart. There are 508 valves that have the potential problem. Of about 200 already disassembled, the problem actually exists in one. Nevertheless, all of them have to be repaired and replaced. The impact on this quarter is about $230K already spent to fix the problem and an additional loss reserve of about $1.8 million to cover the additional expense to complete this recall and replacement.
Many of these valves were already installed in satellites, but the test procedures identified the defect before any of them were launched. Nevertheless, the valves have to be removed and replaced. It’s been an aggravating and expensive exercise for a number of our customers. On the other hand, most of our customers recognize that, on very rare occasions, this sort of thing can happen in the space business and, to a degree, they measure the quality of a supplier based on how well we respond in a situation like this. I can tell you that the team of people working to recover from this problem are doing an extraordinary job and, in a number of cases, our customers will recognize that it was an unfortunate error that came about in an attempt to make an improvement. Once it was recognized, our Company has done everything possible to minimize the impact on each of our customers.
As a result of this problem, the margins in Space & Missiles continue in negative territory with an $800,000 loss for this quarter. On the positive side, without these recall costs, our Space margins would have been about $1.2 million in the quarter – perhaps the first light at the end of the tunnel.
Industrial sales of just over $70 million were up 11%, or $7 million, from the same quarter a year ago. In about half of our Industrial sales, we had the benefit of a very strong Euro. It averaged about $1.19 in the quarter. In addition, we saw some real sales growth in most of our major product lines.
Plastics, our largest product line, was just under $15 million for the quarter, up 19% from a year ago. About one-third of this business was in Asia which was particularly strong in the quarter.
The level of activity in the launch vehicle business was pretty consistent this year to last, and actually running ahead of our forecast for this year.
Missile defense is down this year, with less activity on the National Missile Defense Programs. Some of that difference is made up by the build-up of Minuteman refurbishment in the strategic missile category. But the big increase in activity this quarter is in tactical missiles. At $6.9 million, we had the biggest quarter for tactical missiles that we’ve had in a long time and it’s spread across a number of programs, including Maverick, Hellfire, TOW, VT-1 and the Vertical Launch ASROC. All in all, sales of tactical missile hardware in the quarter were almost double what they were a year ago. On the other hand, it’s a level we don’t expect to sustain. Our forecast for the year for tactical missiles is about $22 million.
For the Space and Missiles Segment, we’re right on track in terms of production activity. There are some signs, though, that an upturn could be at hand. We had a very strong booking quarter and are optimistic that the trend will continue. Our 12-month backlog has been building over the last three quarters.
That’s the good news. But the gods still don’t seem to be smiling on this segment. We had predicted, in terms of operating margins, that we would simply break even in fiscal ‘04. We made that projection as a result of our experience in the previous year, operating at the current relatively-low sales levels. For the quarter, we would have been on the slightly positive side of that projection were it not for one unfortunate turn of events.
Towards the end of fiscal ’02, we acquired a very small product line of space vehicle control valves from the Perkin-Elmer Corporation. These are solenoid-operated thruster valves that generally meter the flow of hydrazine into attitude control thrusters on spacecraft and satellites. In the course of transferring the production from the Perkin-Elmer facilities to our own, we recognized a few opportunities to make manufacturing changes that would make the production process more reliable and, in some cases, reduce the cost of manufacture. One of these attempts at an improvement change has backfired. As a result of a change in manufacturing process, we moved from the middle of a tolerance range on a particular set of parts to the low end and, in fact, about 20% of the parts in question are out of specification on the small side. The result is an inadequate press fit and the potential for unreliable operation. Incidentally, the part in question is less than 1/4” in diameter and the dimensions are below the tolerance in the worst case by 1½ ten thousandths of an inch. The frustrating aspect is that the only way to discover whether a particular valve has the fault is to take it apart. There are 508 valves that have the potential problem. Of about 200 already disassembled, the problem actually exists in one. Nevertheless, all of them have to be repaired and replaced. The impact on this quarter is about $230K already spent to fix the problem and an additional loss reserve of about $1.8 million to cover the additional expense to complete this recall and replacement.
Many of these valves were already installed in satellites, but the test procedures identified the defect before any of them were launched. Nevertheless, the valves have to be removed and replaced. It’s been an aggravating and expensive exercise for a number of our customers. On the other hand, most of our customers recognize that, on very rare occasions, this sort of thing can happen in the space business and, to a degree, they measure the quality of a supplier based on how well we respond in a situation like this. I can tell you that the team of people working to recover from this problem are doing an extraordinary job and, in a number of cases, our customers will recognize that it was an unfortunate error that came about in an attempt to make an improvement. Once it was recognized, our Company has done everything possible to minimize the impact on each of our customers.
As a result of this problem, the margins in Space & Missiles continue in negative territory with an $800,000 loss for this quarter. On the positive side, without these recall costs, our Space margins would have been about $1.2 million in the quarter – perhaps the first light at the end of the tunnel.
Industrial Segment Q1’04
Industrial sales of just over $70 million were up 11%, or $7 million, from the same quarter a year ago. In about half of our Industrial sales, we had the benefit of a very strong Euro. It averaged about $1.19 in the quarter. In addition, we saw some real sales growth in most of our major product lines.
Plastics, our largest product line, was just under $15 million for the quarter, up 19% from a year ago. About one-third of this business was in Asia which was particularly strong in the quarter.
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