Curtiss-Wright Corp (CW) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Curtiss-Wright 2005 First Quarter Earnings Conference Call. All lines have been placed in a listen only mode and the call will be open for questions following the presentation.

At this time, I will turn the call over to your host Mr. Marty Benante, Chairman and CEO of Curtiss-Wright. Sir, the floor is yours.

Thank you very much Christine and good morning everyone. Welcome to our 2005 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 Marti. If you do not have a copy of the earnings release which was issued yesterday please call Ms. Debra Torrey at 973-597-4712 and she will be happy to email or fax a copy to you and add you to the Curtiss-Wright distribution list for all future press releases.

Before we begin we will be making certain "forward-looking statements" on today's call such as statements about the company's competence and strategies or expectations about the results of operations, future contracts or market opportunities. While we believe that our operating plans are based on reasonable assumptions we cannot guarantee that we will meet any expectations that might arise from these "forward-looking statements" for their underlying assumptions. Such "forward-looking statements" are made pursuant to the "Safe Harbor" provision of the Security Reform Act of 1995 and involves risks and uncertainties that may produce results or achievements that are materially different from those expresses or implied during this discussion. Such risks and uncertainties include those factors that generally affect the business of aerospace, defense, electronics, marine and industrial companies. Please refer to our SEC filings under the Securities and Exchange Act of 1934 as amended for more thorough discussion of risks and uncertainties as well as further information relating to our business.

For our agenda today Marti will open our discussion with an overview of Curtiss-Wright's First Quarter 2005 Operating Performance then I will review our segment performance and financial position and finally Marti will conclude our discussion with an update on our recapitalization process and our current 2005 guidance. After that, we will open the call for questions. Marti.

Thank you Glenn. I'm pleased to report sales of $258 million during the first quarter of 2005 an increase of 20% over the first quarter of 2004 and organic sales growth of 4%. Our organic sales growth was driven by a metal treatment and emulsion control segments which achieved organic sales growth of 13% and 5% respectively compared to the prior year period.

In our flow control segment organic sales declines 1% primarily due to a decrease in Navy shipments in the first quarter of 2005 as compared to 2004 resulting from the timing of customer driven delivery schedules. This is not indicative of a decline in our Navy business. Variation and the timing of revenue recognition is to be expected in the production and delivery of highly customized low volume products.

Our operating income of $25 million in the first quarter of 2005 decreased slightly from the first quarter of 2004.

Net earnings of $14.5 million or $0.67 per diluted share for the first quarter of 2005 decreased 7% from $15.6 million or $0.74 per diluted share in the first quarter of 2004.

These declines resulted from several factors. As I just mentioned our military products are typically low volume, and dependent on customer driven timing of program procurement contracts. Today many of our military programs are in the early stages of the procurement cycle and we expect to see a ramp up in the second half of the year with improved margins.

In addition, we recently announced several developmental contracts that have begun but generally provide lower margins than production contracts. Development programs such as the electromagnetic gun, advanced arresting gear, electromagnetic programs, 767 tanker and Boeing 787s should provide us significant opportunities in the future.

Another factor impacting our performance is our recent acquisitions. As you know, we acquired 11 companies in 2004 and one so far in 2005. Acquisitions are subject to higher amortization costs and generally produce lower margins in our base business which will cause a short-term drag in our operating margins.

While these factors will continue to have an impact throughout 2005, we want to emphasize that overall our acquisitions are meeting our financial criteria and are on track.

Curtiss-Wright also experienced a decline in operating margins from our embedded computer division where we integrating our embedded computer companies in order to eliminate duplication of the functions, establish centers of excellence for manufacturing and rationalizing and retraining our sales force.

These efforts are expected to produce close reduction in the second half of the year of approximately $3.0 million which result in improved margins in the future.

We achieved shown performance in our global shop peening business in both aerospace and industrial markets and solid growth in our commercial markets including power generation, oil and gas, and general industry markets which partially offset these declines.

A number of you have asked us about our outlook of the automotive market. Let me take a moment to address that. The automotive market represents 7% of our overall business and 31% of our metal treatment segment. The slow downs that GM and Ford were anticipated in our 2005 guidance.

Although the debts and expense of a GM slow down is proving to be more expensive than originally expected.

While momentum in the passenger truck build rates are expected to slow down for the balance of the year a clear driver for the metal treatment business is specification of our processes our engines and transmission programs.

As the OEMs have designed more highly stressed parts many new programs that require our shop peening, coding and heat treating processes will enable us to offset the lower sales from lower automobile grids.

Finally, let me say that we're very optimistic about the balance of the year. Our backlog is at a new record level of 748 million up 19% for 2004 year end and our new orders were strong in both the first quarter of 2005 and first quarter of last year providing us with strong momentum for the remainder of the year.

As indicated on the 2004 year end call we anticipated a light first quarter in 2005 with each quarter increasing sequentially and the fourth quarter being the strongest.

We are confident that our business are performing on track, but I'll first turn the call over to Glenn to discuss our segment performance and our current financial position. Glenn.

Thank you Marti. Excuse me. In our flow control segment sales for the first quarter of 2005 of $109 million were up 22% over the prior year quarter primarily due to contributions from the 2004 acquisition.

Our base business had a decline of 1% from the comparable prior year quarter due to lower sales to the U.S. Navy resulting from customer driven delivery schedules. This was partially offset by the higher sales to the oil and gas and commercial power generation markets.

Operating income for the flow control segment decreased 1% compared to the prior year due to the lower sales volume to U.S. Navy decreased higher margin spare sales to the oil and gas market. Increased sales of generic electronics products and increased development programs both of which generate lower margins.

In our motion control segment sales of $100 million in the first quarter 2005 increased 20% over last year principally due to the contributions from our 2004 and 2005 acquisitions.

Organic sales growth of 5% was generated by higher sales to the commercial aerospace market. Integrated sensing products to the industrial market and electronic products for military helicopters and mobile gun systems.

Lower sales of F16 spares and the completion in 2004 of the tilting train system program in Europe partially offset these increases.

Operating income for our motion control segment decreased 23% from the prior year period. The decline resulted from decreased higher margin sales such as the aforementioned F16 spares and the tilting train program and new lower margin development contracts such as the Boeing 67 tanker program.

In addition, this segment incurred business integration costs primarily in the embedded computing group which are anticipated to reduce costs and improve profitability in the future.

In our metal treatment segment sales for the first quarter of 2005 of $49 million increased 16% over 2004.

Organic growth of 13% was driven by higher global shop peening revenues in the aerospace and industrial markets.

Operating income increased 19% over the prior year primarily as a result of the higher sales volume.

Now I will review our liquidity and financial position.

During the first quarter of 2005 free cash flow defined as cash flow from operations less capital expenditures was a negative $14 million in the first quarter primarily due to higher receivables. Our cash flow is typically low in the first quarter due to the high level of cash expenditures.

In addition our sales for the quarter were heavily weighted to March. Some customer payments were delayed at their request and collected in early April and some of our milestone billings were delayed pending testing approvals all of which negatively impact our free cash flow in the first quarter.

Depreciation and amortization was approximately $11 million and capital expenditures were approximately $8.0 million.

Our balance sheet remains strong with working capital of $274 million and total debt outstanding of $420 million as of March 31, 2005 for a total debt to both capitalization of 42%.

I will now turn the call back over to Marti to provide an update on our recapitalization process and our 2005 full year guidance. Marti.

Thank you Glenn. In addition to focusing on strong fundamentals we continue to work toward the recapitalization of Curtiss-Wright's key class stocks. In order to simplify the capital structure and enhance liquidity for all of our shareholders. We announced in March that IRS issued a supplemental ruling that will permit Curtiss-Wright to go forward with its proposed consolidation of common and Class B shares into a single class of common stock. The recapitalization proposal still requires the majority vote of both classes of stock acting as a single class and will be presented at the upcoming annual meeting schedule for May 19, 2005.

If we receive shareholder approval the recapitalization would result in a one for one exchange of Class B share and common shares eliminating the Class B shares entirely. The transaction would be complete approximately five days after receiving shareholder approval at which time all the outstanding shares will trade under a single ticker CW.

Finally, I'd like to reaffirm our full year 2005 guidance. We anticipate total revenues in 2005 to be in the range of one billion 50 million to one billion one hundred million an increase between 10 and 15% over 2004.

We anticipate operating income in a range of $130 to $138 million which is approximately a 15-20% increase over 2004.

And we expect earnings per share between $3.24 and $3.45 per diluted share which would approximate an increase of 10-15% over our 2004 reported results excluding $0.16 of non-recurring tax benefits reported in 2004.

Our guidance - EPS guidance assumes an average of 22 million shares outstanding for the year 2005. Our guidance also did not include any acquisitions for 2005.

We look forward to continuing to generate solid profitable growth in 2005 and to provide our investors with superior returns.

At this time, I'd like to open up the conference call for questions.

[Operator Instructions]

Your first question comes from Jay Hatani (ph) of SG Cowan. Please proceed.

Good morning Marti, good morning Glenn.

How you doing?

Hi Jay.

Could you just talk about the profit contribution from the acquired revenues. I know in the press release it was 100,000 on essentially I guess $35-$36 million of acquired revenue. That seems like a pretty slim contribution even given consideration of what might be lower margins at the outset plus-

That was incremental contribution. It wasn't a total contribution. From 2005 compared to 2004. I'll give you a little bit of flavor. The acquisitions represented about 19% of our sales and the operating income was only about 3-4%. The reason why Jay is that a lot of our acquisitions in 2004 were embedded computers and if you look at embedded computers there's normally a 6-7 month lead time and we're the largest suppliers of embedded computers.

We have about $200 million worth of sales of which $180 million is embedded computers and the government normally will order their embedded computers at the end of last year and the beginning of this year so what happens is you don't get a lot of shipments out of those companies. They normally have very low shipments and are not that profitable.

You have a lot of fixed costs that you're not really covering by your shipments and they tend to as time goes on and you're on a as shipment basis and you start shipping them out in the third and fourth quarters that's when those profitabilities come up so you'll see the acquisition profitability as well as the profitability associated with motion control where embedded computers are 40% of their business will also increase and really move forward in the third and fourth quarter.

Let me follow on that in the embedded area. Can you quantify the expense that our incurred in the quarter regarding the consolidation embedding and I guess the question ultimately drives to how should I think about that in terms of impact to motions, margins versus this issue of 3% contribution income and 19% of sales in the embedded area?

It's not -- the 19% weren't all of our acquisitions. I'm saying that was predominantly in the acquisitions. Let me first start out by talking a little bit about the integration of our sensor group and then I'll go and follow up on the embedded computers.

When we first purchased Penny & Giles, which is the main sensor group that we have and that's about $120 million of our sales this year, they were in single-digits. We have been integrating those companies over the last 1.5 years and we went from single-digit return operating income to a low teens. We eliminated a plant in England and we are currently doing the same integration plan in the United States and which we already eliminated a company in Long Island. So we are now integrating that business, improving the margins as it goes forward. We're doing the same thing in embedded computers.

Our learning curves from -- or now what we're doing is we are reducing the amount of duplicate functions we have in our six companies. We are establishing centers of excellence in manufacturing. Therefore, some of the boards that were produced at one of the six companies are now being consolidated and pushed through one manufacturing area and there's some learning curves associated with that. We've also rationalized our sales group and retrained it. So we think that we spent approximately $750,000 this quarter in order to initiate that integration. But we've also identified about $3 million of cost reductions that will be permanent cost reductions forever.

And as far as relating it to our operating margins, we're continuing to stay on the operating margins that we gave in the guidance for Motion Control, which is between 11.5 and 12%.

What would the -- what expense are you expecting going forward as we think about the rest of the year in Motion?

We don't -- we basically have done a lot of the integration. There'll still be some learning curves. I don't think that it's going to be anything really to talk about. Most of it has already been done, so I think you'll start to see as the shipments pick up in that area -- Motion Control, when you look at their sales, they've only shipped out 18% of their defense volume in the first quarter which shows you how little military business, and also embedded computers, they've actually shipped. So we will gain momentum beginning that third and fourth quarter and you will see those margins pick up.

Okay. You talked about in the press release military programs that are in their early stage with a ramp in the second half. What are they and what is happening that they're picking up in the second half? What programs are they?

Most of them are valve shipments to the Navy. There was less valve shipments this quarter. It impacted our operating margins for about $1.5 million and those will be picking up.

The other thing is that we had a nice spares contribution last year in the first quarter, particularly in the F-16. And unlike last year, this year we will have those same spare sales in the fourth quarter of this year. And I think that's what you're going to see a lot of the defense contractors where you can't find the spares. They don't fall into the quarters where people would like them to, but it will tend to make the quarters variable based on when those spares will appear.

Okay. One last question and then I'll get back in line. Can you quantify the percent of your revenues in the quarter that were on a cost plus or a development type contract versus a production contract and how that has changed versus, say, last year's quarter?

We don't really have that as far as cost pluses are concerned. Let me just say one thing, Jay, and then I think it's good for us to carry on with the conversation. When you take a look at our quarter, having $0.67 this year we actually did a lot better than we originally planned. Our original plan was about $0.12 to $0.14 less than what this quarter is. So there's not a degradation of what we're doing. Actually, we've seen some very nice pickups in the commercial area which you can't project because they come as more -- in a more rapid basis.

But we had some very nice pickups in power generation, integrated sensing and also oil and gas. So there's -- I don't think when you take a look at our first quarter, where a bigger portion this year is military, a bigger portion is embedded computers, they tend to have less margins in the first quarter. I did indicate that 2005 first quarter would be the lightest. So it's not so much of did we have any one program that is causing a drain in profitability by any stretch of the imagination. It just happens to be it's where we're at.

And you next question comes from Miles Walter (ph) of CIBC World Markets. Please proceed.

Could you just give us a sense of the size of the organic growth by end markets that you had, most noticeably commercial power and commercial air in the quarter?

In commercial power in our last conference call, we indicated that we were going to get a 16% overall growth but a negative 3% organic growth because there were some large programs that we had in the 2004 timeframe. So we actually -we still expect a 16% growth. We haven't increased the top line. But we actually had an 8.5% organic growth in the first quarter. We did very nicely in power for the first quarter.

And I'm sorry, Miles. What was it, was it commercial air?

Commercial air, yes.

In the last conference call we indicated there would be a 12% increase in sales and a 12% increase in organic growth and right now we're probably more like 14 and 14. So again, commercial aircraft is coming along nice, as is the power generation side.

Okay, great. And then a little bit of clarification on the guidance. I think in the press release it said it doesn't include any acquisitions completed in 2005, so does that mean it doesn't include the closed acquisition of Indal?

That is correct. And we expect -- we wanted to keep it on an apples to apples basis. Indal will be accretive, it will help us obviously in 2005, but we did not want to give out guidance that would be changed based on an acquisition that took place this year.

Okay. So when would you update guidance or would you just not?

Well, the thing is, I'll update -- I think we had a good first quarter; we're very optimistic. However, it's too early in the race to look at a new guidance. But we would look -- if we see the same tendencies going forward through the next three months, I think we would be in a situation where we might do that.

Okay, great. And just -- I'll get off after this one. M&A outlook and specifically if you can just talk about how you approach going after an acquisition, kind of what are your targets and measures that you look for, whether that's accretion or fit with the business, and the particular target areas you're currently looking at.

I'd rather not discuss the target areas. But our search for acquisitions, they must be accretive in the first year and produce a 12% return on investment by the third year. And we have been making a lot of acquisitions in the electronics area; we favor that. And that's about it.

And your next question comes from Peter Arment (ph) of JAS Research. Please proceed.

A question on the -- Martin, could you clarify, you mentioned to Jay that the integration expense in Q1 was 750,000 tied to the embedded computing. Is that a similar type level that you're going to expect in the second quarter also before we start to see some of the benefits in the second half?

No, we don't expect to spend that kind of money. A lot of the movement of components being manufactured have gone from one company to another. So we don't expect to see that kind of interruption. You won't see the benefit that much in the second half because we're still going to have low shipments of embedded computers in the second quarter. You'll see more of that impact in the third and fourth quarter. And again, those types of savings are perpetual savings, so you'll see that entering next year also.

Right. Okay, not to pin you down, but do you -- should we expect sequential improvements in margins from the first quarter level?

We should, yes.

Okay. And then could you give us a little color behind the F-16 in terms of the spares volume down? Is it just sort of timing? We've seen a high level of activity associated with the War on Terrorism with the F-16.

Well, we have the same type of order in the fourth quarter of this year as we did in the first quarter of last year. So it's basically just the timing issue.

Okay, so you expect that revenue to be recouped going forward?

That's correct.

Okay. And then just one quick housekeeping one. Glenn, the tax rate, 37% in the first quarter, is that pretty much the level you expect for the year?

It is. That's our first cut, Peter, at the impact to us on the American Jobs Creation Act, so we are starting to see some benefit of the manufacturing phase- in. But that's our best estimate at this point for the year, yes.

And your next question comes from Eric Hugel (ph) of Stevens Inc. (ph). Please proceed.

A quick question. I'm just trying to get sort of maybe some underlying issues in the flow control business in terms of the margin. I know there's a chunk of pension there that's in the EMD business that's not stated separately. Can you sort of -- do you have that number of how much it was this quarter versus last quarter or can you give us an idea of how much the margin impact was as a result of any changes?

The pension at EMD, I don't have the exact figures. About 4 million for the year, Eric, so it would be about 750 for the -- no, about a million, I'm sorry, for the quarter. Not a big change from last year. It's approximately the same level as last year, so the comparison would be about the same.

Okay. I guess just to make sure that everyone's also on the same basis, I think we had this issue last year, your guidance of 3.24 to 3.45, the $0.07 gain that you had in the quarter on the sale of that piece of property, does that -- is that now included or does that exclude?

That is included in our guidance for this year. The sale of that property has been going on for a long -- a pretty long time.

So that was -- basically that was anticipated when you gave the guidance?

Absolutely. Well, the question -- we weren't really sure what quarter it was going to fall, but it was either going to be in the first or the second. But yes, it was anticipated.

Okay.

Let me also, Eric, one of the reasons for the margins in the flow control area is basically tied to just lower pump sales in the first quarter that we anticipate improving or having greater sales in the second half. But also, we had some development costs from the JP5. We had an additional about $200,000 there of some development, we were expecting new orders subsequent to that. Delta Valve, we spent money on element analysis. That's about another $200,0000. And we were performing some final element analysis for Conoco. Now, Conoco is the largest coker processor of crude oil in the world, and we're hoping to sign an agreement with them from the third and fourth quarter of this year and hope to do subsequent orders in the following year.

And also, in our development area of the electromagnetic gun, resting gear, the new Navy propulsion area, we probably, based off of our normal margins, probably sacrificed another $600,000 worth of operating income there. So you're seeing less production programs in the first quarter. You're seeing development projects that are there that are of less margins, but obviously that's going to pave the way for some very nice future programs in production.

And just sort of -- you talked about your margins, that you were still comfortable with your margins in Motion Control, the segment margins that you gave for Flow Control, and all that's still unchanged?

That's unchanged.

Okay. And just a last question and I'll get back in line. You talked about $3 million benefit from the consolidation things that you were doing in the first quarter in the embedded computer. When we think about that, is that -- you were saying 3 million in the back half of the year. Is that a 3 million annual run rate or is that a 6 million run rate going forward?

It's a 3 million run rate. So you're not going to see 3 million in the second half of the year.

Okay, so about a million. Okay, fine. Great.

And your next question comes from Tyler Hojo (ph) of Sidoti. Please proceed.

Just one question in regards to backlog growth; pretty strong, I'd say. I was just wondering if there was any segment in particular that really drove that growth.

Motion Control.

It was all Motion Control?

Well, the thing is, we've -- if you think about MIC, it has no backlog. It basically is a service area. So you're going to have run-up in backlogs in the Motion Control and Flow Control. Motion Control has a lot of backlog in embedded computers. Again, that's a non-ship basis; it's not an accrued sale. So you don't -- you do not take sales as you come to certain completions of production there. So it's our Motion Control area.

Okay, great. And just one other question in regards to the Indal acquisition. How's the integration going? Were there any issues that you've noticed with the one month since you've owned it or just kind of how's that going?

It's going the way we expected it. We've had several meetings with our other portions of our naval segments in Flow Control, looking at doing some joint marketing and advertising. But right now it's going as expected. We had some amortization of purchase accounting that affected their first quarter, but that's going to be eaten up and we'll go on from there.

And your next question comes from Jim Fong (ph) of (inaudible). Please proceed.

Marty, that was helpful giving us the development cost at Flow Control. Could you kind of do the same at Motion Control? And it seems like you had $1 million of development costs just in Flow Control. Was that correct?

That's about right, yes.

And then, could you just kind of clarify how much that kind of hurt the margin in Motion Control as well as the expenses there.

Right now we had an investment on the 767 tanker of about 300,000. And also about a $350,000 investment on the 787 where we're working with Boeing on designing a system there without benefit of a contract that we expect to get sometime in the remainder of this year. And it'll stop going from an investment to a program.

So is that -- ?

And the laser peening we had about $300,000 worth of development on laser peening.

Is that going to continue in the second quarter? I'm just trying to get a sense of was that like a one-time cost?

We are going to continue -- the 767 is at the end. The 787 we expect contract coverage and that'll stop and go on to more of a development. We normally do a lot of development. The thing is that when you look at quarter to quarter, there's just a lot more this quarter that affects it.

And be cautious becomes a little bit more significant. We did the same thing in the last quarter of last year, but you would never have seen it and it wasn't that significant. And obviously we've been announcing a lot of development programs, so you can see where some of our attention, some of our shipments are -- the shipments are high, but the margins are lower. It's just more pronounced this quarter.

Okay. And that's partly because of the -- I guess it's accentuated by also the timing of shipments...

That's correct.

...in the second half. Could you -- on that score, could you kind of help us see how much revenues got shifted to the right in terms of what should we look at in the second half of this year, some of the timing of these military programs?

Let me try to work through this with -- I gave the guidance last quarter and that was we expected the lightest quarter was going to be this quarter and sequentially getting better. Second quarter we expected to be somewhere around where we are right now, probably a little bit better, and then really strong third and fourth quarter. So you're going to see, as I was indicating before, that we're going to have a lot more military shipments in that second half that will produce very good profitability for us. And the thing is, right now when you look at the -- again, I'll go back to the embedded computers, they're not really covering their fixed costs, so that's one of the reasons why, based on their volume, that they don't have very good margins. So you'll see the shipments are not going to go up dramatically, even though they'll be greater, but the profitability will go up dramatically.

Okay, good. And then -- that's pretty much all I have for now. Thanks a lot.

And your next question comes from Robert Stallard of Bank of America Securities. Please proceed.

Just a couple of questions to follow up. Marty, first of all on the F-16, you seem pretty confident those sales will come in. Can you elaborate on why you are confident given some of the other trends we're seeing in the military, the defense aftermarket sales year on year are leveling off a bit.

Because we already have the order.

Right, okay. That's good.

That's as confident as you can get.

Okay. And you see those shipments coming in Q4?

Yes, right.

Okay. Moving on to the margins in your division, are you still comfortable with the guidance you gave last quarter on a division-by-division basis?

I am. I think there may be a little bit give and take here or there, but for the most part, we're going to be there. Again, we see some optimism in some of the markets that we're in, so that would tend to drive it. But we're also seeing a little bit -- we're not as far advanced in the laser peening as we had expected it, but you saw that the margins for MIC was higher than the first quarter of last year. The thing is, too, is as commercial -- we did not project the increase in Boeing's commercial aerospace this year, which is going to help out having the automobile industry being a little bit flatter than we expected and laser peening not probably taking off in the second quarter as we had anticipated. Not that there's not a good sense that it'll be going forward, we just haven't received the contracts yet. So basically, Rob, answering the question, we expect that on a whole we'll be there. We're very confident that we'll do well in approaching all three of those numbers we gave you.

Right. And Metal Treatment in particular, you came in at 16% for the quarter; you're going to 17 to 18 for the full year.

Right.

Do you think that it may be towards the bottom end of that range now?

No, I don't. We have more buildup in that commercial aerospace which really, when you look at commercial aerospace, is a bigger portion of what we do and the parts are more sophisticated because the -- those platforms add a lot more safety related items to it. So we feel pretty good about that. It's going to be based on how the general economy goes. I mean we had -- economists are changing their view at the beginning of last year compared to the first quarter of this year and we had the same situation. But overall, I think we'll be in very good shape there.

And do you still think the margins in Metal Treatment can head higher as the volumes increase Airbus and Boeing.

I think you're going to see that realistically the laser peening this quarter was less than the last quarter of 2004 and its contribution margin was cut down quite a bit because of the development, but yet we still went into almost 16%. That's aerospace. And I still feel very confident that when you look at Boeing's schedules, I guess it's the 2007 timeframe when they hit the -- what they're projecting to be 28 737s among five 777s. I feel very confident we're going to be up in that area.

Yes, okay. And then just finally on your acquisition pipeline and all the rest of it, your hearing now is up to 42%. Do you think that we may see Curtiss-Wright going through a bit of a period here of integration rather than acquisition given the way your balance sheet is positioned?

I'm not too -- the answer is yes, but not because of balance sheet. The answer is yes because I see that there's still nice opportunities out there, but they're less and they seem to be at a little bit higher multiples. And I think that will also slow it down. I indicated that during good times that companies tend to part with their divisions less often because people are now starting to get to a position where their cash position is not too bad and their leverage position starts to come down. So I think there may be less opportunity out there...

So we can probably expect...

...than there has been in the past. But we always integrate, Rob. You know when we are driving our companies and if you look at companies that we've had in the past and how well their operating margins have come up, we always integrate. So regardless of how we --what we acquire or when we acquire it, it still does not stop our integration process.

So we can probably expect a few less deals than we saw last year, for example?

Possibly. And then you'll see the benefits come in 2006 or driving that integration process and operating margins going up.

That's great.

And your next question comes from Steven McBoyle (ph) of Lord Abbott. Please proceed.

Maybe just to start on Metal Treatment. You just made the comment that laser peening was lower year over year. I'm not too sure I understood why that was.

As I indicated in our last conference call that we were going to be doing more development, so we took a laser that normally would be producing production. And the retrofit program of the Rolls Royce engine is slowing down a bit and basically had bought out all -- the capacity of all four lasers. And now we're doing more development work. We have development work with ExxonMobil, as I indicated, and the Department of Energy. We also have development contracts with helicopters, both civilian and military, with the Department of Transportation and the Department of Defense. So you're seeing again switching from production areas to development programs.

And the reason why it's a little bit slower is that we do have our mobile laser. Of the fifth and sixth lasers that we talked about coming online this quarter, the fifth one, which is the modulating head, has been deployed to Europe and is in the process of forming A380 wings. And the mobile laser that we expected that would be deployed this quarter, we do not have a customer for that one yet, which we expected.

And again, we're developing the market, so we don't dictate when the orders come in. But we do have three very good possibilities of getting a contract and deploying that later.

And to that latter point with regards to not having a current customer -- let me back up. With regards to Rolls Royce, it was always my impression that they could not get enough capacity of this and yet it seems that they're not requesting incremental capacity in the '05 time period. This is Rolls Royce specifically. Is that the case?

No, we still- we know their product. The thing is that we had two lasers that also were performing nothing but retrofits on their twin engines.

Okay. Again, just with respect to margins and staying on Metal Treatment, it appears as if you made 100 basis point improvement sequentially on flat revenues and I'm just again trying to get an impression, was there a low profitable job in the fourth quarter than ran course or what specifically made -- ?

No. I think what happens is when you look at the fourth quarter last year, we had a lot more automobile shot peening in there. And the automobile shot peening, because it is a less high performance platform than an airplane, normally have a lot less inexpensive shot peening associated with it. Whereas in commercial aerospace where there a lot more safety issues, each part gets more shot peening and, therefore, helps drive the margins. And that's the reason why. As commercial aerospace builds up, we'll do well there.

And to the extent that you have confirmed the segment margins that you laid out last quarter, can you just also confirm your growth expectations in all the divisions?

Yes, that's exactly -- what we spoke about last call, we expect this call.

So Metal Treatment ought to grow organically what this year?

Okay. Just hold on one second.

Sure.

It was a...

9% overall.

About a 19% increase and about an 18% -- I think we gave 16% organic.

Okay, and 17, 18 margins. Thanks a lot. And then switching to the Motion, adjusting for the 750,000 in consolidation related costs, the pro forma margin would be some 7.1%. Obviously you're quite confident you can get to 11.1 to 12%. That 11.1 to 12%, that is a full year figure, correct?

That's correct.

And can you just kind of speak to the level of confidence that you have in your ability to do that? How much of it is the F-16 spares pickup in the back half versus some of the other related issues?

When you look at last year, for instance, take a look at last year, you'll notice that last year fourth quarter was $1 and our earnings per share grew 44% over any quarter that we had that year. If you look at where we started from and the amount of volume that we shipped in that fourth quarter, it should give you some level of confidence in our ability to first of all, meet the demand of our customers where we're shipping more product in both the third and fourth quarter of this year and that the profits are also there. So the level of confidence is that we have a lot in our backlog. As long as we ship it out, I'm very confident that we'll meet those margins. Obviously, when you take a look at embedded computers and integration, you wonder how much of that money that we look at savings will come out in the third and fourth quarter and that can be a little bit variable. But I'm not talking about a tremendous amount of variability.

Yes, that's where I was actually going to go next. Just in terms of what your assumption is on cost saves on the back half related to -- is that something you can speak to?

I'm sorry; I was coughing so I didn't get the question.

Yes. The question is just in terms of your full year assumption of 11.5 to 12%, to what extent are you assuming cost savings in the back half related to the embedded consolidation that you're going through in the first half?

About 1.5 million.

Through the full second half period?

That's correct.

Okay. And then the...

...I'm hoping that we're light on that as far as our assumptions.

Right, okay. And then on the tilting train program that expired in 2004, can you just elaborate on that in terms of what that may have contributed in '04? Does that all but go away in '05? Is there any service spares that would continue through '05? Just what's the incremental swing there '05 versus '04?

Steve, it's Glenn. It was about a $4 million contract in '04 with very good margins. I don't have the exact one, but it was a fairly high margin job and it was the completion, so we don't have that revenue now.

I just want to step back and I just want to make a clarification. The guidance we gave on Metal Treatment was 10%, not 19. I just want to...

Okay.

That's the guidance we gave. I just want to make that correction. But that's the impact on the tilting train.

Okay, great. And...

I gave you a lie.

You're allowed one every year, right?

We're hoping for 19, though.

It was a number I liked putting down.

Me, too.

Can you also just update us in terms of the -- if you don't mind going through end markets, you've in the past gone through defense electronics, total electronics, embedded computing, commercial, gas and oil. Do you mind giving us an update in terms of where you would expect both total sales growth and organic through the '05 period?

Sure. I'll even compare them to what we said the last quarter and that is defense electronics we still see about a 25% increase in sales and I said the last time about 12% organic growth. We're looking more in the area about 16 now. Total electronics, which is about one-third of our business, 15% growth, 8% -- about 8% organic. We see about 14% growth with about a little bit more, like 10% organic growth. So we're seeing a little better improvements in those areas. Embedded computers, we said about 23% and 14. That basically remains the same.

Commercial aircraft, we said 12 and 12, 12% increase, 12% organic. That's more like 13 to 14% both increase in sales and increase in organic. Our repair business as far as aerospace is concerned, a 23% increase. That's the same organic growth as before. Gas and oil, 25 and 16, 25% growth and 16% organic. It's the same outlook now. And our power generation we indicated was a 16% growth and about a negative 3% organic. Well, we still are just saying 16%, but in the first quarter we had an 8.5% organic growth. So we're not really projecting out the remainder of the year there, but I think we'll do better than expected.

Great, thank you. And just a bigger picture. I understand the President's out speaking to a more forward-looking near term nuclear related type build opportunities. Just curious as to your perspective on that and how that may benefit you?

Well, since we're in all 103 nuclear power plants in the United States and they're still operating, I believe that we'll have a portion there. That's still in the early stages. The United States funded three companies to take a look at feasibility of nuclear power. Obviously with the price of oil where it is, it becomes more and more of an alternative, and the shortages that we've encountered over the last couple of decades.

I think the more positive area is in China where we signed a Nuclear Accord last year about selling nuclear power plants there. And, as you know, Westinghouse is one of the three companies in the running and we have a not very good relationship with them.

So you have several situations going on in nuclear power. You have United States that are putting in for plant life extensions. About 30 companies have put in for that; about 10 already started the process and you'll see over the next decade the remainder of the 103. And we've seen some very nice growth due to the plant life extension in the United States since again, we're on all 103.

We expect an increased market in Asia and we are a leading -- we're one of the largest suppliers of severe service valves and pumps to that arena. And then you have the United States that I think will pick up. And I think you'll see by the end of this decade that's going to be a very viable alternative and you're going to start to see probably power plants come online by that timeframe.

Great. And just last question, with regards to the roughly 330 million in new orders this quarter, can you speak to the kind of end markets associated with those?

On the new orders we have that broken down between military and commercial.

Okay.

And as far as the increase, it increased about 38% over the 2004 first quarter. The greater portion of those new orders were in the military side. About 60% was military, 40% commercial.

Great.

And your next question comes from Bob Satch (ph) of Lord Abbot. Please proceed.

On your laser peening sales, did you end up near the 10 million you'd hope for last year?

Yes, we did.

And despite the decline in the first quarter, where might you think they'd be this year?

We indicated it was about 15. We're doing less, maybe 13, somewhere in that area.

Okay. On the auto side, you talked about strong fourth quarter, a little less first quarter. Is there anything in the customer mix there we should be aware of and are you supply -- who are you supplying, the tier ones or the OEMs?

We're supplying the tier ones. And the thing is that we see an increase in our European shot peening, but also the transmissions and engines for the 2006 models we are -- have more processes on them since they are again more high performance than they've been in the past. So we see that across the board.

So on the auto side, do you have any sense in terms of geographic breakdown how much of the business is conducted or going into U.S.-produced products, whether it's Big 3 or transplants, as well as European-produced products?

We have approximately 70% of our sales in the United States and 30% in Europe. Of that, 31% of MIC.

MIC?

Metal Treatment.

...Treatment, I'm sorry.

Okay. And the 70% U.S., do you know the breakdown between Big 3 and transplants?

I think the Big 3 is -- GM is 45, Ford is 30, DC is about 15.

And is it somewhat more skewed towards larger vehicles than cars?

Not really, no.

Okay. What do you see as the F-22 build this year?

On the F-22, I believe we're looking at 22 airplanes this year.

So that'd be similar to last year?

I think it's 23 versus 22. I think there's one more ship set this year. But they're very close to one another.

All right. On the Power Gen side, are you nicely tied to GE's business there?

On the Power Gen. On GE, Westinghouse -- on GE we currently have about $20 million of input for a GE plant, but we have between 25 and $30 million on a Westinghouse plant.

Okay, but are you typically on either of their sales nevertheless?

Yes. And also the Korean standard plant.

Okay. And GE clearly has talked about a trough in that business...

For themselves.

For themselves. Are the other guys not talking the same language for this year that gave you some pause in terms of the organic performance, even though first quarter was better?

It really was not tied to the GE or Westinghouse because you're not building a new plant this year. We had production programs for the Taiwanese plant, which was a GE plant in Taiwan, which is coming to an end and so did ours. And that's the reason why because we didn't see the large -- we didn't see the large production. But we did have very nice spares sales in the first quarter, so it's not -- our projection was not tied to long-term projects, but more to spares this year.

Okay.

We're seeing very good demand for those this year.

All right. And can you talk about the number of coker valves you're likely to ship this year?

I don't -- I'm not familiar with the quantity. I really just look at the volume. That plant we're producing about $27 million of revenues this year compared to three years ago when it about 6 million. So right now we have had some very nice new orders both in the fourth quarter of last year and the first quarter of this year. And we have also gone through some development programs with Conoco. As I indicated before, that is the largest coker processor in the world where hopefully we'll sign an agreement in the third and fourth quarter of this year. So they're doing well, doing very well.

And the...

The quantities I do not have.

Yes. And you had filed a patent suit against Valen ?

That's correct.

Are they likely to be licensing the product or just not been able to sell a somewhat similar product at all?

No, they cannot sell a product at all. I think that says some testimony to our technology about the reason why people would like to have the same type of technology. But they're not going to be able to license or sell that product.

Okay. And then I'd like to just pursue a little bit the swing in the embedded computer business. As you said, you've made a number of acquisitions there in the last few years. Why is it necessarily that the principle orders are received in the fourth quarter and beginning of the year and not shipped till later? Why -- ?

The thing is that about $180 million worth of our sales is in the government and the government procure -- their fiscal year ends in September. So just as in a lot of our military businesses, we get orders in the fourth quarter of that year and the first quarter of the next year. It would be a lot easier for the government to have multiyear procurements. It would be less expensive and it actually would help us to smooth out those variable quarters. But we don't tell our customers when to place the orders, but that's the way it's done. And the thing is, because they're not a long-term contract, they're not on accrued sales. So it tends to drag your operating income in the first and second quarter of the year. Just the way they procure.

Okay. So would you expect to be meaningfully expanding that business at all from here?

Just because it has that type of profile doesn't mean that it is not a good business. It just says that it doesn't produce the revenues in the first and second quarter.

I understand that. More from the standpoint that highly seasonal businesses that are like that, the larger they are, the greater the impact in the slower periods because you have a certain level of fixed expenses...

That's right.

...that are there. So one would expect a more significant swing, then, in not just this year but in future years between your first half and second half performance.

That's right.

And I guess indicative of that, I was just looking at the last couple of years. If you looked at first half earnings compared to second half earnings '03 and '04, the first half was 48 and 46% respectively. If you're going to have a similar quarter to the first, and let's just call it $1.25 in the first half, we're looking at anywhere from 38% or higher, depending on whether you hit the high or low end of the range, and 62% or lower of this year's earnings in the second half. Do you think it's more likely to be, with the current business mix, going forward 40% or less in subsequent years as well?

The thing is again, if you happen to get spares orders, the answer overall is yes. We're going to always have because 50% of our business is in military and they tend to have yearly procurements, which gives you lower first and second quarters. Now, if you happen to be lucky and get spares contracts that are procured throughout the year and you get them to fall into the first half, that's fine. But typically, we will have weaker first half's compared to the second half's.

Okay. And then just jumping over to the carrier business, you had earned a meaningful five-year program win of which you were hoping to do 40 million last year. Is that an area where we didn't see the contribution in this quarterly period that we're going to see this year's contribution come later?

That's correct. We're down about $7 million in pump sales this year as compared to last year first quarter, but overall they'll be equal. So you'll see a lot more shipments in the second quarter -- second half of this year in the pump area. That has a little bit to do with also the contract was extended for about a year and we did indicate we'll have about $40 million a year shipped on the carriers. It's just the timing of the delivery schedule, that's all.

Okay. So to the extent -- I'm just looking up at my screen here. The stock's reacting poorly because it appears as if the market's misunderstanding the change in your business mix and the timing of the contribution to be generated from various business of yours now going forward, but on a seasonal basis as a typical year may progress. Seems as if that probably needs to be spelled out better in your release. I know I guess you attempted to do that in the aggregate, but people tend to be a little bit sensitive to "backend oriented" forecasts.

Right. I am not surprised at that. I think that whenever you have a quarter, and we don't give out quarterly results, that tend to be less than half or one-quarter of what your profit expectation is. As I indicated in our last call that we're not a commodity business and, therefore, we ship to our customers' requirements and you'll have variable quarters.

Now that...

That indeed will take place and the fact that you have a buildup in the third and fourth quarter, I think people are looking at we'll see what happens in the second quarter and subsequent to that.

Okay, so it seems to be more important to focus as you've been able to produce historically. Whether it's they want to look at the last five or last 10 years, is they just continue to look at kind of annualized rates of compound performance you've been able to generate. And with the end market and business exposures you currently have that the markets that you're serving with the products and services you're providing that the outlook for them individually are attractive and in the aggregate are as well.

Right. I agree with you. The thing is that we didn't change fundamentally from the fourth quarter of last year to the first quarter of this year. Just that simple.

So again, just to summarize, then, with some of those markets, been talking that the way things are setting up here we might have a very healthy aerospace market that might even end up peaking together somewhere in '07, '08 timeframe.

That's what we say. And the fact that the Boeing numbers are going back to what was the 1998 level and I think Airbus will also be at very good levels compared to where they were at that particular point in time, I think that's going to be a very good outlook for us.

And then with what seems to be occurring after 20 years of decline, oil and gas business, even on the refinery side, looks like that should continue to be pretty steady and show growth from here. Power generation, again with any kind of growth in the mobile environment, should be favorable. And Metal Treatment, not just from the old shot peening but also the lasers, should find new applications. So does seem as if the base business has a pretty strong outlook.

And just lastly on acquisitions, are you likely to be focused less on the computing area in the next few years and more in the other areas of your business?

...asked that question and I indicated that we felt we had enough space there in the embedded computer. It's not because of the seasonality by any stretch, but the thing is that we've built a nice portfolio there that we would make acquisitions depending on specifically what area of technology we'd like to improve or what market or geographic location we'd like to be in. But I think we've done a nice job in helping consolidating that area and I think that we're not going to see large moves from us in those areas.

And your next question comes from Chris Donaghey of SunTrust Robinson Humphrey. Please proceed.

Hi good morning guys, I know it's been a long call so I just have one question for you. I was wondering, going back to -- all the way back to the beginning to Jay's question, just help me understand the comment in the press release about 2004, 2005 acquisitions contributing 0.1 million of incremental operating income in the first quarter.

Again, it's incremental, so it's not what they actually contributed. It has its own -- it contributed $100,000 more than their contribution last year.

Okay, so using the numbers that you said earlier, 19% of sales, 3% of operating income, that would be 49 million in revenue for '05 and 740,000 in operating income versus last year it would have been 640,000?

I'm not...

Not that those numbers have to be exact, but that's what you're saying?

No, your numbers are off.

I'm not sure -- that doesn't jibe with our numbers, but again, incremental -- what we put in the press release, which we traditionally put in the press release, because you have mid-quarter acquisitions, when you compare back to the prior year of companies that have some -- part of the quarter last year versus -- and for us it's primarily die for. Last year it was in mid-quarter in '04 and a full quarter in '05. So those are incrementals. Overall, the acquisitions I think were in single-digits, but incrementally it was small, small quarter over quarter.

And your next question is a follow-up question from Jack Khetani (ph) of SG Cowen. Please proceed.

One just quick one. Why are you still spending development dollars on the 767 tanker given where that program stands?

Well, there are that have been sold to Italy.

Okay, there's still development spending. Can you quantify that?

As far as what?

The level of development spending on the tanker.

I think it was about $400,000 for us in the first quarter.

Okay.

Let me go back to Chris' question. Chris, you may be looking at the numbers on a full year basis compared to just the quarter because the numbers you put out were like four times what the numbers should be as far as the acquisition's contribution, as far as the sales and OI is concerned.

And your last question comes from Eric Hugel of Stephens Inc. Please proceed.

Just a follow-up. Maybe you can help us get a better understanding. I know you've said that you expect earnings to grow sequentially in Q3 and Q4 to be a nice step up. Should we expect Q2 to be much closer, I mean above Q1 but not significantly above, and then have a big step up in Q3, Q4? Is that sort of what you guys are looking at?

That's correct. Originally when we put out our guidance we didn't expect as good a quarter in the first quarter as we have had. As I indicated, we're probably $0.12 to $0.14 higher than what we had originally planned. So that's what we said sequentially it will go up. We are anticipating an improvement in Q2, but I'd like to sit down and go over those numbers a little bit more. But we expect that Q2 is going to be similar to Q1 and then very good third and fourth quarters. And typically, our third quarter wouldn't normally have the kind of impact this year as we've seen in the past.

With regards to -- you mentioned that the $0.07 gain is in the guidance. Are there any other sort of one-time bump-ups that you're looking at that are already also baked into the guidance, not really coming from operations but from these sort of one-off type events?

No.

Not really, Eric.

Okay. And I guess the last thing, I don't know if you have the information, but it would be nice to sort of be able to look at your margins, your business margins, ex acquisitions. Do you have the D&A or amortization by segment like you would disclose in your K, but you don't really do it in your Qs.

Not at my fingertips, Eric.

Okay.

Okay, if there are not any more questions, I'd like to thank you for joining us today and we look forward to our second quarter conference call in July. Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.