Curtiss-Wright Corp (CW) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Curtiss-Wright Corporation fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference Mr. Martin Benante, Chairman and CEO. Please proceed, sir.

Thank you. Good morning, everyone. Welcome to our 2005 full-year and fourth quarter earnings conference call. Joining me on the call today is Mr. Glenn Tynan our CFO who will begin our forum today. Glenn?

Thank you, Marty. And good morning, everyone. If you do not have a copy of the earnings release, which was issued yesterday, please call Ms. Deborah Torre at 973-597-4712, and she will e-mail or fax you a copy and add you to the Curtiss-Wright distribution list for all future press releases.

Before we begin, we will make certain forward-looking statements on today's call. Such as statements about the Company's confidence and strategies or expectations about the results of operations, future contracts, or market opportunities. And 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 or their underlying assumptions. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Security Reform Act of 1995, and involve risks and uncertainties that may produce results or achievements that are materially different from those expressed 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 Security and Exchange Commission act of 1934, as amended, for a more thorough discussion of risks and uncertainties as well as further information relating to our business.

For our agenda today, Marty will open our discussion with an overview of our 2005 performance and corporate initiatives. Then I will are provide a detailed discussion of segment performance and financial position, and finally, Marty will conclude our discussion with our 2006 market outlook and financial guidance. And after that, we will open the call for your questions. Marty?

Thank you, Glenn. I am pleased to report that for 2005, we achieved $1 billion in sales in our 10th consecutive year of sales growth. During 2005, our sales increased 18% to 1.1 billion. Operating income increased 25% to 138 million. And net earnings increased 16% to 75 million, or $3.44 per diluted share. This performance reflects overall organic sales growth of 8% supported by strong performance from each of our segments, as well as the contribution of our acquisitions made in 2004 and 2005. Our operating income was driven by overall organic growth of 21%, which included double digits organic growth in each segment. 2005 was an excellent year for Curtiss-Wright because many of the key drivers of our commercial businesses such as the U.S. economy, and the global commercial aerospace industry improved. In addition, U.S. military spending levels remained steady, and we were able to strengthen our position on certain key platforms.

Looking at our markets, our diversification strategy has provided growth in 2005 from both our defense markets, which grew by 19% and our commercial and industrial markets which grew by 17% in 2005. Within our commercial markets, aerospace grew 18%, gas and oil 34%, and power generation by 15%. In addition, we received new orders of 1.26 billion in 2005, an increase of 26% over 2004. And our backlogs increased 28% to a new record level of 806 million at year's end, which will provide us with solid momentum into 2006.

During 2005, we completed a number of significant corporate initiatives, which will add value to our shareholders. In May, we recapitalized our dual class stock structure into a single class of common stock. We believe a single class of stock will benefit all of our shareholders by providing a more simplified capital structure, and enhanced trading liquidity. In 2005, we established a government relations office in Washington, D.C., which will increase our building ability into future platform spending and government-funded R&D programs. Additionally, we are looking to expand our research and development efforts to coordinate efforts with university, research centers, and private companies. In December, we completed a $150 million follow-on debt offering. This offering expands our long-term capital base and enables us to continue to pursue our corporate growth strategies.

As anticipated, the acquisition market slowed somewhat for us during 2004 -- 2005. But I assure you we have not taken our eye off the ball. In fact we are constantly evaluating a number of opportunities. However, they must meet our disciplined acquisition criteria. We avoid making acquisitions just to meet annual growth targets. Instead we focus on technology, core markets. We will acquire only when those strategy requirements are met.

Finally, as Curtiss-Wright has consistently delivered significant growth and operating performance while maintaining a solid balance sheet, we increased our quarterly dividends by 33% in November 2005. Clearly, this is the most tangible commitment to enhancing shareholder value, as we can make. This dividend increase coupled with our recently announced stock split, reflects our confidence in our ability to continue to deliver strong revenue, profitability, and cash flow growth in the future. We are committed to providing significant returns for our stockholders while maintaining a culture of excellence. And expanding the diverse markets in which we compete. I will now turn the call over to Glenn to discuss our segment performance and financial position in detail.

Thank you, Marty. Our financial results continue to reflect strong performance in each of our business segments and markets. Sales growth of 18% in 2005 was driven by a solid organic growth in acquisitions. Overall organic sales growth of 8% in 2005 was achieved through strong performance by all of our segments, with metal treatment at 11%, flow control at 8%, and motion control at 7%. While all of our markets experienced growth in 2005, let me take a moment to discuss the primary market drivers in each segment.

In flow control, sales increased 20% overall. Sales to the U.S. Navy, oil and gas, and power generation markets all contributed to the growth. Our U.S. Navy business had higher sales of instrumentation and control products, JP-5 valves for aircraft carriers and ball valves for submarines. In addition, we had higher development revenue from the U.S. Army's electro magnetic gun program.

In the energy markets, sales of our coker valve continued to strengthen due to greater customer acceptance and increased market penetration. While other oil and gas valve and service revenues were higher due to increased maintenance expenditures, by refineries worldwide. In the motion control segment, sales increased 20% overall. Higher sales of OEM products, primarily actuator sales for the popular Boeing 737 platform, and higher sales of sensors and other components, were the major contributors to this growth. Increased sales for after-market spares, repair and overhaul services were driven by improving conditions in the commercial airline industry. Additionally, sales to the ground defense and helicopter markets increased due to our solid position in imbedded computing. Other sales to the military aerospace market were essentially flat as increased ship set production of our actuation systems on the F-22 aircraft was offset by lower sales of F-16 spares.

Metal treatment sales increased 12% overall. Shot-peening, coatings, and heat treating sales increased primarily due to the continuing recovery of the global economy, and its impact on the global commercial aerospace and automotive markets. Laser peening sales were essentially flat compared to 2004, as we continued to develop new applications for this technology. Operating income for 2005 totaled 138 million, an increase of 25% from 2004. Overall operating income increased double digits in all three segments. And at a rate higher than sales growth in both the flow control and metal treatment segments at 23% each. The increase in operating income is primarily attributed to overall organic growth of 21%. Driven by our metal treatment segment at 21%, motion control at 15%, and flow control at 10%.

Metal treatments organic operating income growth was the result of higher volume in both the global aerospace and automotive markets. Motion controls organic operating income growth was due to higher volume on Boeing 737 and 747 programs, increased military aerospace and commercial aerospace after-market revenues, as well as previously implemented cost control initiatives. Organic operating income growth in our flow control segment was due to higher volume to the U.S. Navy, record sales of our coker valves, and higher margin service and repair business to the commercial markets. Our overall operating margin improved from 11.6% in 2004 to 12.2% in 2005. However, we had some items that impacted this improvement including lower environmental costs of approximately 4.5 million, a gain on the sale of nonoperating property of 2.8 million, and lower consulting costs associated with compliance with Sarbanes-Oxley section 404, of 1.2 million. Taking these corporate items into account, our overall segment margins were essentially flat year-over-year.

On a segment basis, 2005 operating margin were solid. Operating margins for the metal treatment segment increased 150 basis points due primarily to higher volume and favorable cost absorption. The operating margins for the flow control segment improved 20 basis points due to higher sales and cost containment. The operating margin for the motion control segment decreased 80 basis points due to cost overruns on certain projects, quality issues on some new programs, and integration costs. Partially offset by cost reduction initiatives.

Now, let me review our liquidity and capital structure. In 2005, free cash flow, defined as cash flow from operations, less capital expenditures, was 62 million representing a cash conversion of 83%. Free cash flow improved from our revised forecasts through very strong collections in the fourth quarter. In fact, as of December 31, 2005, we had completely paid down our revolver, and invested approximately $20 million in cash. For the year 2005, depreciation and amortization was 48 million, and capital expenditures were 42 million.

Our balance sheet remains strong, with working capital of 269 million as of year end 2005. Total debt outstanding was 365 million, and our net debt to capitalization ratio was 32% at year end. Our current liquidity provides us the flexibility to continue our acquisition program of strategic niche businesses that broaden our technological capabilities, product offerings, and market penetration. We plan to maintain our target net debt to capitalization at or below 45%. I will now turn the call back over to Marty for some closing remarks before we open the call to your questions. Marty?

Thank you, Glenn. We frequently discuss our diversification and its impact on our profitability and growth. 2005 has been a prime example of this strategy at work. Curtiss-Wright is committed to providing highly engineered solutions for demanding applications. Our continued focus on technical innovations and competing in diverse markets and our achievement of critical mass in our niche markets has put us in a unique position to deliver value to our customers and that is what drives our operating performance.

In the defense market, we have balanced platform exposure on naval, aerospace, and ground programs. While the defense budget growth is anticipated to be less than 5% next year, we believe we can achieve organic growth of 5% or greater in our overall defense markets. Our flow control and motion control segments are well positioned on many major defense platforms including the CVN 21 next generation aircraft carrier. The Virginia class submarine, the DDX destroyer, the F-22, V-22, the F-35 joint strike fighter, unmanned aerial vehicle programs, such as the Global Hawk. While some programs might be negligibly impacted by mounting budgetary pressures, and the increased costs of operations at Iraq, particularly in the aerospace sector, we expect an impact to be counter-balanced by increased Navy, Army, and helicopter programs, as we continue to win new electronic upgrades in retrofit programs, as well as new development competitions.

The commercial aerospace market, we have a strong position as a valued supplier in both Boeing and Airbus. They have unique strategies for supporting the market growth, and we believe both companies will increase production on existing platforms in 2006. Let me be clear. Production is not necessarily equivalent to orders or deliveries rates. Our business is driven by customers schedules which do not necessarily correlate to our customers announcements citing order or delivery figures. In addition we expect spares and repairs in overall markets to be strong in 2006.

In the energy market, we see continued growth in the oil and gas markets, as refiners increase their capital spending on upgrades to comply with environmental regulations and maintenance spending on new technologies to reach plans flexibility, reliability, production, and profitability. Additionally, increased demand for oil and natural gas domestically and from emerging countries internationally. And increased demand for after-market services also provide positive impact at this market going forward. In fact, the demand for our DeltaGuard coker valve has been outstanding. In 2005, our Delta business received record new orders of over $53 million. And continued strong into 2006. We currently have a 20% global market share and a 42% market share in U.S. and Canada of the overall coker valve market and we continue to capture 100% of all the new installations worldwide.

Similarly, the nuclear power industry is expected to grow as more and more emphasis is placed on enhanced green technologies. In the U.S. growth will continue to come from plant life extensions and facility upgrades of the 103 existing nuclear power plants. As of December 31, 2005, approximately 39 plants have received 20-year life extensions, applications from 10 additional plants have been submitted, and are pending approval, and letters of intent to apply have been received from 27 more plants. Long-term, the nuclear power market has significant growth potential due to the anticipated construction of new power plants. In 2005, both Duke Energy, and Progress Energy announced that they tend to apply to the Nuclear Regulatory Commission for a license to build new nuclear power plants in the United States.

Curtiss-Wright through its flow control segment has significant content on the AP1000 reactor. If approved, construction can begin as early as 2010.

Internationally, China intends to expand its nuclear power capabilities significantly through the construction of several new nuclear power plants over the next several years. China is currently in the process of selecting a reactor design which has been narrowed down to the Westinghouse AP1000, and Ariba-EPR design. A decision is expected in 2006. These developments combined with new plant construction in other parts of Asia and the rest of the world, are expected to drive expansion in this industry, beginning as early as 2010. Overall, these economic factors equate to an overall organic growth of 8% in 2006.

To achieve this kind of organic growth consistently, we must remain focused on our long-term market strategy while constantly addressing the internal challenges of expansion. Multi-faceted operational improvement plans are in place in each business unit to optimize operations and increase market share globally. Driving operational efficiency is a clinical element for achieving the organic growth targets we have set.

Now I would like to provide guidance for our 2006 financial performance. We anticipate total revenues in 2006 to be in a range of 1.225 billion, and 1.25 billion, an increase of 8 to 10% over 2005. We anticipate operating income in the range of 155 to 162 million, including $5 million of pension expense which is a 12 to 17% increase over 2005. We are forecasting pre-split earnings per share of between $3.60 and $3.80 per diluted share, for a 5 to 10% EPS growth. Which includes approximately $0.13 per diluted share for stock option expenses. An 8% -- $0.08 per diluted share for increased pension expenses. Excluding these items, our EPS growth would be between 11 to 16% from 2005.

Our EPS guidance assumes an average of 22.5 million shares outstanding. Additionally, we expect free cash flow defined as cash flow from operations, less capital expenditures to be in the range of 65 to 70 million. This assumes depreciation and amortization and capital expenditures of approximately $50 million each.

We do not provide quarterly guidance due to the fact that the majority of our revenues are from highly engineered low volume projects, subject to long-term contracts. The timing of which is primarily driven by our customer. However, I can indicate that we anticipate the first quarter to be our lightest quarter. Most likely below the first quarter of 2005. And our fourth quarter will be our strongest due to the nature of our long-term contracts. What I will say is that we are committed to meeting our customer's requirements which is the most important to us. While we may experience variation in our quarters during the year, I can tell you that we are highly confident that our expectations for the full year as we have demonstrated in the past, we expect to achieve the targets we have indicated. Thank you for your time today. We look forward to our -- generating solid, profitable growth in 2005. At this time I'd like to open the conference call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Myles Walton with CIBC World Markets.

Thanks, good morning.

Good morning, Myles.

Could you just give us a little bit of color, you did a great job of giving us some color on the end markets, I was wondering if you could give us color on guidance by segment, both on the revenue side and the operating margin side, and in particular, if you can focus in on motion control.

Sure, Myles. As we indicated before, we expect sales growth to increase between 8 to 10%. 8% of which would be organic. We expect that flow control will grow somewhere around 8.5%. Motion control about close to 10%. And metal treatment about -- in the area of about 9%. Our operating margins, we're looking at flow control to be between 11.5 to 12, the same thing with motion control, as far as operating increment is concerned it will be 11.5 to 12 and metal treatment between 18 and 20%.

That's great. And then kind of a follow-up on the imbedded computers business within motion control, you've had that for a full year now and if you could just talk to us a bit about the integration that you have done, what you may still have left to do, and the potential benefit of that integration that you've done in '05 that you will see in '06 I guess that's now reflected in some of that margin.

Even though expected our -- we will probably do better as far as internal growth on military program, the areas where we're really improving is actually in the imbedded computer. We expect double digit growth and actually more than the -- much greater than growth, our income will grow faster than the -- than our growth projections. We have done very well as far as capturing new business for new programs and also our retrofit business on existing platforms and also electronic upgrades.

Great. And then the last one, and then I will get back in the queue, on the nuclear front, do you think that the purchase of Westinghouse by Toshiba is going to play any role with you? I know that you team with Westinghouse quite a bit on new designs. Obviously, those haven't been built yet, but just in terms of the future and how it plays out, do you see any change in that relationship given the new ownership> And also do you think the new ownership plays any role in China's decision making with regard to selection between Westinghouse and Ariba?

Right now, the relationship we will have with Westinghouse and/or Toshiba, when that happens, will remain the same. Obviously Toshiba played quite a bit more than -- almost double what the market expected, I think which shows what they consider to be considerable opportunity there. I don't think that the ownership of Toshiba will help or hinder the relationship -- the decision made by China on the next generation of reactor.

All right. Great. Thanks. Good quarter.

Okay.

Your next question comes from Jay Khetani with SG Cowen.

Good morning.

Hi, Jay. How are you doing.

Fine. Thanks. I wonder if you could just give us a quick update on two of the items, the programs that caused you some challenges in Q3, the APR39 radar and then the 767 tanker, are those essentially behind us?

They're behind us.

Okay. In the metal growth for 2006, in MIC, can you parse that at all between general industrial, so I guess let me put it this way, commercial aerospace and then all else?

Commercial aerospace is going to grow very nicely, automobile is flat. And that's one of the reasons why, when we talked about the growth of MIC, it was around 9%. So we're having very good growth in the laser peening side. We anticipate we have deficiently good growth on the commercial side but automobile is essentially flat. But when you think about the fact that the United States automobile industry was really down in 2005, we did very well, because we do have increased participation on the newer cars. But we expect that to be flat.

Okay. Can you give us any metrics on the coker valve revenues in '05 or installs or however you choose to measure it versus what you expect in '06? I know you gave us some order metrics.

We've performed very well there. We had a 33% increase in 2005 in revenues so it came out close to about 38 to $40 million. We expect a very good year again this year. Of the $53 million we received new orders for, $18 million was in December, and we received another $10 million worth of orders in January. And when you look at it as a seven-month lead time, you will see one of the reasons why our second half is going to be better than our first half. When you look at the split between revenues and profits, last year, we had a lot more military shipments in the second half of the year, and our commercial was basically flat between the two halves. This year, we have both military and commercial lower in the first half compared to the second half. So that's one of the reasons why you have this skew this year.

Does that -- should I think that metal, we see more of that margin ramp coming towards the back half of the year?

You mean in metal improvement?

Yes.

No, I don't think so. I happen to be talking about coker valve and some of our other products.

Okay. Great. Thanks. I will get back in line. Thank you.

Okay, Jay, thank you.

Your next question comes Robert Stallard with Banc of America Securities.

Good morning, guys.

Good morning, Bob. How are you doing?

Thanks. A couple of questions. First of all, on the metal treatment margin, you've given quite a big range there, 18 to 20. What would cause you to come in at the bottom or the top of that range?

I think that when you look at the difference between the two, there's not much difference there, as far as I'm concerned. I think that we anticipate good commercial sales. I think that if we do a little bit better in laser peening than we anticipate, obviously we will be at the top end of the scale. If we don't, we will be toward the bottom end. I think it is -- that is really the X factor there.

What are some of the lead times you have in that business? Boeing has given its '07 production guidance, I'm presuming that would affect you at some point in '06, does that mean have you slightly lower sales growth expected through the year?

On the Boeing side?

Yes, their production growth in '07 is less than '06.

Right. And we would expect that we would see some portion of that at the tail end of the year.

Right.

Our lead time there is very, very short.

Okay. Moving on to defense, in the QDR, and the budget, there has been some more positive comments on the Virginia class submarine, but essentially what is going to move it from one to two seems to be the price of the boat. Do you see any cost pressures coming down from the prime contractor onto Curtiss-Wright?

There is always pressure on costs, but you offset that with trying to trim what we would consider over-designed situations, which would reduce the costs. I don't think that -- I think the cost pressures are always followed by a change in design.

Okay. And just finally, on the pension situation, could you give us a longer term feel of how you see pension expense panning out over the next two to three years?

Yes. Good morning, Rob.

Good morning.

We expect 2005 -- actually 2006 I should say to be our highest expense year, and we should see the expense coming down over the next couple of years. This is the last year of the five-year amortization of the losses in 2001 and they're going to start to disappear. Our returns have been very good, and you're going to see that starting to come back in 2007, '08, and '09.

Is it a relatively modest reduction you expect though in '07, '08?

I have long term, -- the forecast now, relatively modest, they're not huge but they will be coming down.

Okay. Thank you.

You're welcome.

Your next question comes from Peter Arment with JSA Research.

Good morning, Marty and Glenn.

Good morning, Peter. How are you doing?

Good. Thanks, I just want to echo, I think it was Myles' comments about giving us a thorough review of the end markets. We certainly appreciate that. A bunch my questions have been already asked, but Glenn can I just ask you a couple of quick housekeeping questions. What is your tax rate assumption for '06 and also I guess the -- your assumption you're using for your overall borrowing costs? I know some of it is already fixed.

Actually right now, all of it is fixed but let me just -- the tax rate is 37% for 2006, and the -- right, as of right now, all of our debt is fixed, and we don't have any reason to believe it is going to change from that right now.

And what's your blended rate there, I guess?

It's got to be 5, 5.5, somewhere in there. 5.4. I don't have that exact calculation.

That's fine.

It's our senior notes.

Right. Okay. Thanks, guys.

You're welcome.

Your next question is from Eric Hugel with Stephens Incorporated.

Good morning, guys. Great quarter.

Thank you, Eric.

Just to follow up on -- can you -- what are you looking for in interest expense for the year.

Approximately around 21 million.

21 million. Are there -- in the guidance, I guess sort of like last year, you had the $0.07 gain baked into your guidance. Are there any other sort of one-time nonrecurring sort of -- those types of gains in your guidance for this year, in your EPS guidance?

No, there are not.

Thank you. With regard also, can you talk about any specific sort of segment or companywide sort of cost reduction initiatives?

Eric, we have cost reduction initiatives across every division that we have. Now, we promoted nine Vice Presidents to -- we grouped the -- all three divisions by market, by product, and all of them have cost reduction initiatives associated with them.

And are, I mean can you talk about I guess sort of they have initiatives, they have specific targets, I guess how are they sort of compensated relative to that, and are those sort of factored into your guidance? Or is that potential upside if they can sort of make those numbers or beat those numbers?

They're compensations, they are based on improving OI, and we have some of it -- some modest amount baked into our guidance.

Can you update us or give us a sense where you stand in terms of 787 content right now?

Right now, without any formal announcements, we have about 70,000 per airplane, and we're looking at about another 30,000 in -- we have outstanding bids for.

Okay. Great. I will get back into the queue. Thanks a lot, guys.

Thank you. Take care.

Your next question comes from Tyler Hojo with Sidoti and Company.

Hey, how are you guys doing?

Okay. Tyler, how are you?

Great. Thanks. Quick question for I guess Marty. Going back to the imbedded computing, I was wondering if you could talk a little bit on how you think you're currently positioned, and your outlook going forward in regards to some of these new VITA standards that are being implemented.

Well, I think we're positioned very, very well. We have the largest sales volume on the military side, that's where you have most of your imbedded computers. We have our longstanding commitment to open standards technology which is really being well received by our customer base. Now, our markets, the technology, pricing strategies, seemed to align extremely well with our customers' needs. Now, our new technologies are extremely accepted.

One thing that we talked about, the value proposition of imbedded computers, is that as you have munitions out there, high performance platforms out there, whether they be new, or current, which we require upgraded electronics, or obsolescence improvement, all that is coming through and we think we are well situated. We have as far as the integration is concerned, we've put all six businesses together. We offer sub-systems. They act very well, almost invisible, it's invisible to our customers. That sub system component of ours is received extremely well by our customers, and we feel we're very well positioned and we feel very, very good about the market.

But right now, the strength is really coming from more component sales rather than system sales. Would you say that is a fair statement?

It is fair, but if you look at the growth that we've had since we've owned them, just from a percentage standpoint, our system side has grown a multiple compared to our component side.

Okay. And what do you think is going to be the driver behind that?

The sub-system side?

Yes.

I think when all is said and done, when you look at putting together a sub-system, we have all the components. And we integrate those components very well and our customers are looking for the ability to provide sub systems all from one supplier. Other suppliers can do that but they have to buy components from other suppliers, and you got a lot of G&A and profits associated with that, and we can streamline that for them. And they are particularly happy with that.

Great. Well, thanks for the time.

Well, thank you.

Your next question comes from Chris Donaghey with SunTrust Robinson Humphrey.

Good morning, guys. Good quarter.

Hi, Chris. Good morning.

Marty, can you just run through the segment break down or the business segment break down again on the growth rates?

I think I said about 8.5%--.

I'm sorry, not -- I'm sorry, the business type, power generation, energy and I'm talking about the backward-looking numbers for '05.

Okay. Military, we said, about 5%, or possibly better, obviously that is going to depend on some of the supplements which are geared toward helicopters and tanks and that we're obviously on. Imbedded computers we have said that we will grow at double digits. On the commercial side, very strong growth, every market we're in is double digit, the highest is power gen. So they're all in the 10, 10% range or a little bit more. Power gen is higher than that. And the only one that we really -- is the automobile side, which is down o about, which is no growth whatsoever.

Okay. And so as you look at acquisitions going forward, do you look at industry segments like power generation, or energy as a place to expand your presence there to take advantage of that incremental growth?

That's -- we feel, as we indicated that we've made some very good inroads in both the power side and in particular the oil and gas side. We definitely have lead in products there where we're able to get to customer, we have technologies currently that we feel that substantially help the life cycle costs of our customers and we're going to continue to add to that portfolio because they continue to do well.

Okay, great. And one last question. You mentioned that the first quarter would be down versus 2005. Were you talking specifically about the earnings or the revenue?

The earnings. The earnings. When we look at first quarter last year, I think we made $0.67, but $0.07 was for sale of a property, so we're going to be at that $0.60 or a little bit below.

Okay. Great. Thanks a lot, guys.

We had the same thing, same profile last year.

Okay. Great. Thanks.

Okay.

Your next question comes from Jay Khetani with SG Cowen.

Hi, thanks. Just one follow-up. What was your imbedded, what were your imbedded sales in 2005? Can you tell us that?

It was slightly below 200.

Okay. So if you're talking about better than 10% in imbedded in '06, and about 5 on defense overall, majority of your imbedded is to defense, that would say that kind of the X imbedded defense growth is in low single digits, 1 or 2% just based on my, calculations. Is that a number that you think is conservatively postured? Are there particular programs that are declining that you would highlight? You mentioned in your commentary Marty, military aerospace programs.

We're actually come out even. We had reduction in F-22, just the way the schedule breaks out. We have some increase in JSF. V-22 is going up. So that has basically been balance in neutral.

And that's on aerospace. Is there anything else on defense other than the imbedded and other than the aerospace that you would highlight as major kind of swings positive or negative into '06?

No, I think that when you look -- you are looking at imbedded, we have approximately -- in some RAST systems, but no, we're, again, we're looking at about 5% growth there. A lot of this is coming out of the Army, helicopters, tanks, where you would expect it, and there is going to be an X factor there when you look at the supplements, the procurement supplements are in the tank and helicopter areas.

Okay. Okay. Thanks.

Your next question is from Eric Hugel with Stephens Incorporated.

Hey, guys. Just another quick housekeeping question. With regards to the margin guidance, does that have option expense baked in at the segment level? Or is that going to be showed like in a corporate and other line?

No, that's at the segment level. So about 30 basis points a piece. So obviously, when you look at our overall operating margins, which was about 12.2% last year, if you were to take the stock -- if you were to neutralize it and take the stock options out of it, we would be looking at about a 13 to a 13.3% operating margin this year.

What is that in terms of a dollar amount on a pre-tax basis?

4.5 million.

4.5 million. That's sort of what you were talking about last quarter, right?

Yes.

And did you guys see -- the delay in the '06 budget, did that impact your order rates any?

Yes, definitely. It is trying to skew it again into the second half of the year. So when you look at the way we have to operate, and you have low volume in the first half and such high volume in the second half, it is really a trick to be able to pull that off to hit the numbers that we do. But our customers give us orders when they give it, and we deliver it when they want it.

Can you update us maybe on some laser peening projects? Are they sort of in the same position that they were when we talked last quarter? Have things advanced? Are there more things in the pipeline? Sort of where do we stand for that?

Things that advanced, there are more things in the pipeline. We are doing a lot of work on steam turbine blades, military turbine blades, engines, advanced aircraft structures, and titanium. We're actually working with the computer industry on enhancing their process mix, on polishing silicon wafers, airplane structures, in delivery, highly tensile load areas. Competitive racing cars. Commercial aerospace undercarriages such as landing gears. Flight turbine engine pressure blades. Wing box panels for corporate jets. Orthopedic implants to the -- so they're able to actually put in smaller implants into larger people, which would be able to withstand the increased weight. We also have our first nonmetallic component that we have laser peened in the orthopedic implant area and also commercial fan blades. So we are definitely making progress in the area. We're definitely the results -- the results are coming out. It is just -- it is an area we have to be patient on and unfortunately I don't have much.

And just one more question. I mean maybe we can talk offline, Glenn, afterwards, but I'm just sort of looking midpoint to midpoint in your guidance sort of from your operating income number of lets say 158 million, you said a 37% tax rate and all that stuff. That would imply, and you talked about interest expense, of about 21 million, but it would imply an order to sort of get to a 370 number, sort of the midpoint of your earnings guidance, sort of some other number in there to the tune of about 5 or $6 million. Is there any environmental issues or I guess can you sort of -- I guess there is sort of -- I mean maybe we can talk offline but there is about a $5 million number in there that I don't know what it is.

I don't know what it is, either. I guess we will have to take a look at it. There shouldn't be, but if you want, we can take a look at it, there isn't anything material in between what we -- what we already said. So maybe we will just go back and go back through the numbers with you later on.

Yes, that sounds fine. Thanks a lot, guys. Good quarter again.

Thanks.

[OPERATOR INSTRUCTIONS] As there are no further questions in the queue, I will hand the presentation back to Mr. Benante for closing remarks.

Okay. Thank you very much. I would like to invite everybody that is on the call today, and also our significant investors, to our investors conference that we will be hosting on May 10, and 11, at our EMD facility in Cheswick Pennsylvania. We will be demonstrating advanced technologies from all three of our divisions. We're excited about it. It will give you a lot more insight as to when you look at imbedded computers and it is just one catch-all, the breadth and depth of our capabilities and also true of all of the divisions that we have, so I more than welcome you, and also looking forward to talking to you again for our first quarter report a little later on. Well, thank you very much.

Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation. And you may now disconnect. Have a great day.